Examination of Witnesses (Questions 120-139)
DR DAVID
LONG, MR
PETER SCULLY,
MR IAN
GOOD, MR
GAVIN HEWITT
AND MR
IAN SHEARER
8 DECEMBER 2004
Q120 Mr McFall: To what?
Mr Hewitt: ONS is doing work at
the moment.
Q121 Mr McFall: What is your figure?
Mr Hewitt: We gave a figure, for
example, for 2001-02 where we said the figure for fraud, using
the NAO work which looked at it, was between £10 million
and £260 million. That was the spread when the NAO looked
at our figures, which were worked on the General Household Survey.
That compared with the figure, when the NAO corrected it, which
was £330 million and £1,080 million for the Customs
figures. So our figure is substantially lower. We believe, if
the ONS look and come out with the right data set, which is what
they are working on at the moment, we may well see some figures
changing yet again.
Q122 Norman Lamb: With those ranges is
it not the truth that nobody knows how much fraud there is?
Mr Hewitt: We do believe we know
the truth, but the government has actually chosen statistics which
do not reflect market realities. We believe the figures are very
close, much closer to ours, because we have the reality of the
market to prove them.
Q123 Mr McFall: How come you have the
Holy Grail and the government does not have it?
Mr Hewitt: I am afraid we have
a very expert statistician who has worked very hard on it.
Q124 Mr McFall: Mr Shearer, welcome.
You tell us, educate us all here.
Mr Shearer: What has happened
is that Customs and Excise have used one survey set for the consumption
of spirits, but there are other ONS survey sets out there and
we believe that there is a need for a check to be introduced on
which set of figures accords most closely with reality. Interestingly,
the government actually also published our alternative figures
last week in an annex to the Pre-Budget Report. They did publish
the alternative survey estimates and by those figures, which are
based on the work that we did, the illicit market share in 2000-01
was 6%, in 2001-02 it was 3%, it compared with the government's
estimate, which I think was 13%, and in 2002-03 the level of illicit
market was minimal, possibly less than 2%, compared with the government's
estimate of 7%. Now why do I talk about reality checks? One needs
to look not just at the theoretical debate which tends to create
this kind of fog of uncertainty, but you also need to look at
some reality checks on the figures. The first one is market disruption
and Ian spoke in his introduction about the kind of market disruption
which he experienced on his brands in the 1990s. There was evidence
that some of his brands were getting into cash-and-carries and
that they were definitely being illicitly traded. At the present
time, he is not experiencing that, so the industry is not experiencing
the market disruption that it used to. The second reality check
is actually the revenue that the government is getting. If you
look at the revenue figures for spirits, they have gone up continuously
since 1998; they have actually gone up by 35% since 1998 which
is an increase of about £600 million. You will remember that
the £600 million was the original speculation as to the size
of the fraud problem, but the revenue has actually gone up by
£600 million since 1998. If revenue is going up, that suggests
that fraud has been going down.
Q125 Norman Lamb: Or consumption is going
up.
Mr Shearer: Well that is the third
reality check. The third reality check is consumption and the
Customs estimate is based on an estimate of consumption. However,
their estimate of consumption is so huge, that it does not tally
with the experience of sales and marketing people as to what the
level of consumption really is. Also, as I said, there are other
ONS surveys on spirits consumption which show a totally different
trend from the consumption trend which is shown in the original
Customs' survey that they have relied on. So there are two different
pictures of consumption there. A couple of other very brief reality
checks. One is: what are Customs actually seizing and detecting
in terms of fraud? If you look at their seizures, the stuff which
comes in through the ports, these have considerably fallen. They
have gone down by 57% between 2000-01 and 2002-03. If you looked
at the outward frauds that they are detecting and asked them now
what hard evidence there is that there are now currently major
outward frauds going on, they are quite reticent on the subject
because there is not much hard evidence at the moment of outward
fraud. The third sort of thing is that if 7% of the market were
illicit, that would be about 80,000 bottles a day. Now if that
kind of fraud were being found in the marketplace by Customs'
investigators, Ian's company and other companies would be expecting
phone calls from Trading Standards' and Customs' officers around
the country on a regular basis saying "Can you tell us about
this bottle and this lot code? What is the history of this lot
code? Should it be in the UK market at all?" and we are just
not getting that volume of calls. I think in Ian's company he
has had about one call in the last year.
Mr Good: One in the last year.
Mr Shearer: The final reality
check is, if you do an analysis of the market by sales channels;
how much the average consumer spends in the supermarket on spirits,
how much they spend in off-licences and how much they spend in
independent corner shops on spirits. This 7% figure which the
government quotes is equivalent to total sales of just about half
of all corner shops in the UK. When they said it was £600
million, that would be every bottle in every corner shop in the
UK. We assume there is no fraud in supermarkets and major off-licence
chains, by the way, because those have very secure supply chains,
but the current figure is equivalent to probably about half of
all corner shops in the UK and every bottle in that share of the
market. I put it to the Committee that that is slightly implausible.
Q126 Mr McFall: So we are talking about
the level of fraud here, and you are arguing about the range.
Is that right? Fraud still exists but we are arguing about the
range.
Mr Hewitt: Yes.
Mr Shearer: But we think it is
not just a picture of uncertainty. You can do these reality checks
which either back up, or do not, one set of figures.
Q127 Mr McFall: Why can you not sit there
with Customs? I would expect that if Customs and yourselves sat
down and presented us with a common theme here, we would chip
away. It is like a marshmallow here. Why is this?
Mr Hewitt: You know how far we
have actually argued. When the Chancellor last year, on 10 December,
came out and proposed tax stamps as a solution to fraud, we actually
seriously criticised and continue to criticise the figures. We
have shown time after time after time that the figures which Customs
and Excise are using are wrongly based. We have been consistent
in this. Our persistence led to the NAO looking at the figures,
looking at our figures and looking at the government's figures.
They made comments when the NAO report was produced to the Committee
of Public Accounts. The Committee of Public Accounts looked at
them and asked the ONS to go away and look at the data sets. Why
did the government's own data sets, the different ones, produce
such different figures? That is the work the ONS is now dealing
with and we are looking forward to the results of their inquiries.
Q128 Mr McFall: And that famous NAO survey
showed the range was between £10 million and £1,080
million.
Mr Hewitt: Precisely so.
Q129 Mr McFall: Not very precise is it?
Mr Hewitt: They did a very good
job in the time available, but when they did that report, and
they admitted this themselves, they were not able to apply the
market reality checks which Ian has just set out.
Q130 Mr McFall: Right; so we have got
it then that you are working well with the government and this
is a common theme and we are going to have tax stamps and we are
going to crack down on fraud. The government thinks there is big
fraud and you think it is medium or wee fraud. Is that right?
Mr Hewitt: Yes.
Mr Good: It is certainly not significant.
Q131 Mr McFall: Dr Long, welcome. Dr
Long, you said in your memorandum that duty fraud, and I quote
"is damaging the UK beer market". Illicit beer sales
will damage pubs and other retail outlets, but what effect does
beer fraud have on brewers if it is UK brands or overseas brands
brewed in the UK under licence that are involved? What is the
scene?
Dr Long: I think the picture is
very much as described by The Scotch Whisky Association, that
the differential in excise duty as between the UK and France and
other countries within continental Europe is driving fraud. This
is damaging to the beer market and it is damaging to brands, both
those produced in the UK as UK brands and those produced under
licence from brewers overseas. I think this is a straight matter
of economics in the market: if the price of the product is undermined
this will damage the product in the market.
Q132 Mr McFall: Customs have not been
able to estimate the excise duty losses on beer or wine from smuggling.
How significant is duty fraud in these areas and do you have any
estimates of the sums involved?
Dr Long: When we talk about fraud,
we have to be clear that we are talking about a number of aspects
here. We are talking about smuggled beer; we are talking about
outward diversion fraud, inward diversion fraud and drawback fraud.
Fraud is notoriously difficult to measure but for the last 10
years The British Beer and Pub Association has been carrying out
surveys and one of the surveys is in relation to the so-called
white van trade. This is a highly visible form of smuggling of
beer into the UK and over the last 10 years we have been measuring
this and we have very robust figures which now show that that
van trade is at an extremely low level. We have down-played the
amount of work that we are now carrying out in Calais on that
work. There is no doubt that some of that smuggled beer will be
diverted into, displaced into other areas, maybe into larger-scale
smuggling, but that is extremely difficult to measure in terms
of trailers.
Q133 Norman Lamb: Do you mean high value
consignments which are diverted?
Dr Long: I am talking about trailer-loads
of beer which could be coming in, but we have no means of measuring
that.
Q134 Norman Lamb: What happens? Does
it pull up in a lay-by on a motorway or whatever and get off-loaded
before it ever gets to its destination?
Dr Long: That is precisely what
happens. This is either beer which has paid French duty, and remember
that the French duty comparison for a 5% ABV product would be
5 pence, UK duty would be 35 pence, so we are talking about that
sort of differential or—
Q135 Norman Lamb: Or movement between
two warehouses.
Dr Long: —moving between
two warehouses it never reaches the destination, but fraudulent
paperwork suggests that it has. This is then diverted onto the
UK market, having either paid no duty at all or having paid French
duty.
Q136 Norman Lamb: Do you have no estimate
at all about how much of that is going on?
Dr Long: We have no estimate,
but, again, we rely on information which we have from the market,
which suggests that the level of fraud is in fact at a low stable
level and it is that residual level of fraud that we are trying
to tackle. We have some evidence that we presented in our written
paper to the Committee which looks at the difference, the discrepancy,
between import and export data between the UK and France. There
will be statistical differences of course between different fiscal
authorities in different Member States, but we believe that this
discrepancy is too large to explain by a statistical difference.
It would indicate a level of fraud which, again, is relatively
low and relatively stable.
Q137 Mr Walter: May I go back to Mr Good?
It seems quite clear from what you have already said that nobody
really knows what the extent of this situation is, in terms of
excise duty fraud or duty foregone by purchases either legally
or illegally outside the UK net. You have said that the Customs'
figures for the levels of fraud are inconsistent with your own
knowledge. I wonder whether you could just give us some idea of
exactly how much of your information is available to Customs.
Do you share every piece of information that you have with Customs
authorities?
Mr Good: Absolutely. Part of the
joint industry task force and the memorandum of understanding
is that if we have any questionable transactions or changes in
pattern of sales through warehouses that we do not know, we will
notify Customs immediately. For example, if we found that there
was an increase in sales to one particular warehouse, to one particular
customer using this warehouse, and he in turn did not seem to
be selling the product, or it was not apparent on the shelves
as we might have expected, we then found that he had sent it on
to warehouse Y, we would tell the Customs that and the Customs
would investigate warehouse Y. It would be as transparent as that.
Q138 Mr Walter: Why could you not ensure
that duty was paid at a level at which you control? If it is going
to go out to all these different distributors it is supplied duty
paid.
Mr Good: I would suggest you ask
the Chancellor why 74% of every bottle of whisky is duty and VAT.
Q139 Mr Walter: To what extent is what
we are looking at excise fraud and to what extent is what we are
looking at the consumer buying, quite legitimately, products outside
the UK? I cannot remember the last time I have purchased a bottle
of whisky for my personal consumption UK duty paid. Perhaps I
should not admit that. I do buy Speaker Martin's ten-year-old
malt but that is usually for draw prizes. I am not alone in that.
To what extent is that the problem and to what extent is the fraud,
is the conspiracy to defraud the reason?
Mr Good: There is a complete difference
between what I would call legitimate buying of product at airports
or wherever and also, I would say, retailers who are reducing
their prices to what you might say are almost VAT-free prices.
That is normal commercial business. What we are talking about
is where people are not paying duty by fraudulent means and that
is what we want to stamp out because that affects our brands.
Mr Hewitt: In the Pre-Budget Report
papers, page 12, there are the figures of statistics and spirits
estimates, together at the back with our own calculations. You
have cross-border shopping, which is what you are talking about,
buying legitimately in France or Germany and bringing it in, at
£150 million, but that is not fraud, that is legitimate purchasing
in another tax regime and bringing it in. They calculate then
the illicit fraud, that is the fraud in smuggling, at £250
million. So legitimate trading, people bringing goods in but having
paid the tax in another regime or in the duty-free shop if you
are outside the EU, is £150 million, fraud is £250 million.
Those are their figures. Our figures are £150 million legitimate
trading in another tax regime and effectively zero, because they
say the figures, and they accept this, do not produce a meaningful
result, that is basically it is very, very small.
| 
