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Sir Robert Smith: The worrying thing about what the Minister is saying in assessing the alternative is that the Treasury has found what it sees as all the weaknesses, costs and likely drawbacks of the industry's proposals but has not balanced that with any assessment of the weaknesses, drawbacks and likely consequences of its own strip stamp proposal. He says that someone will know what they are dealing with, but will every customer be trained to see which stamps are fraudulent and which genuine? How is the Committee expected to make a decision now on something that will happen in two years' time when the risks of the Government's proposal have not been assessed, even though they have managed to assess the risks of the alternative?

John Healey: The hon. Gentleman has completely made up my mind that I really must proceed with my speech. I was about to move to a section entitled "Problems with Tax Stamps". Let me anticipate the areas of concern that hon. Members will raise and that the Select Committee on Scottish Affairs covered in its inquiry. I hope that that will ensure that those issues need not entirely dominate our debate this afternoon.

First, there is a concern that duty stamps will quickly be counterfeited. I say bluntly that I cannot guarantee that UK duty stamps will never be counterfeited, but we have held detailed discussions with anti-counterfeiting specialists and several leading members of the security printing industry. Anti-counterfeiting technology has improved considerably in recent years and continues to do so. We will consider all the technologies available in coming to a decision on the final stamp design, and there are a number of ways in which security features can help to remove the chance of counterfeiting.

The second, related, concern is the experience of other countries. The fact that several countries have abolished duty stamps in recent years has been repeatedly held up as an argument against implementation in the UK. I have three things to say about that. First, some of the examples given of stamps becoming the source of fraud have occurred in countries in which there is, frankly, a general level of corruption, legal non-compliance and maladministration that is alien to, and simply not comparable with, the situation in the United Kingdom. Secondly, there are examples that serve both sides of the debate: for every notable country that has abandoned the system, a Denmark, a Spain, an Italy or a Portugal can be cited in which duty stamps continue to work well. Thirdly, the reasons why countries have stamps, or why they got rid of them, vary. For example, in Latvia and the Philippines, duty stamps were introduced not to tackle fraud but primarily as a means of revenue collection. Greece was forced to abandon duty stamps because its system discriminated in favour of domestically produced ouzo, which was not required to be stamped.
 
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Those who declare themselves determined to tackle fraud but who continue to oppose our plans have a duty to propose an alternative with an equal impact on the problem.

Ann McKechin (Glasgow, Maryhill) (Lab): Will the Minister comment on the fact that many consider the United Kingdom to be a unique market among the EU countries that apply strip stamps? We have a very large spirits industry and a high level of taxation. The combination of those two things makes the UK unique and particularly susceptible to problems of fraud and criminal gangs trying to undermine the system. What measures will the Government take to prevent that?

John Healey: We do indeed have a particularly strong spirits industry. We do indeed have relatively high duty rates on alcohol, although we have relatively low tax rates in many other areas. It is not the case, however, that diversion fraud is unique to the United Kingdom. Other EU member states suffer similar fraud, as my hon. Friend will know as a member of the Treasury Committee. We happen to be the only country that has made a systematic attempt to estimate the scale of the problem. At the heart of the difficulty lies the EU-wide duty suspension movement system, and that means that the problem is not peculiar, particular or unique to the UK.

Those who oppose our plans have a duty to propose an alternative with an equal impact on the problem. I must warn that the combined efforts and detailed work of the Government and the industry have failed to do so. After three years, we have reached the end of the road on alternatives. The task now is to design and introduce a system of duty stamps that will have maximum impact on the fraudsters and minimum impact on legitimate firms. The best interests of the spirits industry and of the people who work in it are best served by contributing to the Government's detailed design and implementation work and by influencing the decisions we take to reduce the costs for companies.

Mr. Richard Bacon (South Norfolk) (Con): I take it from the way in which the Minister's comments are proceeding that he has finished his remarks on the problems with duty stamps. There may be one or two Members who think that he has not referred to one or two such problems. May I point out one of them? There is a risk that genuine strip stamps will be used to disguise breaks in seals for bottles that have been refilled and that genuine stamps, issued by Customs and Excise, will therefore add authenticity to fake product, stealing sales from legitimate traders and revenue from the Government? Will he address that point?

John Healey: That concern is one of the drawbacks, which I mentioned earlier, in the proposal to incorporate the duty stamp on the label of the bottle rather than as a strip over the top of the bottle. The fear that legitimate strip stamps will somehow be used to disguise essentially counterfeit product is, in our judgment, unlikely to be realised. What drives the counterfeiter and fraudster are the profit margin and the low degree of risk. If they have to source legitimate duty stamps to put them on counterfeit product, the cost of doing so is likely to make the incentive to perpetrate such a fraud distinctly lower.
 
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1.30 pm

The best interests of the spirits industry are best served by its working with the Government to influence the decisions that we take to reduce the costs for companies and to get right the detailed design and implementation work for the duty stamps regime. The industry is now committed to taking that approach, working with Customs in two formal sub-groups of the joint alcohol and tobacco consultation group—one looking at financial security and payment options and the other looking at the scope and design of duty stamps.

We recognise that duty stamps carry a significant compliance burden, and have accepted the trade's estimates of set-up costs of about £23 million and ongoing costs of £54 million, which in turn translate into an ongoing per-bottle price increase of about 13p. We acknowledge the particularly vulnerable position of small companies, in potential finance costs and the possible risk to competition, so we will help to offset and mitigate, as far as we can, overall compliance costs, and in doing so we will respond especially to those pressure points.

Mr. David Laws (Yeovil) (LD): The Minister mentioned the proposal's estimated costs to the industry as some £23 million in one-off costs and £54 million in ongoing costs. How much of those costs will the Government compensate the industry for?

John Healey: The scale of the compensation will depend on the discussions that we have now begun with the industry and the decisions that we take about the pressure points.

First, we will attempt to implement duty stamps without requiring up-front payment for the stamps. That would prevent increased cash-flow costs, which alone would account for more than 40 per cent. of the industry's estimated ongoing costs from duty stamps. We will have to discuss that further with the industry and ensure that such an approach does not undermine the anti-fraud benefits of duty stamps, but if it becomes apparent that it would be impractical, we will examine other means to keep cash-flow costs down.

Several hon. Members rose—

John Healey: I shall give way to the hon. Member for Salisbury (Mr. Key), as he has not previously sought to intervene. I shall then give way to the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), after which I shall seek to conclude my contribution.

Mr. Robert Key (Salisbury) (Con): Will the Economic Secretary confirm that when he considers, in consultation with the industry, how much he might be able to offset the initial costs, European Union state aid rules would allow him to contribute £12 million every three years?

John Healey: I can confirm that we have considered the EU state aid rules, and that relates to the second point that I was about to outline. We have set aside a £3 million fund for 2005–06 to assist firms with capital investment. Although 80 per cent. of capital costs will
 
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fall on the big nine producers—those that handle more than 1 million cases a year—we accept that the burden of compliance costs will be proportionately greater for smaller firms. Therefore, we want to target support on them. Officials are having further discussions with the trade on the details, and we want the trade to take the lead in deciding the principles that we should adopt in allocating the money.

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