Memorandum submitted by the British Beer
and Pub Association
1. INTRODUCTION
1.1 The British Beer and Pub Association
(BBPA)[5]
welcomes this inquiry; since duty fraud is damaging the UK beer
market as well as the Treasury's revenue stream. HM Customs &
Excise (HMCE) are unable to accurately measure the amount of large-scale
smuggling/diversion fraud for beer. This is a concern for the
industry and must be a cause for concern for the Government.
1.2 A major incentive for fraudulent activity
in the UK is the high rate of duty per se and the differential
in duty between the UK and France. Regulatory options proposed
by HMCE do not include removal of the incentive but rather focus
on reducing levels of fraudulent activity. The regulatory options
under consideration are directed towards treating the symptoms
rather than tackling the root cause of the problem. Members of
the BBPA are keen to work with HMCE towards the joint objective
of reducing duty fraud.
1.3 On several occasions over the past two
years, the BBPA has suggested that HMCE and the trade engage in
a joint work programme on modernisation and simplification to
reduce compliance costs, improve revenue assurance and release
HMCE resource to focus on the higher risk areas in order to combat
fraud. Modernisation would complement the fraud reduction strategy
in achieving more effective control. A longer-term plan would
capitalise on existing technology and dovetail with future requirements
under the EU's Electronic Movement Control System (EMCS).
1.4 In order to tackle fraud we continue
to advocate a risk-based approach. The BBPA considers that the
majority of movements between sites within the same ownership
and between brewing companies are low risk[6]
and are essential in order to facilitate consumer response times.
The BBPA is not aware of any fraudulent activity connected with
such movements. Any human errors are reported and, since the duty
is accounted for, there is no risk to the revenue.
1.5 A joint approach is essential. HMCE
should utilise their authority effectively in the context of risk
analysis. Operational staff should be fully trained and qualified
to meet this objective.
1.6 A high degree of quality assurance audits,
control, and investigation work by HMCE managers, should ensure
that the legitimate trade is not antagonised and disadvantaged
by needless restrictions, and that the force of the law is focussed
and directed reasonably where it is needed most.
2. LEVEL OF
FRAUD AND
HOW THIS
HAS BEEN
ESTIMATED
2.1 The level of fraud is difficult for
both industry and government to quantify. The Association believe
that the only way HMCE can accurately determine the level of fraud
is through collaboration with industry.
2.2 Cross-border shopping, smuggling and fraud
2.2.1 BBPA volume estimates for duty paid
imports for the last 13 years are shown in Table 1a and Table
1b, Annex I[7].
These are based on two regular surveys commissioned by the BBPA
starting in 1992 and 1993.
2.2.2 The total volume of duty paid personal
imports has fallen since a peak in 1997 although there was an
upturn in 2003.
2.3 Cross-border shopping survey
2.3.1 Each month over 200 people on Calais
dockside on the Shuttle are interviewed by market research company
HI Europe regarding their alcohol purchases to bring back to the
UK. This survey is statistically reliable with a robust methodology.
This is the basis of our volume estimate for "normal"
passengers/legitimate cross-border shopping.[8]
2.3.2 Increased price competition from UK
supermarkets and the abolition of the duty free regime in 1999
resulted in beer volumes falling from their 1997 peak. The number
of day-trippers to France fell and those who did go were increasingly
buying wine at the expense of beer. In the second half of 2001
and 2002, the HMCE "zero tolerance" policy towards bootleggers
in vans (Table 2)[9]
extended to other vehicles and cross-channel shoppers buying over
indicative limits, and with the ensuing publicity surrounding
this, volumes purchased fell further.
2.3.3 However 2003 saw an upturn in beer
volumes (+17%) as day-tripper numbers increased along with the
average volume bought per person. There was an increase in the
proportion of beer buyers buying over the minimum indicative limits
and this has coincided with the modification of HMCE policy regarding
seizure procedures and the stopping and searching of vehicles
following defeat in the High Court at the end of October 2002.
2.4 The "van trade"
2.4.1 This survey commenced in 1993, and
is undertaken by commercial investigators (ex-police) who are
stationed at Calais dockside and the Shuttle entrance logging
vans and note whether they are heavily laden or not.
2.4.2 Additional resources and a "zero
tolerance" approach adopted by HMCE, combined with the higher
fare prices, saw a sharp decline in this trade during 2000. HMCE
seized 10,200 vehicles in the financial year 2000-01 or 200 per
week. Not surprisingly, beer smuggled in heavily laden vans fell
by a further 89% in 2001. The high likelihood of vans being stopped,
seized, and destroyed combined with rising costs has made bootlegging
in vans uneconomical.
2.4.3 Consequently only very limited surveillance
was undertaken in 2002. This work indicated that the professional
"bootlegger" was still very much in business with vans
and car trailers seen at outlets being loaded by pallets in quantity.
However the overall level of this type of trade was only a small
proportion of what is was at its peak and this was also reflected
in the fall in the number of outlets dedicated to supplying the
bootlegging trade. No further surveillance was undertaken in 2003.
2.4.4 What is unclear is whether beer smugglers
have switched to other activities or whether smuggling has transferred
to other routes or, as is more likely, an increase in paper fraud
or in beer being smuggled in large-scale consignments in lorries
and/or sea containers to meet the demand of established networks
in the UK. Unfortunately any such volume will not be captured
in BBPA surveys.
2.4.5 Each year until 2003, HMCE undertook
their own cross-channel smuggling survey over a two-week period
in June. This showed a dramatic fall in cross-channel beer smuggling
in 2001, with total revenue evaded down from £260 million
in 2000 to £20 million. The figure fell to £15 million
in 2002. No survey was undertaken in 2003.
2.4.6 In terms of large-scale smuggling/
fraud, and hence total illicit beer consumption, the latest HMCE
report (November 2003) states that they are still not able to
provide a robust quantification for this. The report states though:
". . . there is no clear indication
that the illicit beer market supplied in this new way (diversion
fraud/large-scale smuggling) represents a greater proportion of
the market than the previous estimate [2000-01] of 4%"
2.4.7 Since the cross-channel smuggling
survey has ceased and HMCE are still not able to accurately measure
the amount of large-scale smuggling/diversion fraud for beer,
this must be a cause for concern for the Government as well as
the Industry.
2.5 Duty fraud
2.5.1 The high rate of duty per se encourages
fraud. One indication of where diversion fraud/large-scale smuggling
may exist can be seen by the difference between reported beer
import and exports statistics in the UK and in France for trade
between the two countries. This is shown in Table 2, Annex I.[10]
2.5.2 Over the last 5 years, UK trade figures
indicate that over 1.1 million hectolitres of beer was exported
to France that has not been accounted for in French import statistics.
In the same time period French trade statistics also show nearly
1.7 million hectolitres of beer exported to the UK that does not
appear in UK import statistics.
2.5.3 Clearly possible evidence of diversion
fraud or other fraudulent activity is not necessarily confined
to trade between the UK and France. According to the trade database
of Global Trade Information Services Inc, there are significant
differences with two other of the UK's major trading partners,
the USA and Germany (Table 3 Annex I).[11]
2.6 European dimension (Table 4 and 5)[12]
2.6.1 With the introduction of the Single
Market in January 1993, a target rate of 18.7 Euros was set with
the aim being to harmonise beer duty rates in the EU. Since then
all the EU countries which were significantly above this rate,
except the UK, have reduced their duty rates significantly. Following
the latest increase last year, the UK rate has now increased by
28% since the start of the Single Market moving it still further
away from the target rate.
2.6.2 The duty differential between the
UK and its nearest neighbours has also increased in recent years
as other EU countries have not tended to index-link duty rates.
For example, the last French increase was in 1997. Even if inflationary
increases were undertaken in all countries, the absolute differences
would still increase between the high and low tax countries
2.6.3 We are also aware that DG Taxud has
issued two reports; one on tax rates and the other on distance
purchasing. The latter proposing a liberalisation of the regime,
removing the requirement for the purchaser to accompany the goods
with a concomitant removal of current minimum indicative levels.
2.6.4 These developments could weaken the
ability of UK Customs to prevent avoidance and fraud and hence
increase the flow of legal and illegal beer from lower taxing
countries. This would do further damage to the UK brewing industry;
and increase losses to the Exchequer. With the removal of Nordic
Derogations, the Finish Government reduced beer duty rate by 32%
in order to prevent the predictable increase in the flow of beer
from lower-taxing Estonia.
2.6.5 Despite already having a relatively
low rate, Austria has also announced a cut in beer duty of 4%
to combat the potential cross-border trade with neighbouring countries
following EU enlargement.
2.6.6 The European Commission is proposing
to take the UK to the European Court of Justice regarding the
"disproportionate" treatment of cross-border shoppers
who buy over the indicative limits and are buying for family and
friends on a "not for profit" basis. Hoverspeed have
also launched a £50 million damages claim against HMCE regarding
their "heavy handed" searches of their passengers. Clearly
in a Single Market, the UK cannot continue to maintain what are
essentially illegal fiscal border controls.
3. STEPS TAKEN
AND PROPOSED
TO REDUCE
THE LEVEL
OF FRAUD
3.1 Recent beer duty increases have widened
the gap between the rates applied in the UK and mainland Europe.
This continues to provide an incentive for duty fraud. The solution
remains in the hands of the Government.
3.2 The Chancellor introduced a major initiative
to reduce spirits tax fraud in the 2004 Budget. Tax stamping is
to be introduced in 2006. Although this does not directly affect
the brewing industry, we would like to ensure that tax stamps
are not extended to all alcoholic drinks. It would be impracticable
for tax stamps to be introduced for beer and would be wholly disproportionate.
HMCE considered a number of regulatory options in 2003. This focussed
attention to restricting duty suspended movements. Restricting
movements in the brewing sector would have headline costs of £5-10
million for the industry to introduce essential systems changes
and cover cash-flow losses.
3.3 The BBPA contended that the majority
of duty-suspended movements of beer in the UK are of low risk
to the revenue and are essential to satisfy trading patterns and
market demands. We were pleased that the proposals to stop duty-suspended
movements, was dropped. There are a number of other regulatory
measures, which have not been progressed because the attention
of HMCE has been focussed on the tax stamp issue. We are keen
to discuss these matters further in the context of an overall
simplification and modernisation plan.
4. THE IMPACT
THESE HAVE
HAD ON
THE LEVEL
OF FRAUD
AND ON
COMPLIANCE COSTS
4.1 Beer premises registered under the Alcoholic
Liquor Duties Act (ALDA)
4.1.1 The brewing industry has invested
heavily in fabric and systems to create national distribution
networks to meet the requirements of the End Product Duty system
which was introduced in 1993.[13]
Pay-back calculations were based on an assumption that the current
system would have longevity. The industry is concerned that regulatory
changes, could require extensive systems development and, possibly,
a re-organisation of the warehousing system. This would have a
significant impact on compliance cost.
4.1.2 Beer is a relatively low value high
volume good which is perishable. This needs to be moved close
to market to satisfy demands from retailers for just-in-time deliveries.
4.1.3 Beer registered premises are regulated
under the ALDA. Where such premises are managed properly under
existing UK and EU procedures we would maintain that the beer
regime operates satisfactorily and that it is a low risk business
in terms of potential revenue loss. We would oppose an all-embracing
regulation of breweries under Customs and Excise Management Act
(CEMA) perhaps driven by a mistaken belief that this will have
a significant effect on levels of fraud. Whereas, we consider,
that there is a strong case to align alcohol trade systems in
order to simplify them, there is no benefit that could be gained
from removing ALDA registrations and replacing these with CEMA
approvals. This would result in high compliance costs to the brewing
industry for little or no return in the battle against fraud.
4.2 Alcohol fraud—Effect on the legitimate
trade
4.2.1 Alcohol Fraud impacts on the UK beer
market and is highly damaging to the fragile economics of the
supply side of the industry. There is a concern that, in applying
regulatory controls to reduce fraudulent activity, it is the legitimate
trader who will be penalised and the measures will be disproportionate
to the level of risk.
4.2.2 In order to tackle fraud we would
advocate a risk-based approach. The BBPA considers that the majority
of movements between sites within the same ownership and between
brewing companies are low risk and are essential in order to facilitate
consumer response times. The BBPA is not aware of any fraudulent
activity connected with such movements.
4.2.3 It is considered that the higher risk
areas are associated with movements to third-party warehouses.
It is through a series of movements between warehouses where the
fraudster, commonly with the collusion of a haulier, gains access
to duty-suspended goods which are then diverted onto the UK market.
It is in this area that the Association is strongly supportive
of cooperation with Customs and Excise to assist in reducing the
level of fraudulent activity.
4.2.4 A distinction should be drawn between
large pack (keg and cask) where diversion fraud is not an issue
at present and small pack (bottle and can) where there is potential
risk. Currently, the large pack constitutes 60% of the UK market.
4.3 Guarantees
4.3.1 No guarantee system can ever effectively
insure HMCE against the potential revenue loss in a fraud, as
was found in the heyday of diversion fraud in the latter half
of the 1990s. However, the guarantee requirement has the advantage
that it clearly indicates on whose shoulders the liability for
payment of excise duty falls in the event of an irregularity.
Therefore the trade agrees that the liability should fall to the
parties to a movement which are likely to have the most control
over the movement of the goods.
4.3.2 It is suggested that HMCE, warehousekeepers,
and transporters should all co-operate to formulate a written
code of practice governing the use of guarantees in duty suspended
movements: this would formalise and reinforce the advice given
informally by HMCE on an ad-hoc basis. Also, steps should
be taken to ensure that all those in an organisation involved
in selling excise goods are aware of its contents.
4.3.3 The benefit of this proposal is that
the use of the guarantee as a deterrent to potential fraudsters
will become more potent. Many people embarking on fraudulent activities
for the first time will probably lack the credibility and reputation
which financial institutions will require before they will underwrite
a guarantee. It cannot be stressed enough that when the guarantee
procedures are diligently applied frauds are less able to get
off the ground. Some fraudsters may be able to obtain guarantees
themselves but, for others, this may make their fraud too risky
to be worthwhile.
4.3.4 HMCE should ensure that its database
of guarantees is kept up to date and that traders can check that
guarantees used by others in the supply chain are valid. As this
does not contain details of guarantees taken out in other EU member
states, HMCE should re-affirm previous advice that the latter
may not be used for movements starting in the UK.
5. THE BREWING
INDUSTRY'S
COMMITMENT TO
TACKLING FRAUD
5.1 The industry shares HMCE concern about
the level of duty fraud and it is acknowledged that any level
of fraud is unacceptable. There is a consequential impact on the
UK beer market. In this regard, the brewing industry and HMCE
are as one; fraudulent activity must be reduced in order to maintain
sustainability of the sector and protect tax revenue.
5.2 In seeking to reduce fraudulent activity,
the brewing sector agreed to participate in a Joint Beer Fraud
Task Force to assist HMCE by supplying intelligence to identify
criminal activity. Unfortunately, the focus on spirits tax stamps
has diverted HMCE resource from this initiative.
5.3 The industry has also engaged with HMCE
in trialling an electronic real-time notification system which
could pave the way for meeting the UK obligations under the European
Electronic Movement Control System (EMCS).
5.4 The brewing industry considers that
this is an ideal opportunity to discuss a longer-term framework
for improving revenue assurance and tackling fraud through simplification
and modernisation of the duty collection system. A major objective
would be to use HMCE resource more effectively. Sharing a joint
vision of a desired future state would facilitate the development
of more cost-effective systems. HMCE and the industry could capitalise
on enabling technology (readily available to all enterprises)
to improve the process for duty-suspended sales and movements
and capitalise on the potential for managing data through trending
and exception management. The industry has discussed ideas previously
with HMCE, suggesting a "Barclaycard" approach in which
it would be feasible to notify all duty-suspended movements and
sales, not just those at high risk.
The brewing industry has worked closely with HMCE
in the past to reduce fraud and diversion, and will continue to
do so. An effective fight against fraud involves a meaningful
exchange of information and a genuine partnership. For its part,
the brewing industry is committed to providing such information
and to working in such a partnership. However, we remain of
the view that addressing the root of the cause of the problem—the
high duty rate—is the only long-term solution.
5 The BBPA is a Trade Association representing 98%
of the UK brewing industry and interests of owners and operators
of over 35,000 public houses throughout the UK. Back
6
The BBPA rationale for ascribing a low level risk is that there
is one computer system in operation, the goods are owned by the
producer and there is visibility of movements. Back
7
Ev 66 Back
8
It should also be noted that there is a grey area regarding when
cross-border shopping becomes smuggling. A significant proportion
of respondents in the HI Europe survey purchase more than the
indicative limit of 110 litres of beer and this increased in 2000
and 2001 when the van trade declined. Hence the amount of beer
that could be classed as smuggled is considerably higher than
just the van survey volume. Back
9
Ev 67 Back
10
Ev 67 Back
11
Ev 67 Back
12
Ev 67-68 Back
13
EPD: The change to End Product Duty from 1 June 1993 meant that
duty became chargeable when beer left the brewery or other registered
premises. Previously duty was chargeable at the wort-stage of
beer production. Back
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