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John Thurso (Caithness, Sutherland and Easter Ross) (LD): Will the Economic Secretary bear in mind the particular needs of micro-producers? My constituent, who happens also to be my wife, purchases retail whisky, infuses it with herbs and spices, rebottles it and sells it. Her business is only 500 bottles a year and she is not alone. Such businesses will suffer immensely under the new system. Will the Treasury consider seriously the plight of those small, but none the less important—certainly to me—businesses?
John Healey: I do not know whether that is a declarable interest, but it is certainly a handy one to have in the family. The short answer to the hon. Gentleman's question is yes.
John Healey: I shall give way to the hon. Gentleman one more time.
Mr. Weir: On the question of capital start-up costs, will the Economic Secretary clarify the cost to individuals in the industry of the necessary machinery? My understanding is that the maximum compensation available will be €100,000 or some £67,000, but the cost of the machines and the disruption to the bottling line will be far in excess of that.
John Healey: The hon. Gentleman is getting his compliance costs mixed up. He started by asking me about capital costs, and I have explained that 80 per cent. of the capital cost, according to the industry's figures, which we have accepted, will be borne by the big nine companies. The impact on the running speed of production lines—and, therefore, the potential loss of productivity and output—is clearly costed as part of the £53 million of ongoing costs. If the hon. Gentleman studies the regulatory impact assessment, he will see that that is clearly identified and that we acknowledge that factor because the industry has helped us to analyse it.
Thirdly, the industry was concerned that it would have to bear the production and distribution costs associated with duty stamps, estimated at 1p per bottle. That figure was part of the compliance costs that the industry produced, which were based on no support or offsets. Instead, the cost of printing and distributing the duty stamps, which we put at between £5 million and £10 million a year, will be absorbed by Customs.
Finally, and to help to address specifically the issue of pass-on into average prices, which some in the industry have raised with me, my right hon. Friend the Chancellor has decided to freeze spirits duty for the remainder of this Parliament. The freeze will cost the Exchequer £40 million in 2004–05 and £70 million in 2005–06. It means that, by 2005–06, the tax on a standard bottle of spirits will be 36p lower in real terms
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than now, which is twice—nay, nearly three times—the estimated average cost of full compliance costs, and £1.33 lower in real terms than if duty had risen in line with expected inflation since 1997.
John Healey: The hon. Gentleman will get a chance to make his own contribution and I would ask him to make the points that he wishes to make then, so that other hon. Members will get a chance to make a contribution. I will respond to him when I wind up the debate.
I draw hon. Members' attention to the overall approach that we have taken, which is to seek to specify at this stage the broad parameters of the duty stamp scheme and to leave some of the crucial but secondary detail to later legislation. We have done that explicitly in response to representations from the industry that it wished to retain flexibility over issues such as strengths of product to be covered, design of the stamp and how and where it should be affixed, and security. I know that the Scottish Affairs Committee is concerned about those issues, which have also been raised by hon. Members. They were included in the Scottish Affairs Committee report, and are for resolution in further consultation.
Unusually, draft Finance Bill proposals and the draft regulatory impact assessment were exposed to the trade for comment before publication of the Bill. Indeed, I ensured that the leading members of the trade had copies a week before we proposed to publish the Bill and the RIA. Draft regulations detailing the mechanics of the scheme will be available by the end of the year, and discussions between the industry and Customs are already under way on framing them.
There is a balance to be struck between maintaining flexibility and providing certainty, and I believe we have struck the right one at this stage. However, I have decided to emphasise that, for changes to the scope of the legislation, orders will be laid before the House subject to the affirmative procedure, so that Members will have a full opportunity to debate those provisions in due course.
As well as establishing the overall framework of the scheme, the legislation will introduce criminal offences for dealing in unstamped spirits. It will also create civil penalties for a range of offences involving interference with or misuse of stamps. Finally, when a person is convicted of "suffering" premises to be used for the sale of unstamped spirits, it will give the courts the power to ban the sale of alcohol from those premises for up to six months. Taken as a whole, those offences and sanctions reflect the tough approach that the Government intend to take to enforcement, in pursuit of our objectives to reduce spirits fraud significantly.
In conclusion, duty stamps for spirits are a necessary, proportionate and effective response to a fraud that, according to anyone's estimate, is cheating the Exchequer and the taxpayer of hundreds of millions of pounds a year. I commend the clause to the Committee.
Mr. Prisk:
I welcome you to the Chair, Mrs. Heal, and I thank the Economic Secretary for his patient remarks. They were defensive, and not without good reason, but, as always, he was patient and thoughtful.
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The whisky and spirits industry is vital to the United Kingdom economy. For example, nine out of 10 Scotch whisky sales are exported and the value of those is now more than £2 billion. In many parts of the United Kingdom, the jobs that the whisky and spirits industry provides are crucial, particularly to small local communities.
The Government have told us that they wish to impose tax stamps on spirits because they believe that such stamps are the only way to prevent fraud in the UK spirits markets. No one in the House, or beyond, doubts that there is fraud. However, as both the National Audit Office and Ministers have accepted, there remain serious questions about the level and trend of this fraud. What is clear, however, is that if Government policies are to work, they must be based on sound evidence.
The Secretary of State for Scotland told the House:
"It is estimated that about 16 per cent. of the spirits market has been subject to fraud, amounting to about £600 million".—[Official Report, 13 January 2004; Vol. 416, c. 651.]
What is the basis of that assertion? After all, a 16 per cent. fraud rate is neither recognised nor accepted by any of the leading figures in the industry. Both the Scotch Whisky Association and the Gin and Vodka Association believe that the figures given by the Secretary of State are wrong and that they represent a serious overestimate. If one stopped to think about it and consider the figures, one would realise that if the Government figure were correct, it would mean that about 200,000 bottles of spirits were going missing every day.
According to the evidence considered in the National Audit Office report, the problem is that the figures that the Government are basing their estimate on are unclear and run counter to other evidence. Both surveys from the Office for National Statistics—the family expenditure survey and the national food survey—are based on a very complex methodology that does not, for example, reflect the true amount of Customs clearances. Since the report, I gather that mistakes have been admitted by the Office for National Statistics. Therefore, as we have seen from the opening contribution to the debate, the result is a rising sense of confusion.
The Government's briefing to Members issued by the Economic Secretary on 18 March stated:
"Last week's report from the National Audit Office recognises that measuring illegal activity is inherently difficult."
He referred to that in his speech. The briefing went on that the report
"confirmed that that Customs' estimate is reasonable but suggests that given the high degree of uncertainty attaching to such estimates, it should be expressed as a range from £330m to £1080m".
As Members will recognise, that is a pretty wide range upon which to base Government policy. However, the briefing continued:
"The NAO report also concluded that a fraud estimate put forward by the Scotch Whisky Association showing fraud at a level of £100m to £150m should be expressed as a range from £10m to £260m and is also reasonable."
That means that, depending on how one measures the fraud, it might be as low as £10 million but could be as high as £1,080 million. In truth, no one knows for certain. The Government do not know, the industry is not sure and Customs cannot be certain.
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Conservative Members accept that there is a problem. However, the very uncertainty—that wide range of values expressed surrounding the scale and the trend of the problem—means that it is even more important that the Government work closely with the industry.
1.45 pm
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