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Mr. Prisk: We learned in the debate that the potential for fraud involving the strip stamps themselves has not been properly assessed. Given that strip stamps will not reach the streets until 2006–07, will the Economic Secretary commission an assessment of potential fraud involving strip stamps, and publish it for the House to consider before we rise in July?

John Healey: I am wary of getting into the same pattern as occurred during my opening speech. I am dealing with the points raised in the debate, and if the hon. Gentleman will forgive me, I shall deal with his precise question when I get to it.

The hon. Gentleman asked, "Why now?" and the hon. Member for Yeovil (Mr. Laws) asked, "What has changed since 2002, when the Government last examined the possibility of a tax stamps regime?" Three things have changed. First, estimated spirits fraud has increased. Secondly, our action on other excise regimes has decreased fraud on tobacco, fuel and VAT—spirits is the one area in which fraud is not decreasing. Thirdly, we have worked within Government and with the industry for two years to come up with alternatives to tax stamps that have an equal impact on fraud. Last year, we held a formal consultation on a package of measures that the Government felt might do the job, but the simple fact is that, throughout three years of detailed work, no one has come up with an alternative. If there were a serious alternative to duty stamps that would have a similar impact on fraud, we would take it.

The work that has gone on over the past two or three years can hardly be described as "hasty", as the hon. Member for Hertford and Stortford argued. My hon. Friend the Member for Strathkelvin and Bearsden (Mr. Lyons) described the measure as a "headlong rush"; my hon. Friend the Member for Vauxhall (Kate Hoey) talked about "rushing proposals through"; and the hon. Member for South Norfolk (Mr. Bacon) accused us of "rushing ahead". Given the detailed work within Government and with the industry over more than two years to find alternatives that measure up to the nature and scale of the fraud, those descriptions are simply wrong.
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The hon. Members for Hertford and Stortford and for Argyll and Bute (Mr. Reid) mentioned the position in the United States, as did several other hon. Members in interventions. The US system that governs the sale and movement of excise goods is far less liberal than the systems in the European Union and the United Kingdom. In the US, duty is paid early in the process—essentially, at the factory gate.

Last year's formal and public consultation considered measures radically to tighten up duty suspension arrangements in the UK. The measures would limit, first, duty-suspended movements, thereby reducing opportunities to divert alcohol, and, secondly, how many times alcohol products can be sold while they are in a warehouse, to prevent fraudsters hiding their connection with goods in complex and artificially long supply chains. The industry unanimously rejected both options on proportionality, cost and fair-trading grounds, and because the options' impact on fraud would have been limited. When we examined the industry's representations, carefully reviewed the anti-fraud impact of the proposals, and considered the information that we received during the consultation, we agreed that European Union rules mean that we cannot stop duty free product entering the UK duty free at the port of import. We cannot tighten the system sufficiently to deal with inward diversion fraud to create a system of regulation comparable to that in the United States.

I pay tribute to the balanced comments that my hon. Friend the Member for Paisley, North (Mrs. Adams) made about the Government and the industry. She expressed a strong and moving concern for what she described as the fragile communities in Northern Ireland and in Scotland. That was a feature of the report by the Scottish Affairs Committee, which she so ably chairs. We are paying attention to small bottling plants as well as to small distillers, and we will use her Committee's report as a contribution to that work. She urged us to keep talking to the industry, as we will, and urged the industry to meet the Government halfway, as I hope that it will.

My hon. Friend urged me to keep an open mind on the design of the duty stamps. We are indeed doing so at this stage, as the Bill leaves open the scope for the design of the stamp. We are prepared to consider the options. I have to tell her, however, that incorporating a duty stamp or mark on to the label has several potential flaws. Unlike a strip stamp, it would not be tamper-proof. Moreover, it would raise fresh security and counterfeiting risks, because we would have to entrust the design to all printers of spirits bottle labels. The spirits industry may have differing interests in this respect. For example, the Scotch whisky industry, which exports around 90 per cent. of what it produces, occupies a position in the UK domestic market that is rather different from that of other types of spirit producer.

The hon. Member for Yeovil expressed concern about the potential costs to industry, especially to small producers. We are giving particular attention to that, assisted by formal working groups under the joint alcohol and tobacco consultation group. I suggest that the hon. Gentleman and my hon. Friend the Member for Vauxhall read in full the regulatory impact assessment, which covers many of their concerns. I
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undertake to keep them, and other hon. Members who have expressed an interest, informed about the development of our plans to deal with compliance costs.

My hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) rightly reminded us that the public interest is important and that the public would expect us as a Government to act when they as taxpayers are being cheated. The Public Accounts Committee might also have something to say about that, as it regularly does when it feels that we are not acting strongly enough or soon enough to deal with the collection and protection of duty. Although my hon. Friend did not say so, when he was a full-time official in the GMB he had responsibility for the spirits industry, so he speaks with experience in saying that trade unionists welcome the duty freeze because of the benefits that it brings in terms of costs and jobs in the industry. I share his interest in ensuring that trade union concerns are taken into account as we go forward. The best interests of those who work in the industry must be served by putting in place the most effective scheme with the least possible impact on legitimate firms.

My hon. Friend asked about the fund for capital costs. That is intended to help with start-up costs in the initial period, but we are also concerned about the possibility of recurring annual costs.

I was particularly interested in the doubts that my hon. Friend cast on the approach of the Scottish National party. It seems to me that its interests were made clear in the motion about tax stamps that it tabled in last month's debate in the Scottish Parliament, which stated that

It is now clear that the SNP is hijacking the interests of the Scottish spirits industry by turning legitimate concerns into a nationalist campaign on tax independence.

Angus Robertson: Will the Minister give way?

John Healey: No, I will not.

The Scottish National party is acting in contrast to my hon. Friends, to the Scottish whisky industry and to the Scottish Executive, who recognise that we have looked hard at all the alternatives over three years with the industry—which recognises that we must, and will, act to deal with fraud—and that the best interests of the industry will now be best served by detailed work between the Government and the industry on implementing the new system in the most effective way.

I would say to the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan) that we do indeed have support for these plans from the retail sector, whose legitimate traders are threatened by spirits fraud. Let me also make it clear to the hon. Gentleman that I have not been looking for interest groups to come up with support for duty stamps. I have been looking for them to come up with serious alternatives, which they have not been able to do.

I understand the hon. Gentleman's argument about the essence of the Scotch whisky industry residing in small producers such as Mr. Armstrong in his constituency. If he would like to give me the details of the circumstances of Mr. Armstrong's firm, I will ensure
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that they are included in the consideration we give to the position of small firms as we examine the appropriate measures to deal with compliance costs.

The hon. Gentleman mentioned security, as did the hon. Members for Yeovil and for South Norfolk, and my hon. Friends the Members for Newcastle upon Tyne, North and for Paisley, North. As we have said, the contract that we shall award for the printing and distribution of duty stamps will incorporate a requirement for secure, timely delivery. We have also said that we shall look at ways of helping the industry with any costs associated with the secure storage of duty stamps. We shall be discussing precisely those issues and developing options with industry representatives in the coming weeks and months.

My hon. Friend the Member for Strathkelvin and Bearsden asked about the traceability of barcodes and lot numbers. I should like to explain to him and to the hon. Member for South Norfolk why we do not have fully traceability, and why those codes and numbers do not at present promise to be the alternative to duty stamps that they seek. The industry's proposal to use barcoding technology was considered as an alternative to tax stamps but, as the industry and the Select Committee recognised, it is not yet sufficiently advanced, in terms of its use in the spirits industry or of the barcodes including sufficient information, to be beneficial in the anti-fraud effort. Any potential benefits, including improved tracking and tracing, are unlikely to be widely realised until well beyond 2006.

Let us be clear that a lot number on a bottle of spirit will allow a UK distiller or bottler to identify the production run from whence it came. In reality, however, the lot number will identify only a series of customers, and it is often impossible to identify with any confidence a single customer from a long production run. Even if a customer can be identified, they are likely to be only the first step in a long supply chain. So a customer, especially a large concern, will find it even more difficult to identify with any certainty the subsequent customer, and so on.

Furthermore, the lot number is not required to be carried on the accompanying administrative documentation, the specifications for which are set not by the UK Government but by the European Commission in the European Union. Once the deliveries are moved and split beyond the first customer, therefore, it becomes very difficult if not almost impossible to track them simply by using the lot number. That is the problem with the audit trail in the current arrangements and with the trade's alternatives that the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) asked about.

I shall turn to the serious threat posed by counterfeiting that my hon. Friend the Member for Strathkelvin and Bearsden outlined so eloquently. The issue was also raised by the hon. Members for Moray (Angus Robertson), for Galloway and Upper Nithsdale, for Argyll and Bute and for South Norfolk. I say very bluntly that the simple fact is that we cannot make robust and reliable estimates of the potential for counterfeiting while many of the detailed design features remain open. Were we to choose the approach adopted by Ukraine, which we will not, clearly, the risk and level of potential counterfeiting would be different from what would occur were we to choose the approach adopted by
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Hungary. The detailed design features remain open because tax stamps are still two years away, and we intend to make the maximum use of the time available to get the design right. They also remain open because the spirits industry specifically asked us, if tax stamps went ahead, not to be too prescriptive at this stage. If, at this point, we had imposed the Government's prescription, if we had one, Opposition Members would rightly be criticising us for it.

4.30 pm

I thank the hon. Member for Moray for his generous opening comments, although I realised when he made them that they were too good to last. He and the hon. Member for West Aberdeenshire and Kincardine spoke about the advice given by the British Government to Norway. The hon. Member for Moray referred to that advice being given three years ago, but that advice was given seven years ago, in March 1997, and while I stand accountable for many facets and features of the duty stamp system, I will not be held responsible for the views of the previous Government.

The hon. Member for Moray also spoke about the First Minister. He said rightly and understandably that he was "disappointed" with the decision announced by the Chancellor in the Budget to press ahead with duty stamps. What he did not say was that the First Minister made it clear in the Scottish Parliament that

That is what we are doing, what the industry is doing, and what Labour Members, who have the best interests of the Scottish whisky and spirits industry at heart, are doing.

The hon. Member for Moray made it clear that he plans to vote against duty stamps. I say to him, as I said earlier, that those who oppose tax stamps have a duty to propose an alternative that will have an equal impact on the fraud. He has not done so, the industry has not done so, and the time has passed when we can put off serious action any longer.

My hon. Friend the Member for Dumbarton (Mr. McFall) has taken an active interest in these plans, both as chairman of the all-party Scotch whisky group and as Chairman of the Treasury Committee. To his credit, he has proved a formidable advocate for the Scotch Whisky Association, and skilled in dealing with many of the industry's interests, as he demonstrated in relation to what I might call the recent pure malt problem. I assure him that I take his concerns seriously. I was interested in the letter that he read out from the chief executive of the Scotch Whisky Association, Gavin Hewitt. I understand that he says that he is convinced that the proposal is a mistake, but it is highly significant that he said "I recognise the reality of the Chancellor's decision and affirm the commitment of the industry to work with the Government." That is the lead taken by the industry and by my hon. Friend the Chairman of the Treasury Committee, and it is the lead that I urge my hon. Friends to follow, not that of the hon. Member for Moray or the Scottish National party.
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My hon. Friend the Member for Dumbarton also mentioned the criticism that Customs and Excise had given no clear details to the industry about the offsets and deferment arrangements. That was raised several times by Members who are keen to see more detail of the plans. Customs and Excise provided a series of discussion papers to the industry on 23 March, shortly after the Budget, which covered the range of products to require a stamp and the container size, payment and financial security arrangements for stamps, the design specification of the stamp, and the functional requirements of the scheme. This is work in progress, but it is detailed work that has already begun. Customs and Excise met the industry to expand on those papers the following day, and again on 20 April, and further meetings are planned. I confirm to my hon. Friend the Member for Dumbarton and to the Committee that I will be meeting the chief executive of the Scotch Whisky Association later this week. I am sure that he will raise these matters with me. I shall tell him what stage we have reached in considering the plans for the offsets, the extension of the duty deferral period, and any payments and arrangements for the duty stamps. I shall also ensure that the Chancellor knows of my hon. Friend's concerns, given that he chairs the Treasury Committee, and also those of the Scotch Whisky Association.

My hon. Friend the Member for Vauxhall sought reassurances on the provision we shall make to support the industry. I did not see her in the Chamber when I made my opening statement, but I dealt with many of the issues she raised. I should welcome details of the small organic spirits producer in her constituency, and the problems it envisages with the potential compliance costs. If my hon. Friend wishes to contact me, I invite her to do so.

Duty stamps are necessary and proportionate, and will constitute an effective response to what are high levels of spirit fraud—levels which, according to anyone's estimate, are cheating the Exchequer and the taxpayer of hundreds of millions of pounds a year. I believe that we have made the case for clause 4 and schedule 1, and I hope the Committee will now give us the support that we need.

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