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John Healey: I urge my hon. Friend to be patient. As I explained, this is the first opportunity for the House to consider in detail the proposals in clause 4 and the problem that we are attempting to solve. Countries that use spirits stamps in some form have introduced them for a range of reasons, and their experiences are varied. For every country in which they have failed or have been withdrawn, it is possible to cite others in which they have worked and are regarded as an important part of the duty assurance system.
Before turning to the central issues that Members and the Select Committee are concerned about, I should point out that this Government stand by our record of tough decisions on public finances and the measures that we have implemented to tackle fraud throughout the tax system. The National Audit Office recognises that our strategies on tobacco, road fuel and VAT lead the field
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in Europe, and have already secured billions of pounds in revenue for the taxpayer. On tobacco, we have not only stopped but reversed the growth in smuggling, reducing the illicit market to 18 per cent. in 2002–03, compared with the forecast figure of 34 per cent. We are also tackling illegal diesel use: the illicit market share declined from 8 per cent. in 2000 to 5 per cent. in 2002. Our moves against VAT fraudsters already appear to be causing a significant drop in levels of missing trader VAT fraud.
Mr. Peter Duncan (Galloway and Upper Nithsdale) (Con) rose—
John Healey: I am spoilt for choice. I give way to the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan).
Mr. Duncan: I am very grateful to the hon. Gentleman. He will be aware that the gap analysis that his Department uses in estimating £600 million-worth of fraud is of mixed heritage. Indeed, the wine and beer markets have described it as not reliable enough to estimate fraud in their sector. Why is it suddenly reliable enough to estimate fraud in the spirits sector?
John Healey: The Select Committee raised that issue at the evidence session that I attended—the hon. Gentleman was unable to be there—and as I explained, the gap analysis to which he refers becomes difficult to apply and unreliable when the scale of the fraud under consideration is small or negligible. However, that is not the case with spirits fraud. The approach that we have developed—and published—since 2001 is based on the belief that there is a serious spirits fraud problem in this country, and that in this case only really tough action will work. Unhappily but inevitably, we need to consider and to introduce duty stamps in order to tackle it.
Mr. Weir: I thank the hon. Gentleman for giving way again. He uses tobacco as an analogy in describing the problems in the spirits industry, just as customs representatives did several times during Scottish Affairs Committee hearings. However, there is one question to which we never got an answer. If simply printing a duty mark on tobacco packets, which have to be printed anyway, is so successful, why cannot the same idea be used for whisky bottles? Why do we have to place paper strips over the top of the bottles, given that—in the light of the cost to the industry of the necessary machinery—that strip is the real problem?
John Healey: If the hon. Gentleman casts his mind back to a couple of minutes ago, he will remember that I said that we are prepared to consider such an approach, although I did encourage him not to hold out too much hope. At the hearing, it was the Committee itself—rather than me—that drew a close analogy between tobacco and alcohol. We are dealing here with a very different dynamic in the market and with a different type of fraud, which requires this solution.
This is a problem that we cannot ignore, particularly
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given that in respect of VAT, tobacco and the illegal use of road fuels, we are reversing the rise in fraud. We cannot ignore it when we have dealt over the last couple of years with cross-channel smuggling of alcohol and tobacco. Spirits diversion fraud is the one remaining area of excise duty where we have a significant problem. It is increasingly at odds with the strategies that we have in place elsewhere and with the successes that we are beginning to achieve.
Duty stamps are only one element—albeit an important one—of the strategy that we are putting in place to deal with alcohol fraud, particularly involving spirits. The pre-Budget report set out a package of regulatory proposals that will help to tighten the supply chain to prevent fraud on all alcohol, not just spirits. We will set a tough outcome target for reducing spirits fraud in the spending review, just as we have for other excise regimes.
1 pm
Mr. Carmichael: The Economic Secretary is generous with his time. The Treasury first became aware of the scale of the fraud in the mid-1990s, when the amount of money coming into the Treasury from alcohol duty fell quite dramatically. Has that position recovered, and what is the trend in respect of money coming into the Treasury from spirits duty?
John Healey: The revenue figures are set out, as usual, in the Red Book. I would encourage the hon. Gentleman to concentrate on the nature and scale of the fraud, rather than on Government revenues. The measure is not principally about raising Government revenues, but about driving down levels of fraud—and then consequentially dealing with revenue losses to the Treasury and the taxpayer.
Mr. Mark Prisk (Hertford and Stortford) (Con): In the documentation—and, indeed, in the Government's presentation—it is claimed that £160 million would be recouped from lost tax revenue. Can the Economic Secretary confirm that the recoupment of tax revenue is based on the Government's argument that fraud is indeed at £600 million? That has been questioned by the National Audit Office and by other Committees of the House. If it is based on that level of fraud, what confidence can we have that £160 million is indeed what the Government expect to recoup?
John Healey: As the hon. Gentleman, who studies these matters, well knows, that is an estimate. All such projections for Government revenues are estimates. It is based on the level of fraud that our best estimates and modelling calculate—£600 million a year. For comparative purposes, as I shall explain in greater detail shortly, we have scrupulously estimated the impact and cost of the trade's alternative package of proposals on the same basis.
Mr. Prisk:
That is a crucial point. It identifies the gap between what the industry is talking about and what the Government are talking about. As I understand it, the Government believe that the gap is between £70 million and £160 million, but several measures included in the £160 million could negate the gap. Will the Economic Secretary confirm how narrow the gap is? Will he
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confirm that, given the significant compliance costs for the industry, when the whole package advocated by the Treasury is added up, it does not make overall economic sense?
John Healey: I do not accept that it does not make economic sense or that it is not a proportionate measure. Let me be clear that the £160 million is based on our best estimate of the £600 million that we believe is lost to the Treasury each year. That is a cautious estimate, based entirely on the introduction of tax stamps, with no allied measures built into the calculation. It also does not take into account the likely increase in VAT recovery on duty-paid rather than duty-unpaid products, or the likely increase in interception by customs at the frontier.
John Healey: I want to make some progress. Other Members will have the opportunity to contribute later and I will certainly do my best to respond to every point that is raised in the debate. Before moving on to specific issues, I want to make a more general statement.
The Government clearly recognise that the UK spirits industry plays a strong and historic role in this country's social and economic life. It accounts directly for tens of thousands of jobs and indirectly for thousands more, especially in Scotland, where it is a key employer. I fully recognise its importance, particularly in rural areas, some of which are represented by hon. Members who are in their places on both sides of the Chamber today.
It is crucial that the spirits market is able to flourish in the UK. By freezing the duty on spirits for the longest period since the 1950s, the Labour Government have, since coming to power, played their part. Now the Chancellor has gone further with an extended freeze for the rest of this Parliament. To support the healthy market, we must put an end to the criminal activity that is an outrageous abuse—I choose my words carefully and I mean it—of the duty system. Let me explain how the fraud works, as it remains inadequately understood even by some in the industry itself.
European law enshrines the principle of free movement of goods across the Union and provides for alcoholic goods to be moved around free of excise duty. Alcohol can be moved and sold an unlimited number of times and over an unlimited period without any duty being paid. The papers that travel with a load of alcohol are intended to secure the integrity of the supply chain. Only when the goods are released from duty suspension on to the market does the duty have to be accounted for.
That system guarantees the laudable right of the free movement of goods within the European Union and, by ensuring that duty has to be accounted for only very near to the time of consumption, provides a valuable benefit to the alcohol trade. In practice, however, it is wide open to abuse.
Successful fraud involves five steps. First, the fraudster sets himself up as a legitimate trader—sometimes by hiring or blackmailing somebody else to front up for him. Secondly, he hoodwinks a spirits producer or distributor into selling him a lorry load of duty-unpaid spirits. Experience shows that cash-in-hand to the lorry driver will ensure that he ignores the official delivery instructions and takes the load to a lock-
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up instead. Thirdly, he forges a receipt or bribes the recipient warehouse to stamp it for him anyway, and returns it to the dispatcher who will then have so-called proof of legitimate delivery and a legitimate transaction. Fourthly, either through a complicit retailer or by hoodwinking, he delivers the spirits on to the market at duty-paid prices. Pocketing the £5-a-bottle profit, he does not pay the duty, and except in a rare cases where enough evidence is available, he does not go to jail, because once the bottles are on the shelves, no one can tell which ones are duty paid and which are not. Fifthly, he repeats that process—lorry after lorry after lorry.
In short, that is a high-reward, relatively low-risk activity. The distribution system, set out and constrained in European legislation, provides ample opportunity, and the honest trader and drinker form an easy target.
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