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Mr. Laws: I am glad to be able to follow the hon. Member for Paisley, North (Mrs. Adams) in the debate. Her Committee, a cross-party Committee, prepared an excellent report, which informs our debate. I hope the fact that the report was unanimous will give the Government pause for thought, and will cause them to reflect on the many serious concerns about their proposals and on whether those proposals are likely to deliver the desired results. I hope the Government will recognise the difficulties and risks involved, given that after the 2002 Budget they said they did not believe that the balance of risk and reward justified the proposals going ahead at that time. One wonders whether, in the intervening couple of years, the problems that the Government accepted then have been addressed.

My party has had a close interest in and strong commitment to the fortunes of the Scottish whisky industry for many decades, going well back before my hon. Friend the Member for Gordon (Malcolm Bruce) became Treasury spokesman for the Liberal Democrats and added to the commitment to get the tax regime for the Scottish whisky industry right. Many of my hon. Friends who have whisky distilleries in their constituencies have been lobbying very hard, and have been lobbied very hard, about the consequences of the measures. I pay tribute to my hon. Friends the Members for Argyll and Bute (Mr. Reid), for Orkney and Shetland (Mr. Carmichael), for West Aberdeenshire and Kincardine (Sir Robert Smith) and for Caithness, Sutherland and Easter Ross (John Thurso) for the work that they have done to draw attention to some of the deficiencies in what is proposed and to the potential cost to the industry.

I think that the Government understand that hon. Members in all parts of the House are concerned about the huge fraud that has been present in the alcohol and tobacco industries for many years. Of course, we welcome the fact that the Government have sought to reduce the scale of that fraud in recent years. However, the issue is the size of the fraud, whether the Government's estimates are realistic, and whether the response is proportionate. In addition, will the measures that the Government are proposing work? Will they deliver the benefits that the Government envisage, or will they be undercut, as many people fear, by fraud and other problems?

Furthermore, what will be the cost that will certainly fall to the industry as a consequence? How will smaller firms in particular cope with those additional costs? If there is one thing on which I suspect the Economic Secretary and I would agree in this debate, it is that the extra costs that will fall to the industry are relatively certain. What is uncertain is what the benefits will be. The combination of certain large costs and uncertain large benefits is not a happy one for the Government.

It is worth setting out at the outset the industry's precise concerns about the Bill. Essentially, it has expressed five concerns about the effect of the measures
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on productivity, investment and profitability. The first concern is that the measures will increase production costs, owing to the cost of new machinery and labour costs. The second concern is that they will increase the costs of downstream suppliers or importers, who will have to arrange for the repackaging and stamping of imported products. The third concern is that they will impose an earlier excise duty point for many small businesses, with an adverse impact on cash flow—something that the Economic Secretary mentioned.

The two other concerns expressed by the industry are that the measures will restrict the trading opportunities of brokers and intermediary suppliers where they have mixed UK and non-UK customers and that they will curtail the opportunities for the storage of spirits, duty suspended, in excise warehouses until the point of consumption. All those concerns add up to a very significant additional cost burden on an industry that is relatively small scale, and in which, as a number of hon. Members have indicated, there are many small producers who will be particularly hard hit.

2.15 pm

We hope that the Government will work with the industry to try to formulate proposals that will address those concerns, especially as they have been expressed not only by the Scotch whisky industry, as one might expect, but by the Select Committee on Scottish Affairs, whose report has been mentioned. Concerns have also been expressed by the Confederation of British Industry, which picked out the clause and schedule 1 in this year's briefing on the Finance Bill. It states:

As I mentioned, the Government are very much aware of those concerns. Indeed, they decided in the 2002 Budget not to proceed with this measure on the stamping of spirits, and the details were given in a press notice.

John Thurso: May I add to my hon. Friend's list another concern that was put to me by the general manager of the Invergordon distillery, which I visited two weeks ago: the burden of extra security that will arise because of having to store strip stamps, which will become a highly saleable and marketable black market commodity? The general manager was extremely concerned about the quotations for extra security and insurance costs, and about other burdens that have not so far been highlighted.

Mr. Laws: My hon. Friend is exactly right. The Select Committee report picks up on the same issue, to which I shall return in my closing comments.

I was referring to the Government's doubts about the proposal, which were expressed clearly only two years ago in the press notice that was issued after the Chancellor decided not to proceed with such measures. The hon. Member for Hertford and Stortford (Mr. Prisk) referred to the same issue earlier. In the press notice, the Government said:

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One wonders what has changed in the intervening period. While I accept that, as the Economic Secretary indicated, one of the things that may have changed in his mind is that he has been unable to satisfy himself that there are alternative proposals that will deal with the problems, the fact remains that the Treasury had such doubts about the proposals only a couple of years ago when it questioned whether the benefits would outweigh the productivity and compliance costs. If those problems were an overriding concern in 2002, the same must surely remain the case today.

A number of hon. Members have discussed how large the fraud is. I suppose that it is not particularly surprising that there have been significant disagreements between the Government and the industry on just how extensive it is. The Government will no doubt prefer their own figures, and they will be sceptical of those produced by the industry. As the Scottish Affairs Committee made clear in the conclusion of the section dealing with this matter in its report, however, even the National Audit Office was not satisfied with the figures produced by the Government and the industry. The NAO stated that, in the meantime—in other words, before the issue can be reconciled—

The Committee, which represents all the major political parties in this place, was led to this conclusion:

That is a very strong conclusion, as I am sure the Economic Secretary will agree, from a Committee that represents all political parties and has a predominance of Labour members. The Government accept the lower figure of £70 million cited by the industry in relation to costs. As one is talking about a gap of £110 million in the estimates of how much could be saved, as well as the fact that that gap is based on the Government's own estimate, which is many multiples of the industry's estimate and is extremely uncertain, as the National Audit Office accepted, one wonders whether they have a strong case for proceeding, even before one comes to issues about the potential for fraud in relation to duty stamps. As the Economic Secretary accepted implicitly if not explicitly, the Government still have to do a great deal of thinking about that.

I remind the Economic Secretary of the Committee's conclusions as to whether the Government's measures were likely to lead to the savings that he hopes for. After debating the issue, consulting the industry extensively and travelling to other countries to examine their experiences, the Scottish Affairs Committee concluded:

It was not convinced that the measures, which it described as
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are likely to be effective.

The Government must also answer questions about the costs to the industry and the extent to which it will be compensated. The ongoing costs will be £54 million a year, which is a significant burden, particularly for the many small businesses in the industry. The Chancellor of the Exchequer and the Economic Secretary gave the impression that the industry will be compensated as a consequence of the Chancellor's decision, which he announced with a flourish, to freeze duty on spirits for the rest of this Parliament—most commentators expect this Parliament to run for about a year, so one doubts the generosity of that gesture.

We obviously welcome the freeze on duty on spirits, which the Red Book states will cost some £70 million over the next few years. It is tempting to think of that £70 million as compensation for the industry to set against the ongoing cost of the measures, which is about £54 million per year, and the one-off capital cost of £23 million. I am sure that the Economic Secretary accepts that, although freezing duty on spirits will clearly affect the extent to which the price of the industry's products is forced upwards by additional costs, it will not necessarily impact directly on the industry's profitability and will not necessarily offset the significant ongoing costs.

On offsetting costs, it would be interesting to hear whether the Economic Secretary has a principle in mind if he decides to go ahead with the measures in the Finance Bill. In other words, because the measures deal with a problem that was not caused directly by the industry, do the Government accept their responsibility to offset all costs to the industry, or are they working to another principle?

I apologise if this information is already publicly available, but will the Economic Secretary tell us the additional compliance costs to the industry if it proceeds with its proposals to save £70 million on duty fraud? The £70 million figure must be relevant when we compare the Government's package with the industry's package.

I want to catch up with some of the concrete concerns set out by the Scotch Whisky Association in its briefing paper, which it sent to hon. Members before this debate. The SWA is concerned about the Government's direction, and it hopes that they will not proceed with the measures, or at the very least, that they will delay them to think them out properly.

In its briefing paper, the SWA suggests four ways—I am sure that the Government are aware of them—to mitigate the cost of the tax stamps. First, it argues that the freeze on spirits duty will not bear directly on profits, and it would be useful to hear more from the Economic Secretary about whether his overall package will offset all the extra costs on the industry. The other three areas are duty deferment, security, printing and distribution costs, which my hon. Friend the Member for Caithness, Sutherland and Easter Ross referred to earlier, and capital costs, which other hon. Members referred to.

On capital costs, it has been suggested that the costs to the industry will be mitigated by the £3 million fund for assistance, which will be targeted at small firms. The SWA points out that the £3 million would be spread thinly across the industry in the light of the overall £23  million estimate for capital costs, and there is a
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particular concern that the extra costs will fall most heavily on smaller businesses, which are least able to afford additional equipment.

The SWA asks the Government to clarify their definition of smaller businesses on which the capital assistance will be focused, and points out that EU state aid rules will apply, which means that it will not be possible to provide assistance of more than €100,000 per firm. A single stamp application machine may cost more than €350,000, and there is concern whether the Government can, under EU law, compensate companies for all the costs, even if they want to do so. If would be useful if the Economic Secretary were to clarify that particular point in his summing-up speech.

The Government have made it clear that they will examine duty deferment arrangements in order to prevent increased cash-flow costs falling on the industry. The SWA briefing note states:

It would be helpful to hear from the Economic Secretary whether the Government can deliver on their commitment, or aspiration, to avoid the up-front cash-flow costs, and if so, when information detailing how the measures will work in practice will be made available to the industry.

My hon. Friend the Member for Caithness, Sutherland and Easter Ross referred to security, printing and distribution costs. The Government have repeatedly told the industry that they will bear in full the production and distribution costs associated with tax stamps, although those costs are a fraction of the overall bill. Will the Economic Secretary confirm that point today and say more about how the system will work in practice, because the industry remains uncertain on that point?

It is clear not only from the industry's representations, but from those from the CBI and the Scottish Affairs Committee, which has members of all parties, that there is significant scepticism about whether the Government have the evidence to proceed with the measure. The scale of fraud is uncertain—according to the National Audit Office, there is no agreement on that point—whether the Government scheme will deliver benefits and solve the problems of fraud is uncertain, and the costs, and the extent to which they will fall on the industry, are also uncertain. Given that the Government are introducing measures with large, certain costs and uncertain benefits, I hope that the Economic Secretary will take the time to think again, even if he only delays the measures to allow time to consider their effect on the industry.

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