Examination of Witnesses (Questions 400-419)
JOHN HEALEY
MP AND
MR PAUL
GERRARD
2 FEBRUARY 2005
Q400 Mr Walter: The point that the industry
made to us was that the demand for labels is variable throughout
the year and if there is only one printer at the time of their
peak demand and the printer is backing up they cannot label their
bottles. Can I go back to the design? I am unclear as to whether
you are in favour of just a label that goes on the back of the
bottle or whether you might consider a strip that goes over the
top or some other form of labelling on the bottle. What is the
thinking?
John Healey: Perhaps I can clarify
that because we did set this out in the Pre-Budget Report in December.
First of all, we have accepted the case that has been put to us
by the industry, and actually we see some significant advantages,
as I indicated earlier on to Miss Eagle, in that tax stamp being
incorporated in the back label of particular products, if that
seems sensible to the industry. The second thing is that because
the tax stamp will need to be capable of being affixed at
different stages in the production and distribution process, particularly,
for instance, for people importing into this country for sale
in the UK, it will be necessary to have a stamp which can be fixed
separately. The third thing is that we have said, and said in
the Pre-Budget Report, that we would look closely at and confirm
subsequently whether or not as a third option (in which there
is an interest within the industry) we have the tax stamp affixed
also as a strip stamp. So there could be three options. That brings
us back to the point Mr Gerrard made, which is that the important
factor is that the design is significantly distinctive for consumers
and Customs officers to be able to spot whether it is in a
back label or affixed elsewhere and is designed in a sufficiently
sophisticated way that it has security features that make it more
difficult to counterfeit. That is where we are at the moment;
we are discussing these very closely with the industry, and they
have made the same point to me, Mr Walter, that if the whole of
the industry was dependent on a single printer some of these bottling
operations—as Mr McFall knows very well from his own constituency—operate
very high volumes, very short delivery—just-in-time delivery—timescales
and they have a concern that if they have to source all their
tax stamps or back labels incorporating tax stamps from a single
printer it makes them critically dependent on the capacity of
that single printer to deliver what they need to keep their lines
running.
Q401 Mr Walter: So we could have a situation
of, if you like, three different systems with some consistency
between those systems. Imported products would have either a strip
over the top or a label put on somewhere else on the bottle; the
domestic products—Scotch, gin, vodka—at the point
of manufacture would, in all likelihood, have a back label incorporating
the tax stamp. Can I just pose to you a question here, which certainly
has occurred to me, which is the implication for the Single Market?
We have a European Single Market. If a product manufactured in
this country on a production line has the label put on the back,
which is duty paid in the UK, is the manufacturer then able to
export it or is he stuck with that as a UK product?
John Healey: He would be printing
and fixing a tax stamp because it was a product that was specifically
produced for market and sale in the UK.
Q402 Mr Walter: Is that not against the
spirit of the Single Market?
John Healey: No. It would be the
decision of the manufacturer about which market he was producing
for.
Q403 Mr Walter: Surely the whole essence
of the Single Market was that products can be freely traded and
we have bonded warehouses and duty suspension, and so on. In that
system surely the product should be able to be sold in any EU
country.
John Healey: We do indeed have
a duty suspension system and actually that is part of the reason
we have the dilemma—
Q404 Mr Walter: That is another matter.
You have not suggested getting rid of that system and you are
bound, I think, by European law to collect it. Let us assume that
the situation is as it is. Are we acting in contravention of the
Single Market by having a product that is designed specifically
for one market and cannot be traded?
John Healey: Our legal advice
has not suggested that is a problem.
Mr Gerrard: I have spent many
enjoyable hours with lawyers and the Counsel, and my understanding
is it does not contravene the Treaty.
Q405 Mr Walter: What about the practical
problems for UK manufacturers? I have not taken any information
from this particular manufacturer but it is one that springs to
mind, which is Bushmills in Northern Ireland, where most of their
product goes across the border. They are not going to be in a
position, necessarily, at the point of manufacture to know exactly
which market that is destined for—whether it is the UK duty-paid
market or the Republic of Ireland duty-paid market.
Mr Gerrard: My understanding is
they will have a decent idea of where that product is bound, and
as the Minister has said we have not finalised what the system
will be but my understanding is that what we are proposing is
legal and, in practical terms, achievable by the industry.
Q406 Mr McFall: Just a couple of quick
questions, Minister. You mentioned 84 consignments worth £10
million. Is there any indication that these spirits originated
in the UK and have been diverted back?
John Healey: The particular example
I gave you was where consignments of spirits that were produced
in another European Union country apparently bound for another
European Union Member State—not the UK—were diverted
into the UK illegally and illicitly with false documentation so
that, apparently, according to the documentation, these 84 lorry-loads
were dispatched from one EU country and delivered to another but,
in fact, ended up in the UK market without UK duty paid, and diverted
into our supply chain with no way, once they are in the supply
chain, of being able to nail them.
Q407 Mr McFall: The Scotch Whisky Association
tells us that the estimates are much less than you say. Are there
any examples of spirits that originate in the UK being diverted
back? Are there any examples brought to you by Customs recently?
Mr Gerrard: I have got a couple
of examples of UK manufactured products being exported and allegedly
then being diverted, then coming back into the UK bonded and being
diverted. For example, I have 12,500 litres of vodka manufactured
in the UK brought back in and found at unauthorised sites, and
I have got 15,000 litres of whisky at Ramsgate, which again is
UK—
Q408 Mr McFall: So we are talking about
a considerable amount of money.
Mr Gerrard: That is right. It
is about £100,000, for that kind of volume, in duty.
Q409 Mr McFall: Some people suggest within
the industry that the estimates are much less. If the Treasury
agree that the estimates are much less than, say, £100 million,
is it worth the bother of going ahead with tax stamps, or is the
Government resolute in pushing the tax stamps in terms of fraud?
John Healey: As you know, Mr McFall,
we do not accept the basis of the method that the trade use for
calculating their fraud estimates. Our operational experience
suggests, as Mr Gerrard and I have tried to stress to the Committee,
that there are some serious gangs out there that are perpetrating
some widespread and large-scale frauds. Essentially, we have an
understanding with the industry. They are strongly committed to
helping us tackle fraud and they recognise—although their
estimates may differ from ours about the level—it is a significant
problem. They recognise that we do need to put in place new measures
to deal with that. Our proposed measures have the tax stamp at
the centre of those, and we are looking also, as we have confirmed
in the Pre-Budget Report, at some of the ideas that have come
from the industry. As the chairman of the Scotch Whisky Association
confirmed to the Committee, the notion of the introduction of
a tax stamp is a useful check on the fraud. It is not all we have
got to do and it is not all that we will do, but it has an important,
central part to play. I think, as I said earlier to the Committee,
the industry understandably does not want it, does not really
like it, but I think accepts that it has got an important part
to play and, increasingly because of the detailed discussions
that we are having with them, accepts that it can be done and
be brought in in a way that is going to be proportionate to the
problem and not put on to the industry unnecessary costs.
Q410 Mr McFall: I think clarity would
be helpful here. So you could not envisage a scenario, as a Treasury,
whereby tax stamps are not worth pursuing? In other words, tax
stamps, from your perspective, are here to be implemented?
John Healey: We touched on this
earlier on.
Q411 Mr McFall: I would just like clarity.
John Healey: When we fist considered
tax stamps and decided not to press ahead with them, we then had
a period of discussions with the industry where, frankly, (and
they included a formal consultation as well from the Government
during the course of 2003) that simply did not throw up any other
credible alternatives that would allow us to deal with this spirits
fraud. In those circumstances, we took the decision—and
this is the position we are in—that tax stamps can be introduced,
they need to be introduced and we will introduce them in a way
that balances our ability to tackle fraud with not imposing unnecessary
costs on the industry in doing so.
Q412 Mr McFall: So you are resolute in
your determination to introduce tax stamps?
John Healey: Yes.
Q413 Angela Eagle: I get the impression
that these industries, both the spirit producers and the tobacco
manufacturers, were not that interested in engaging with you on
the smuggling and fraud problems until, certainly in the case
of tobacco, counterfeiting became a problem. Since then you have
negotiated a series of memoranda of understanding which assist
in, hopefully, both the industry and Customs working together
to challenge this very large revenue loss that we now face. Would
that be an accurate assessment?
John Healey: I do not think it
is entirely fair. It is true to say that we share at present both
the judgement that the scale of counterfeiting is very much higher
than it was two or three years ago, we share a strong interest
in dealing with it, but in my judgement the interest and the co-operation
we have had from the UK tobacco manufacturers to some extent,
I have to say, followed out of interest in this House, particularly
in the Public Accounts Committee and, also, in this Committee—an
interest in which Members of his House came to the conclusion
they felt the tobacco manufacturers were not showing enough serious
intent in dealing with tobacco problems. When one looked at the
level of UK-manufactured cigarette exports to some countries they
were so extraordinarily large-scale for the size of the population
for likely consumption in those countries that there was obviously
a problem with that being a likely route to see tobacco manufactured
in this country diverted back in without any UK duty paid.
Q414 Angela Eagle: You are thinking of
Andorra where the daily cigarette consumption would have had to
be 200 per person, every member of the population, to justify
the figures that were being exported there?
John Healey: Andorra was, indeed,
an example, though not the only example. I have to say, over the
last couple of years particularly, now we have memoranda of understanding
signed and in place with each of the UK manufacturers, the level
of co-operation we have is very good. The impact on, if you
like, the proportion of genuine UK manufactured cigarettes which
we are now seizing, as opposed to counterfeit, I think, tells
its own story.
Q415 Angela Eagle: The thing that struck
me particularly when we visited Hungary and the Czech Republic
was the grave threats and highly organised threats posed by sophisticated
counterfeiting operations, not only from China but also from illicit
manufacturing centres set up, run by Vietnamese and other gangs,
in the Czech Republic producing highly dangerous counterfeit cigarettes.
Do you think Customs are doing enough and working closely enough
with their colleagues across the European Union, particularly
at the outer borders of the new EU Member States, to tackle this
serious, emerging danger to public health?
John Healey: We are not doing
enough but we certainly are doing more than we were a couple of
years ago as it becomes much clearer that counterfeiting is a
bigger problem. You are absolutely right, Miss Eagle, the threat
of counterfeit cigarettes is not just a threat to the revenues
to the public purse, the latest evidence suggests that counterfeit
cigarettes are significantly worse than ordinary cigarettes for
the health of the people that smoke them, and in many cases have
very significant levels of heavy metals like arsenic. The sorts
of measures we are trying to take to deal with counterfeit include—and
this is relatively recent, I have to say—increasingly constructive
co-operation with China and some of the governments in the Far
East, because it is there that we have the biggest problem as
the largest source of counterfeit cigarettes finding their way
into the UK and other parts of Europe.
Q416 Angela Eagle: Do you, finally, have
a strategy for the other end, the retail end? Counterfeit cigarettes
cannot get out and pose an even greater threat for the population
of smokers than smoking their normal brands unless there is quite
a sophisticated retail operation to spread the smuggled and counterfeit
cigarettes into the UK. Can you give us a flavour of what you
are doing to try to prevent that end of the distribution chain
being as effective as it currently is?
John Healey: You are absolutely
right. Part of the investment that I talked about earlier on in
the tobacco strategy with the extra personnel that Customs deployed
on this has been deployed inland rather than at the frontiers.
People often have the perception of Customs as simply a frontier
operation and organisation but we do a significant amount of work
seizing and disrupting and detecting inland. I will ask Paul Gerrard
to give you some instances of the inland work. He and I went together
on a Customs operation just over a year ago to the Holloway Road
which is the good example of the sort of outlet for bootleg cigarettes
and smuggled tobacco.
Mr Gerrard: One of the most important
things about illicit cigarettes and particularly about counterfeit
is that at present most of those cigarettes are sold through informal
distribution networks rather than the traditional corner shop
or supermarket. They are sold on street corners like the Holloway
Road. Therefore, when people are buying them they are buying them
at a cheaper price. We did a lot of work in December, which the
Minister played a large part in, in explaining the nature of that
in that if you are buying cheap cigarettes you really do not know
what you are buying and you will not know what you are buying
until you light it up, and at that point it will taste awful or
it may fall all to pieces. There is a lot of work we can do on
educating people about the fact that when they buy cheap cigarettes
they have got no idea what they are buying until they actually
light it up because there is no difference now. The days of finding
illicit cigarettes and counterfeit where they spelt the name wrong
are long gone. These are very sophisticated counterfeits now.
In addition to that, we do an awful lot of work inland using blitz
techniques with brigaded forces to hit hot-spot areas where we
have intelligence and where we have other information that tells
us there is a problem there. It is about trying to affect demand
by an educational process but also by having very well-targeted
enforcement and we seize millions and millions of cigarettes inland.
Q417 Angela Eagle: And prosecution. If
people are found selling these things what kind of punishment
can they expect to receive?
John Healey: We have a range of
sanctions available to us starting from the most basic of seizure
of cigarettes which of course will be a loss of their investment,
shall we say, but also in terms of prosecutions. With the fiscal
mark legislation that the Minister referred to earlier, it is
a straight liability offence. If they are selling unmarked product
we can seize that and we can prosecute for that. There still is
the prosecution option and we are increasingly prosecuting what
we would term "inveterate" offenders. Where normal seizure
action has not worked then we will prosecute.
Q418 Mr Beard: A key element of your
strategy for tackling tobacco smuggling is to reduce the supply
of cigarettes available to smugglers and Customs and Excise have
entered into memoranda of understanding with the three major UK
manufacturers in order to reinforce co-operation in tackling tobacco
smuggling in the United Kingdom. That has already been mentioned.
When we were talking to the chief executives of the three UK tobacco
companies we were left rather perplexed because when we asked
what the difference is now you have signed this memorandum and
what you were doing before, they told us there was no difference.
So how can the memoranda be having the impact on the situation
that is being said?
John Healey: There is certainly
a difference from Customs' point of view. Paul, do you want to
explain the difference it has made to us in terms of our working
relations with the tobacco companies and the intelligence and
action we can take as a result of it?
Mr Gerrard: Under the memorandum
of understanding, which we have worked at now for over a period
since the strategy started in the year 2000, we are able to challenge
deliveries to certain customers if we have suspicions about them,
not necessarily evidence of criminal activity but where we have
suspicions about the supply chain, and we issue what we term yellow
and red cards, ie a yellow card where we have serious concerns
and a red card where we say "we do not want you to supply".
I think what has undoubtedly happened is that tobacco manufacturers
as a result of that memorandum of understanding have taken a lot
more care who they supply a product to, in what markets they supply
them to and I think you can see that in the amount of genuine
UK manufactured cigarettes that are in the illicit market. It
has reduced significantly and that is why counterfeit has come
up. So in my view things have changed significantly. Tobacco manufacturers
may not agree with me but my own view (and I have worked in this
for five years now) is that it has changed very significantly.
Q419 Mr Beard: The other perplexing thing
is here are three major United Kingdom corporations subject to
United Kingdom law; why do they have to sign a memorandum of understanding
before they start abiding by the law?
Mr Gerrard: I think it is a question
for the tobacco manufacturers rather than me.
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