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Standing Committee Debates

Draft Duty Stamps (Amendment
of paragraph 1(3) of Schedule 2A to the Alcoholic Liquor Duties Act 1979)
Order 2006

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First Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mrs. Janet Dean

†Alexander, Danny (Inverness, Nairn, Badenoch and Strathspey) (LD)
†Austin, Mr. Ian (Dudley, North) (Lab)
†Cable, Dr. Vincent (Twickenham) (LD)
Dorries, Mrs. Nadine (Mid-Bedfordshire) (Con)
†Goodman, Mr. Paul (Wycombe) (Con)
†Healey, John (Financial Secretary to the Treasury) (Lab)
†Jackson, Mr. Stewart (Peterborough) (Con)
†Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
†Mahmood, Mr. Khalid (Birmingham, Perry Barr) (Lab)
†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)
†Meacher, Mr. Michael (Oldham, West and Royton) (Lab)
†Milton, Anne (Guildford) (Con)
†Selous, Andrew (South-West Bedfordshire) (Con)
†Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
†Tami, Mark (Alyn and Deeside) (Lab)
†Ussher, Kitty (Burnley) (Lab)
†Ward, Claire (Watford) (Lab)
Emily Commander, Committee Clerk

† attended the Committee

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Monday 23 January 2006

[Mrs. Janet Dean in the Chair]

Draft Duty Stamps (Amendment
of paragraph 1(3) of Schedule 2A to the Alcoholic Liquor Duties Act 1979)
Order 2006

4.30 pm

The Financial Secretary to the Treasury (John Healey): I beg to move,

    That the Committee has considered the draft Duty Stamps (Amendment of paragraph 1(3) of Schedule 2A to the Alcoholic Liquor Duties Act 1979) Order 2006.

I welcome you to the Chair, Mrs. Dean. You come from an area that has a proud brewing tradition and you still have Bass, the world-renowned beer, based in your constituency. Although this debate is concerned with the alcohol industry, it is confined to spirits and the action that the Government believe is necessary to tackle spirits fraud.

The Chairman: Order. I wish to make a correction. The brewery is now Coors, not Bass.

John Healey: I apologise. So Bass has been taken over by Coors, but I still hope that it is a productive brewer in your constituency, supporting local industry and local drinkers.

This is a relatively short Treasury order so I shall make only a brief introduction. It gives effect to the decision that my right hon. Friend the Chancellor announced in the Budget last year to provide a targeted exemption from the new duty stamps scheme for spirits of less than 30 per cent. alcohol by volume. The decision was taken after extensive consultation with the drinks industry as part of the wider consultation on the effective implementation of the new duty stamps regime, a scheme that is a central element of the Government’s strategy to clamp down on spirits fraud. Members of the Committee might be aware that schedule 2A to the Alcohol Liquor Duties Act 1979, which was introduced under the Finance Act 2004, provides for the introduction of a duty stamps regime, a scheme for spirits, wines and made wines.

Schedule 2A provides that all spirits, regardless of their alcoholic strength, for sale by retail in containers of 35 centilitres or more, are subject to the duty stamping requirements. Those requirements apply also to wine and made wine of the strength exceeding 22 per cent. alcohol by volume, which under law are taxable at the same rate as spirits.

The order amends paragraph 1(3) of schedule 2A so that the duty stamping requirements will apply only to spirits, wine and made wines when the strength by volume is 30 per cent. or more. We estimate that, by removing those requirements for products with the
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strength below 30 per cent. alcohol by volume, the ongoing compliance costs to the legitimate trade will fall by 14 per cent. or £7.5 million a year compared with the original estimates. They will do so without reducing the impact that duty stamps will have on fraud.

The Government’s objective through the duty stamps scheme is to tackle spirits fraud to keep the compliance costs for legitimate law-abiding businesses to a minimum. In relation to compliance costs, members of the Committee may wish to note that the new appendix to the regulatory impact assessment for duty stamps shows that the order is not the only measure that we have taken to reduce the costs to the industry. Through the various revisions to the duty stamps regime, the total ongoing compliance costs, which have been agreed with the industry, have been reduced from £54 million a year to less than £4 million a year. The set-up costs, which have also been agreed with industry representatives, have been reduced from £23 million to £5.6 million.

Those reductions in compliance costs in which the order plays a part reinforce our belief that the duty stamps regime remains a proportionate response to tackle the problem of spirits fraud, which we estimate costs some £250 million a year in lost revenue—revenue that must be made up from other sources and law-abiding taxpayers.

I turn now to the decision to introduce the 30 per cent. threshold for alcohol strength. The operational experience of Her Majesty’s Revenue and Customs shows that, by far, the products most at risk from fraud are brown and white spirits such as vodka and whisky. Brown and white spirits with an alcoholic strength between 37.5 and about 40 per cent. ABV have made up the overwhelming majority of spirit seizures in recent years. We therefore sought to find the best practical way of excluding products that do not present such a significant fraud risk.

In consultation with the alcoholic drinks industry, we boiled the options down to two. The first was to define and exempt certain categories of product, such as liqueurs, where the risk of fraud is low, and the second was to introduce an alcoholic strength threshold. However, in our discussions with the industry, which would have favoured a product or category exemption, two things became clear. First, it would be extremely difficult comprehensively to define and exempt particular categories of product in an industry that hon. Members will know is dynamic and innovative and in which brand names, products, promotions and formulations are constantly evolving. Secondly, such an exemption would not provide the necessary simplicity and clarity for producers, retailers and consumers.

One of the essential benefits of duty stamps is that retailers and consumers will be easily able to identify illicit product by the absence of a duty stamp. This benefit would be diluted if they first had to check a list of exempt product categories or, worse still, exempt brands. The proposal in the order for an alcoholic strength threshold, on the other hand, is clear and simple. Any products over the threshold will simply be
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stamped. That therefore became our favoured option and the only remaining question concerned the appropriate level at which we should set that threshold.

In our discussions, the industry argued that a cut-off point of 35 per cent. ABV, rather than 30 per cent., would be most appropriate. We considered that carefully, but rejected setting the threshold at 35 per cent. ABV. We did so principally because if a 35 per cent. strength threshold were adopted, there would be a real possibility that products with a slightly higher strength would simply be reformulated with a strength below 35 per cent. without significantly altering the character of the products in order to avoid the duty stamping requirements. We have seen such reformulation take place in the drinks industry quite frequently, most dramatically recently with the ready-to-drink or alcopops sector. Fraud involving the products we are concerned about today would therefore continue unabated by the impact of duty stamps.

A 30 per cent. threshold reduces such a risk and the risk of products at the cheaper end of the market being introduced below the duty stamp threshold. The strength of any new products developed to avoid the duty stamping requirements would be so much lower that they would not represent a significant competitive threat to the type of product currently susceptible to fraud. For those reasons, it was decided that a 30 per cent. threshold was the best way of achieving the Government’s objective of reducing compliance costs for legitimate businesses without diminishing the impact that the duty stamps scheme will have on spirits fraud. On that basis, I commend the order to the Committee.

4.39 pm

Mr. Paul Goodman (Wycombe) (Con): It is a pleasure to see you in the Chair, Mrs. Dean. I shall refrain from commenting on the production of alcoholic beverages in your constituency, in case I get any of the details wrong. Instead, I shall turn my attention to the order before us. It bears directly not only on a range of spirits but on an important domestic history. Although the order is brief, it has a bit of a history.

The Government first considered a tax stamp on spirits in 2001, but they decided against it in the 2002 Budget. The Chancellor announced a consultation on it in the 2003 pre-Budget report and then decided on stamps in the 2004 Budget, which brings us to where we are today. Stamps were opposed by the Scottish Parliament, the Scottish Executive, the Scottish Affairs Committee in this House, the all-party Scotch whisky and spirits group—perhaps unsurprisingly—and 95 right hon. and hon. Members who signed an early-day motion opposing tax stamps altogether. Some of those Members may even be in the Committee today.

John Healey: Before the hon. Gentleman took up his position on the shadow Treasury team, a Committee of the whole House considered—on the Floor of the House, for a considerable time—the general questions
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and the arguments for and against that he is rehearing. He may wish to re-read that debate, rather than cover ground that we have covered before. The provisions of the order are narrow.

Mr. Goodman: The Financial Secretary is quite right. It was a lengthy debate. I have the report in my hand: I read it before the Committee, rather than proposing to read it afterwards. However, before we consider the order it is useful to sketch out something of the background. That said, given the history that I have just described and the decision to proceed, which, as he said, the House took during the Committee stage of the Finance Bill, we are where we are.

The industry has since entered into a dialogue with Her Majesty’s Revenue and Customs to prepare its members to implement and comply with tax stamps. That included the order that is before us. As a result of that dialogue, the Government have proposed, first, to allow duty stamps to be incorporated into bottle labels and, secondly, to make targeted exemptions. One of those is the one before us today. I gather that the Scotch Whisky Association has no issues to raise in relation to the threshold contained in the statutory instrument. However, I want to ask the Minister a few brief questions.

The order exempts bottles of spirits of less than 30 per cent. ABV from stamps. It was not clear from what the Financial Secretary said whether the Government have ruled out entirely—they have certainly done so to date—exempting certain categories of liqueurs, as a class, from stamps. I understood that the Government’s position was that if that could be achieved in a way that avoided complexity, uncertainty and revenue risk, they would consider the matter. I would be grateful if the Minister could update us on that.

The Financial Secretary referred to the possibility of a 35 per cent. threshold and then said that the Treasury did not want to settle for that figure because it was worried that, if it did, companies that produce liqueurs might alter the strength of their product. I would be grateful if he could explain why that does not apply at 30 per cent., but does apply at 35 per cent. We are told that the Government are also minded to allow additional flexibility in the format of stamps for those businesses that prefer to fix stamps in the form of traditional strips. Does the Financial Secretary have any news on that?

Finally, as the central purpose of the order and the stamps is to reduce fraud, will the Financial Secretary tell us what assessment he has made of the contribution that the change will make to preventing fraud? Will he comment, in particular, on the accuracy and reliability of Treasury figures, given that the last time the Treasury had a fraud estimate and went head to head with the liquor producers, the Public Accounts Committee declared that neither set of figures could be “accepted as unequivocally reliable”? I look forward to his reply.

4.44 pm

Dr. Vincent Cable (Twickenham) (LD): I, too, welcome you to the Chair, Mrs. Dean.

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The hon. Member for Wycombe (Mr. Goodman) quite rightly reminded us of the long and complex history that forms the background to the order. I participated in some of the debates on strip stamps. The first thing to acknowledge is that the Government have moved a long way. There have been exhaustive inquiries by the Scottish Affairs Committee and the National Audit Office, and extensive discussions between the industry and the Government. The positive thing to come from that is that the Government have listened to many of those representations. Many of the difficult features of the original proposal have now been taken into account, and this order deals with one of the more important ones.

Originally, there were two areas of controversy; I shall briefly review how far we have converged on them. As the hon. Member for Wycombe mentioned, there were widely different estimates about the amount of fraud that existed and therefore about how much a strict tax regime could save the Treasury. The Government came up with a figure of £600 million a year, of which they thought they could save £150 million. The industry, on the other hand, talked about £100 million to £150 million of fraud. As the hon. Gentleman said, when the National Audit Office looked at the issue, it found that both parties were being far too specific and that the wide-ranging estimates were based on two different methodologies.

A few moments ago, the Minister said that the Government’s current figure for the fraud was £250 million. Is that a consensus figure between the rival ranges or the figure that the Government have now come up with using their original methodology but taking into account the effect of the exemptions that they have now given? In other words, are we still dealing with very different estimates between the trade and the Government?

I repeat the question already put by the hon. Member for Wycombe: how much of the total fraud level of £250 million, if that is what it is, do the Government now think they can save through their modified proposals—not just the exemptions announced today, but the different approach to labelling? It would be helpful if the Minister elaborated a little on where that figure of £250 million comes from and on how much of that would be saved.

The second area of controversy related to the methods employed, which raised different issues. One issue concerned the compliance costs and the bottling units, another the technology—as somebody said at the time, the original proposals involved 19th-century technology for a 21st-century problem. There was also concern about fraud and the likelihood of abuse, using the Government system.

The Government have moved quite a long way. They have accepted a different, much simpler technique, which involves incorporating the strips into the label, and have introduced the exemptions and the de minimis limits that have been indicated today.
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Probably most important of all from the industry’s point of view, they no longer require it to make large up-front payments.

All that would be regarded as sensible and welcome and has reduced the considerable cost to the industry in terms of both capital and recurrence expenditure. I acknowledge that, broadly speaking, the process of parliamentary consideration and dialogue has produced an improved outcome. One of the benefits of that is summarised in the recent press release from Revenue and Customs, which stated that it is now working with the industry on a voluntary programme, similar to that put forward by the industry, of identifying and tackling fraud.

4.48 pm

John Healey: I welcome the spirit in which the two Opposition Front Benchers have approached this debate. It is the case that the parliamentary discussions and consultations, in which I have been particularly involved, have improved the provisions. However, I also pay tribute to the industry, as the hon. Member for Wycombe suggested we should. It has not only involved itself in consultation with the Government, but come up with admirable, practical suggestions that we have considered seriously. The overall implementation of the duty stamp scheme is very much a reflection of that style.

The hon. Member for Wycombe asked a couple of questions in particular. The first was about categories. In my opening remarks, I explained that we looked first at whether we could exempt categories of drink such as liqueurs. For the reasons I gave, we concluded that that could not be done clearly and reliably for the retailer and consumer. Such exemptions would also have carried the risk that, particularly in an industry that is constantly developing new products and brands, there might be reformulations in order to circumvent the minimum threshold requirements of categories requiring duty stamps applications. For that reason, we have gone for a threshold, rather than a category, approach.

In our view, 30 per cent. is a better threshold than 35 per cent. because, as I suggested to the hon. Gentleman, fraud is most prevalent, and the risk is greatest, in relation to brown and white spirits—that is, whisky and vodka—which have an ABV level of about 35.5 to 40 per cent. The hon. Gentleman will recognise that, if the threshold were set at 35 per cent., it would mean that there was quite a small step in which to reconstitute drinks or introduce competitive products that were close to that mark. We have gone for 30 per cent. rather than 35 per cent. because we judge the risk to be far less significant that way.

The hon. Gentleman also asked about strip stamps. During the detailed consultation to which he and I both referred, and during discussions with the industry, the industry itself encouraged us to move away from the approach of applying strip stamps to the top of the bottle, and encouraged us to consider the incorporation of the tax stamp within the label. We believe that we have found a way to do that. In fact, the label stamp is probably more secure than the strip
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stamp, if one thinks about what a fraudster would need to do to misuse the duty stamp. In order to incorporate the fake tax stamp on a bottle, they would have to get hold of unlabelled products of a particular brand and apply the duty stamp, as part of the label, to the bottle.

The hon. Member for Twickenham (Dr. Cable) quite rightly said that we had moved a long way in preparing for the implementation, but he will recognise that, at the heart of our strategy for dealing with alcohol fraud in the spirits sector, there is still the principle of the introduction of the duty stamps scheme. He may remember from discussions we have had that the scale of the potential gains is very significant: from a containerload of spirits on which duty is not paid, fraudsters stand to gain more than £100,000. That is the potential scale of the profit to the fraudsters. The duty stamps scheme can help us to clamp down on that.

Essentially, £250 million is roughly in the middle of the range that we published in the pre-Budget report—that is something that the NAO encouraged us to do in
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reporting our fraud estimates. The figure is based on the finance in our methodology and the use of a different data set; those are both issues in our attempt to gain a more secure, reliable, and accurate gauge of the relevant fraud. If the hon. Gentleman wants to examine the technical details, he will find them in the pre-Budget report.

The tax stamp scheme is a central part of the strategy that we are announcing to try to reduce the £250 million annual fraud gap resulting from spirits fraud. As Opposition Members recognise, the scheme’s practical implementation has struck a balance. The scheme tackles spirits fraud, which we agree is a serious problem, but is seen by all parties as proportionate and practical. On that basis, I hope that the Committee will back the measure.

Question put and agreed to.


    That the Committee has considered the draft Duty Stamps (Amendment of paragraph 1(3) of Schedule 2A to the Alcoholic Liquor Duties Act 1979) Order 2006.

Committee rose at six minutes to Five o’clock.


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