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Mr. David Heath (Somerton and Frome) (LD): And cider brandy.
Mr. Reid: The issue concerns more than jobs in distilleries, because the whisky industry provides many jobs in bottling plants, which are often located in urban areas where it is difficult to find other jobs. The tax stamp will also affect the constituency of the hon. Member for South Norfolk, because much of the barley used in the distilling process is sourced from East Anglia.
It is clear that there is a problem with duty fraud, but it is dubious whether it occurs on the scale claimed by the Government. We must tackle fraud where it occurs, but we must also ensure that the benefits of any anti-fraud measure outweigh the costs of its introduction. The Scotch whisky industry is also interested in stamping out fraud: it rose to the challenge that the Chancellor set for it in the pre-Budget statement last November, and it has come up with a raft of anti-fraud measures that are far less costly than the tax stamp measures in clause 4.
The Government proposals relate to three uncertain points—the level of duty fraud, the impact of tax stamps on fraud and the cost of tax stamps to the whisky industry. There is simply not enough evidence to demonstrate that the benefits of such a scheme would outweigh those costs, so it should not be introduced in this Bill. The risks to the economies of small, remote communities far outweigh the positive benefits to the Treasury.
I shall examine the Government estimates of duty fraud, which are arrived at by gap analysis—using consumer surveys to estimate consumption and subtracting the recorded legitimate trade. Gap analysis relies on consumers accurately remembering their consumption. Remember, we are discussing alcohol—I see that the Financial Secretary is laughing—and gap analysis relies on people accurately remembering their consumption in order to work out the level of fraud, so the margin of error is clearly wide. The Government rely on the Customs and Excise estimate of £600 million of spirits duty fraud in 2001–02.
However, when the National Audit Office conducted an investigation, it found a massive degree of uncertainty and concluded that a proper reporting of the Customs and Excise study would show that duty fraud was somewhere between £330 million and £1,080 million, not the single figure of £600 million quoted by the Government. The NAO also investigated the gap analysis estimates calculated by the Scotch whisky industry and concluded that its survey estimated the level of duty fraud at somewhere between £10 million and £260 million—considerably less than under the Customs and Excise methodology. The NAO found both methodologies to be theoretically "appropriate". It
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is obvious, however, that both could not be correct, so faced with two widely conflicting estimates, it sensibly concluded that
"great care is needed in determining what reliance is to be placed on the results that are presently available."
Even further doubt was cast on Customs and Excise's methodology for estimating duty fraud by the fact that its annual report for 2002–03 noted that the gap analysis method found that duty fraud on beer was negative. The only conclusion that one can draw from that is that beer drinkers remember drinking a lot less, whereas whisky drinkers remember drinking a lot more. Perhaps whisky is better value for money. The NAO's conclusion that we need to use great care with regard to the Customs and Excise estimates is a warning that the Government should heed. It is important to bear in mind that estimating the level of fraud is not just a theoretical exercise, because if the Government have overestimated it, the reduction in fraud that tax stamps will bring is similarly overestimated.
As regards the tax stamp's potential impact on fraud, the evidence from abroad is certainly not encouraging. A wide range of countries have introduced tax stamps or thought about doing so and found that they simply do not work. That is why the United States decided to abandon its tax stamp scheme 20 years ago. When Norway considered introducing a scheme, the British Government of the time wrote to their Norwegian counterparts to recommend that they did not do so because it would not work. The hon. Member for South Norfolk mentioned Ukraine, where a new stamp with a hologram seal similar to the one the Government are considering was introduced, yet within a few weeks 60,000 bottles of vodka with very good forged stamps were found. The Government themselves do not seem to think that the tax stamp will have a dramatic impact on fraud. In their analysis report, they estimate that it will reduce fraud by only about a quarter—hardly a dramatic reduction.
We all know that forgeries will be so good that it will take an experienced Customs and Excise officer to spot them. Ordinary shopkeepers and customers will be taken in, so raids on shops by Customs officers will still be necessary. As we know from evidence given by Customs and Excise to Select Committees, such raids are already able to detect fraud. For example, when officers recently carried out an exercise in the London area, they visited 300 retail premises and found illicit spirits in nearly half of them. What extra benefits will tax stamps bring when current methods can already detect illicit spirits in the shops? Those raids, which involve targeting sectors of the trade that are suspected of being involved in fraud, are surely a better way to detect it than introducing an expensive tax stamp scheme. That is only one of a whole raft of alternatives suggested by the Scotch whisky industry.
Another proposal involves warehouse keepers providing information to Customs about expected arrivals and advising it of which consignments do not arrive. The reason behind that is that lorry drivers who smuggle into the country spirits on which UK duty has not been paid often book their load into a warehouse as a precaution in case they are stopped and questioned by Customs at the port. If they are stopped, they take their load legitimately to the warehouse, but if they get through without being stopped, they deliver their goods
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straight to the retailers. If criminals knew that repeated failure to turn up at a warehouse would attract suspicion, that smuggling method would be eliminated.
The Government estimate that the package of measures that the Scotch whisky industry proposes would reduce fraud by approximately £70 million a year and that tax stamps would lead to a reduction of around £160 million. Even if the Government's estimates are correct, tax stamps would save only £90 million more than the Scotch whisky industry's suggestions. Their estimate of the annual cost to the industry is £54 million on top of the one-off capital cost of £23 million. Even if all the estimates are correct, the amount of savings that can be expected is low. Of course, there is grave concern that they are far from correct.
So far, the Government have not attempted to estimate security, which worries the industry a great deal. Each tax stamp is a small piece of paper worth £5.48. The industry will therefore have to hold a large number of what are effectively £5 notes on its premises. Many bottling plants are on out-of-town industrial estates and they would have millions of pounds in £5 notes on their premises. The tax stamps are as good as cash to any thief who steals them. What sane company would store millions of pounds in £5 notes in a factory on an out-of-town industrial estate? The police are always telling us to put cash in the bank and not to leave it stored on premises, because of the costs of security. The insurance industry is reluctant to store cash, and insurance premiums to the whisky industry will rocket.
Stamps will create problems on the production line. The machinery that puts the stamp on the bottle is complex. Bottles will have to be monitored as they come off the production line to ensure that two stamps have not stuck together and been affixed to one bottle. Torn stamps will cause problems. Some bottles will inevitably get broken after the stamp has been affixed. Claiming back the costs of stamps on broken bottles and torn stamps will involve costly administrative procedures.
We do not know the scale of the problem that the Government are trying to solve, how effective their proposed solution will prove, or the full costs of the scheme. However, we know that great risks are involved. Should the Scotch whisky industry have to cut back its production because of costs, the outcome will be devastating for the economies of small rural communities such as those on Islay and Jura. I appeal to the Government to ditch clause 4 and not to proceed with tax stamps but to adopt the whisky industry's alternative package.
7.23 pm
Mr. Mark Prisk (Hertford and Stortford) (Con): The debate has been informed, surprisingly wide-ranging and extended. I welcome the Chief Secretary to his place. He began the debate in theatrical and entertaining style and it is nice to see him back on his old form. His speech was followed by a thorough and economically robust speech by my hon. Friend the Member for Arundel and South Downs (Mr. Flight). The Chief Secretary's speech was economically lacking but the entertainment is always worth it.
My hon. Friend's speech was followed by three excellent Back-Bench contributions from my hon. Friend the Member for Grantham and Stamford
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(Mr. Davies), my right hon. Friend the Member for Fylde (Mr. Jack) and last, but by no means least, the undergraduate on the Bill, my hon. Friend the Member for South Norfolk (Mr. Bacon). I look forward to their contributions in Committee.
This year's Bill is longer than ever, if that can be believed. It includes 40 schedules and 310 clauses and extends to 574 pages. The explanatory notes alone stretch to more than 650 pages. As the Chief Secretary suggested, it will keep us busy, and I suspect that the undergraduate is beginning to wonder what he has let himself in for. Not only has the Bill got bigger, but the taxes that it covers will increase, too. Despite all the gimmicks and giveaways, and the spin and the gloss of the Budget day speech, the unvarnished truth is that, over the next 12 months, the nation's tax bill will rise by almost 8 per cent. The overall effect of the Budget and of the Bill will be an 8 per cent. rise in tax yield next year, and almost 8 per cent. more the year after. Indeed, the Red Book shows that the Government are planning for the burden of tax to reach its highest level for more than a quarter of a century by 2008. No wonder everyone is warning about Labour's third-term tax rises.
Our taxes had been rising steadily under Labour even before the Bill. The net effect of the previous seven Budgets and Finance Bills equates to an extra £5,000 per household per year. That is 60 stealth tax rises in seven Budgets, and this year, the Chancellor has slipped in six more stealth taxes. In this Bill, there is a new tax on small companies, a tax on UK businesses for transfer pricing, a tax rise on red diesel, a tax hike on other road fuels, a new tax on trusts and a sixfold tax rise on company vans.
The greatest act of stealth by the Chancellor came not in those specific changes but in his announcement of frozen tax thresholds and allowances. At the time, he made the tax freeze sound like an act of pure generosity, yet by freezing tax allowances and thresholds in the Bill, he is using the oldest stealth tax of all: fiscal drag. Let us take stamp duty land tax, a favourite of the Chief Secretary. When the Chancellor told the House that he was freezing stamp duty, Labour Members cheered; some even waved their Order Paper in support. But what they failed to understand—and what he forgot to mention—was that, as house prices rise, home buyers' tax bills will rise. To be more precise, the Chancellor expects people to pay £1,900 more in stamp duty next year. What Labour Members cheered on Budget day was a tax hike for first-time buyers. What they endorsed would mean thousands more key workers being priced out of a home. The Chancellor might be able to fool Labour Members, but he will soon learn that he cannot fool those whom they represent.
There will be tax increases, but there is another cost at the heart of the tax system under this Government. As the very length of this legislation shows, our tax system is now hideously complex. It has become an expensive burden in its own right. For example, the plan to impose strip stamps on spirit bottles represents a huge increase in costs for the industry, and we have heard Members on both sides of the House seriously urge the Treasury to think again about that proposal.
The complexity of our tax system stems largely—although not wholly—from a Chancellor who constantly meddles and tinkers with each and every tax, duty and charge. Every year we get a raft of new
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schemes, every Budget produces different rates and credits and every Finance Bill brings more and more rules. Let us take the new tax on small companies, as set out in clause 28. In 2002, the Chancellor cut the corporation tax starting rate from 10 per cent. to zero. Indeed, the Paymaster General actively promoted the change. She said in the Standing Committee that small businesses would not look a gift horse in the mouth. Thousands of businesses took her at her word and incorporated. Indeed, her encouragement was so magnificently successful that 300,000 firms incorporated.
Unfortunately, that was far more than the Treasury had budgeted for. Suddenly, the Paymaster General's gift horse was beginning to look a little lame. So, in the Budget last month, the whole policy was reversed, with a 19 per cent. tax rate being imposed on many of the smallest companies. Indeed, we are now told that this was not a gift horse at all, but a loophole. What remarkable genius. Only this Government—perhaps only this Paymaster General—could miraculously transform a gift horse into a loophole in 18 months. That is a remarkable achievement.
Yet the Government were warned of their error at the time. The recent Budget report by the Treasury Committee states:
"We are puzzled as to why, unlike other commentators, neither the tax authorities nor the Treasury anticipated that this would be the likely effect".
The Committee's report that goes on to say that the cost to the taxpayer was an estimated £670 million in lost revenues.
In a sense, the cost to business is probably far greater. There are the professional costs of accountancy advice and changing accounts, and the costs of the time lost in that process. But perhaps the greatest price to the UK economy is the uncertainty that this incompetent meddling has created. How are businesses meant to plan ahead when the tax system keeps changing? How can companies invest when they do not know how their investments will be taxed? Perhaps most important of all, what assurances can the Paymaster General give that some of the reliefs and many allowances in this Bill that she and her colleagues have applauded will not also soon be suddenly denounced as loopholes?
Conservative Members fully accept that seeking to evade legitimate tax liability is illegal and should be dealt with accordingly, but there is a world of difference between illegal tax evasion and tax avoidance or planning. Indeed, I understand that that was once the Labour party's view. Preparing for the debate, I came across a fascinating document, Labour's policy paper "Tackling Tax Abuses, Tackling Unemployment"—a snappy title. It was written when the Chancellor was still the shadow Chancellor. Under the heading, "How avoidance can be countered", it states:
"The taxpayer is entitled to take advantage of the law to minimise his or her tax bill."
"as a matter of principle"
—not a phrase that we hear often from Labour Ministers nowadays—
"we believe that the citizen is entitled to know where he or she stands before the tax law."
"It is the complexity of the present system that has encouraged the growth of a flourishing avoidance industry."
For once, I agree with the stated policy—as it must have been then—of the Labour party and its supporters, but what is the Paymaster General's view? Does she agree with the Chancellor's view then, or with his actions now? Does she accept that people are entitled to ensure that they pay only the tax that they owe? Does she understand that ceaseless change leaves taxpayers unclear about where they stand? Will she agree in her reply that the more complex the tax law, the greater encouragement there is for tax avoidance?
The Bill represents a wasted opportunity, which is why I urge all Members to support the amendment. It could have presented a radical plan to help savers and reduced the complexity and burden of the tax system. Yet, instead of helping enterprise, it stings small companies and the self-employed. Instead of helping home owners, it increases the tax burden of first-time buyers. Instead of simplifying our tax system, it adds 574 pages of complex rules and regulations.
Never has a Finance Bill been so long, and said so little of substance. Long on words, short on vision: that is the reality of this Bill, and that is the record of this Chancellor.
7.33 pm
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