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Mr. Laws: I would not want the hon. Gentleman to push his case too far. Surely he is not suggesting that the Scotch Whisky Association would not be happier if Members of Parliament voted down these proposals?

Mr. McFall: It is saying very clearly that it does not want to participate in the political debate. It is non-political. It is clear from the letter that the SWA gives us    its support to work with the Government to secure a manageable solution to the problem. As parliamentarians we have to work for the benefit of the industry. The all-party group—I see its secretary in his place—will do all it can to work for the industry on behalf of all parliamentarians here. In the next few days I will meet the Scotch Whisky Association again to discuss the way forward.

As chairman of the all-party group I have had constant contact with the industry, and as Chairman of the Treasury Committee I have questioned the Chancellor on these proposals. Today, I am taking the opportunity to speak in the debate and question the Economic Secretary. MPs have done all they can to get these proposals dropped, but we must work with the industry, and the contact between Ministers, the industry and parliamentarians has to be meaningful. The dialogue should be intense. I hope to hear that the Economic Secretary will work with the industry and us and that he will communicate what we are saying to the Chancellor. No one in the Treasury, including the Chancellor, need be deaf to reason on this matter.

The whisky industry is one of the most successful in our manufacturing sector. As I have said to my hon. Friend the Economic Secretary and others, we cannot afford to jeopardise its competitiveness and reduce its productivity. It accounts for more than £2 billion in trade. It is therefore essential that we maintain its competitiveness and productivity.

I speak for the all-party group and the SWA when I say that we will work with the Treasury to ensure that the costs to the industry are mitigated. However, that dialogue must be constant if we are to ensure a good deal for everyone.

Mr. Alan Reid (Argyll and Bute) (LD): I hope that the Committee will vote to ditch clause 4. That is what the SWA has asked us to do today.

The Chancellor announced in his pre-Budget report that he planned to introduce the tax stamp scheme. Since then, the scheme has been investigated by the National Audit Office and the Scottish Affairs Committee. The NAO investigation cast doubts on the accuracy of the fraud estimates used by the Chancellor to justify the introduction of the stamps. Just yesterday, the Scottish Affairs Committee concluded unanimously that tax stamps were a bad idea and should not be introduced.

The view that tax stamps would be ineffective is shared by the US Government, who abandoned their own scheme 20 years ago because it was ineffective. Several other countries, most notably Norway, Belgium and Germany, looked at the idea but decided not to go
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ahead with it. The Department of Trade and Industry wrote to the Norwegian Government advising them not to introduce the scheme. Given all that evidence, I do not know why the British Government should be so hell bent on introducing the scheme. Many other countries that have introduced the tax scheme, among them Poland, Hungary and Ukraine, appear to be fighting a losing battle against fraud and forgery. The Scottish Parliament, including all the Labour Ministers and Labour MSPs, also voted overwhelmingly against the scheme. I am therefore very disappointed that the Government should be going ahead with the plan, despite all the evidence that I have mentioned.

We all agree that there is a problem with fraud. Where it exists, it must be tackled. However, we must ensure that anti-fraud measures are introduced only when we are satisfied that the benefits will outweigh the costs. All the evidence shows that tax stamps fail that test.

The industry will face great costs and risks. The hon. Member for Paisley, North (Mrs. Adams) spoke about the Select Committee's visit to Islay, where members spoke to the management of the distillery and bottling hall at Bruichladdich. The venture had been closed for many years, but was reopened a year or two ago when a group of local business people decided that the market conditions were right. At the time, they thought that Government policy was to oppose tax stamps. Their small bottling hall will face tremendous extra costs if it is forced to put tax stamps on bottles. The restrictions on European state aid were referred to earlier, and they make it unlikely that the Government's compensation scheme will be able to pay the full costs that that small bottling hall will encounter in buying the machinery needed to apply the tax stamps.

Bruichladdich is a small village on the Rhinns of Islay, where alternative employment is very hard to find. As the hon. Lady said, a very high proportion of jobs could be at threat in that remote community, even though the actual number of jobs involved is relatively small. There are no other job vacancies on the island for people who lose their jobs in the bottling plant. It is therefore important that the Government realise that any threat to the Scotch whisky industry risks devastating the employment prospects in, and the economies of, small and remote communities such as Bruichladdich. That is true of other areas on Islay, and of Jura, where the distillery is by far the biggest employer.

The SWA put forward alternative proposals, which the Government estimated would deliver a saving in duty fraud of £70 million. I point out that that could be achieved without all the risks involved in the Government's tax stamp scheme. Surely we should implement the risk-free measures first and evaluate their success before we proceed to more risky measures?

Tax stamps fail the cost-benefit test for three reasons. First, the Government's estimates of fraud are clearly dubious. In addition, the danger that the stamps will be counterfeited means that they are likely to be ineffective. Thirdly, tax stamps will impose a serious financial burden on the industry.
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3.45 pm

The Government's estimates of duty fraud are arrived at by means of what is known as gap analysis—that is, using consumer surveys to measure consumption, then subtracting recorded legitimate sales to arrive at the level of duty fraud. That method depends heavily on the consumer surveys, which means that it depends on consumers accurately recalling how much alcohol they have consumed. I will leave the Committee to judge how accurate that type of survey is likely to be.

The Government plan to introduce an expensive scheme on the basis of the results of such surveys. Common sense tells us that that is not a sensible method on which to proceed, but we can look at the results of the surveys. The Customs and Excise annual report for 2002–03 noted that its gap analysis method for beer found that duty fraud on beer was negative. What rational conclusion can we draw? The analysis for beer says that duty fraud is negative, and the analysis for whisky suggests that duty fraud is high. The only sensible conclusion is that beer drinkers recollect, after their drinking bouts, that they have drunk a lot less than they actually did, while whisky drinkers think they have drunk a lot more. We cannot draw any sensible conclusion about duty fraud. No wonder the National Audit Office has concluded:

That conclusion that great care is needed is a warning that the Government should heed. It is important to remember that if the Government have seriously overestimated duty fraud, the reduction in fraud that tax stamps bring will be proportionately reduced.

How effective are tax stamps likely to be? I spoke earlier about the failure of tax stamps in other countries, and even our Government seem to have doubts about how effective they will be. They estimate that the stamps will reduce duty fraud by only about a quarter, which does not indicate much confidence in the scheme's effectiveness and which seems to reflect the problems that other countries have had. We all know from the evidence given by other Members that forgeries will be so good that it will take a very experienced Customs officer to spot them. Shopkeepers and customers will still be taken in by the forgeries. Raids by Customs and Excise officers on shops and car boot sales will still be needed to spot the forgeries. I do not see what the benefit will be of having very good forgeries stuck on bottles. The whole idea of tax stamps is that somebody will be able to tell at first glance that if there is no tax stamp on the bottle, there is a fraud. We all know, though, that good forgeries will quickly appear, which will completely rule that out.

The Government estimate that the package of measures proposed by the industry would reduce fraud by about £70 million a year, which compares with their estimated reduction from tax stamps of £160 million a year. Their estimate of the extra savings from the tax stamps is therefore only £90 million a year. Yet their estimate of the annual ongoing costs is £54 million, and never mind the start-up costs. The saving appears, therefore, to be only £36 million a year, assuming all the Government's optimistic estimates are correct. I think the risk is too great for a saving of just £36 million a year, and that is without taking into account start-up costs and security costs.
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Security costs worry the industry tremendously. Each stamp is a small piece of paper worth £5.48. Many bottling plants are in out-of-town industrial estates, and those plants will have millions of pounds worth of what is effectively cash sitting in their premises, for the tax stamps are as good as cash to any thief who breaks in and manages to steal them. What sane company would store millions of pounds worth of £5 notes in an out-of-town industrial estate? The police advise companies not to keep cash on their premises and to get it into the bank straight away. If tax stamps are introduced, bottling plants will have to store more cash equivalent on their premises than the local bank has cash. Thieves will no longer want to rob banks: it will be their ambition to rob the bottling hall. Bottling plants will be a magnet for thieves and, therefore, the insurance industry will be very worried. We all know that the insurance industry does not like to insure cash, so insurance premiums will have to rise considerably.

We have also heard about the problems for the production line that will be caused by the complicated process of applying tax stamps to the bottles. If marks have to be introduced, it would be much more sensible if they were in the form of modern laser marks or stamps on the labels. They would be much easier to fix on the bottles than the complicated process of applying tax stamps.

We do not know the scale of the problem that we are trying to solve, we do not know how effective the proposed solution will be and we do not know the full cost. However, we do know that the scheme is a great risk for a relatively small return. If the Scotch whisky industry has to cut back its production because of falling sales caused by increased prices, the outcome will be devastating for small communities, such as those that have been mentioned on Islay and Jura. I appeal to the Government not to proceed with tax stamps but to adopt the Scotch whisky industry's alternative package.

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