Orders of the Day — Finance Bill — [1st Allotted Day]

House of Commons, 27 April 2004.

[Sylvia Heal in the Chair]

Clause 4 — Duty Stamps for Spirits Etc

John Healey (Labour, Wentworth)

I welcome this opportunity for the Committee of the whole House to examine clause 4 of the Finance Bill. Since December, I have had the chance to debate in the House the issues at the heart of the clause, to deal with a range of written and oral parliamentary questions, to give evidence to the Select Committee on Scottish Affairs, to discuss the concerns of the all-party Scotch whisky group and to meet individually hon. Members from all parties. I recognise the level of interest from all quarters of the Chamber and, in particular, from hon. Members from Scotland. I welcome the Scottish Affairs Committee report published yesterday, which makes a number of useful points to which we shall give further consideration.

This Committee is an important opportunity to debate in full the problems of spirits fraud and our plans to tackle them, set out principally in clause 4 and the accompanying schedule. Clause 4 is unusual. It is not just a provision that puts an announcement from the Budget or the pre-Budget report into law; it follows almost three years of detailed discussion and examination of alternatives by the Government and with the alcohol industry. Let me be clear: if there were a serious alternative to duty stamps that could deliver a similar impact on fraud, we would take it. The simple fact is that during those three years of detailed work with the industry, no one has come up with such an alternative. In the absence of effective alternatives, duty stamps for spirits are necessary to counter spirits fraud, which is a major criminal industry, deceiving consumers, undermining legitimate producers and traders and defrauding the Exchequer of several hundred million pounds each year.

John Robertson (Labour, Glasgow Anniesland)

Would the Minister, even at this late date, still accept an alternative if one were found, and move forward with it, or has he finally drawn a line under the matter and decided that he is going for strip stamps?

John Healey (Labour, Wentworth)

I am emphasising one point now, and I shall come to another, related point later. The point that I emphasise now is that three years' exhaustive work by the Government and with the industry has failed to produce a set of alternative measures that would have a similar impact on fraud. I therefore do not want to encourage my hon. Friend to hold out hope that somehow, a magic solution might be found in the coming months.

Alistair Carmichael (Liberal Democrat, Orkney and Shetland)

What would the Minister say to the front-line customs officers whom we met last week with the Scottish Affairs Committee, who described the strip stamp as just one more hurdle that those involved in the illicit trade would inevitably overcome?

John Healey (Labour, Wentworth)

If the hon. Gentleman will bear with me, I will discuss how duty stamps will assist in our efforts to increase the risks and decrease the profits associated with fraud by putting up extra barriers. Law enforcement agencies in every sector face continually and rapidly changing responses from fraudsters and smugglers. It is beholden on such agencies to attempt to get one step ahead, as the proposals in the clause seek in part to do. A number of measures, on which I shall touch, will significantly reduce the risk of counterfeiting, and of fraudsters successfully overcoming the proposed duty stamps.

Duty stamps will strike at the heart of the problem by putting an end to taxed and illegally untaxed spirits sitting side by side in warehouses, on lorries and on shops' shelves, with traders and consumers having no means of telling one from the other, and the authorities having no clear means of detecting—let alone proving—knowing complicity in fraud. Duty stamps will provide a clear identifier that duty has been paid, and although I make no claim that they will eradicate fraud entirely, they will radically restrict both the opportunities for, and the profitability of, spirits fraud.

I introduce the clause in the full knowledge that—as is already clear—some Opposition Members might oppose it.

Pete Wishart (Scottish National Party, North Tayside)

Will the hon. Gentleman give way?

John Healey (Labour, Wentworth)

May I first finish this point? Those Members will doubtless argue that they are not complacent, and will assert their determination to drive fraud from the spirits market. They will doubtless dispute the fact that the scale of fraud justifies duty stamps, and dispute their likely impact on fraud and their fairness in respect of the legitimate trade. They will doubtless argue the case for the industry's alternative proposals, or urge further delay so that more discussions can take place. I propose to deal with each of those issues in turn. I now give way to the hon. Member for North Tayside (Pete Wishart).

Pete Wishart (Scottish National Party, North Tayside)

It is not just the Opposition parties in this House who oppose strip stamps; so do the Scottish Parliament and the Scottish Executive. I challenge the hon. Gentleman to name one representative body in the industry—in fact, anybody outwith the Treasury—who thinks that this is good idea.

John Healey (Labour, Wentworth)

I do not expect the industry to like our proposal; I am arguing that we must accept that there is no alternative, and work to put this regime in place. The interests of the industry and of the hon. Gentleman's constituents are now best served by working with the Government, through the industry associations, to ensure that we can put in place a proper duty stamps regime that will bear down on fraud, while imposing the lightest possible cost on the companies that need to comply.

Michael Weir (Scottish National Party, Angus)

The hon. Gentleman is being very careful to describe the stamps as duty stamps rather than strip stamps. One problem is that the stamps have to be placed over the bottles, and the necessary equipment is expensive. Is he hinting that he has an alternative in mind, or is he determined to go ahead with such stamps, which have been described to us as

a 19th century solution to a 21st century problem?

John Healey (Labour, Wentworth)

Having read the Scottish Affairs Committee's report, I am aware of the description that the hon. Gentleman cites. I have chosen to use the phrase "duty stamps", and I am aware that the Committee is interested in the idea of incorporating what is essentially a duty stamp into the labels on bottles. We are prepared to consider it, but I should caution Members that there are a number of fundamental flaws with such an approach. I do not want to raise hopes unnecessarily, but equally, I certainly would not rule it out. It is one of the useful ideas in the Select Committee's report, and we will give further consideration to it.

John Lyons (Labour, Strathkelvin and Bearsden)

A number of Members have serious doubts about the viability of strip stamps; indeed, countries throughout Europe and in the far east have moved away from them because of their experiences. What does the Treasury know that those countries do not?

John Healey (Labour, Wentworth)

I urge my hon. Friend to be patient. As I explained, this is the first opportunity for the House to consider in detail the proposals in clause 4 and the problem that we are attempting to solve. Countries that use spirits stamps in some form have introduced them for a range of reasons, and their experiences are varied. For every country in which they have failed or have been withdrawn, it is possible to cite others in which they have worked and are regarded as an important part of the duty assurance system.

Before turning to the central issues that Members and the Select Committee are concerned about, I should point out that this Government stand by our record of tough decisions on public finances and the measures that we have implemented to tackle fraud throughout the tax system. The National Audit Office recognises that our strategies on tobacco, road fuel and VAT lead the field in Europe, and have already secured billions of pounds in revenue for the taxpayer. On tobacco, we have not only stopped but reversed the growth in smuggling, reducing the illicit market to 18 per cent. in 2002–03, compared with the forecast figure of 34 per cent. We are also tackling illegal diesel use: the illicit market share declined from 8 per cent. in 2000 to 5 per cent. in 2002. Our moves against VAT fraudsters already appear to be causing a significant drop in levels of missing trader VAT fraud.

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

rose—

Michael Weir (Scottish National Party, Angus)

rose—

John Healey (Labour, Wentworth)

I am spoilt for choice. I give way to the hon. Member for Galloway and Upper Nithsdale (Mr. Duncan).

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

I am very grateful to the hon. Gentleman. He will be aware that the gap analysis that his Department uses in estimating £600 million-worth of fraud is of mixed heritage. Indeed, the wine and beer markets have described it as not reliable enough to estimate fraud in their sector. Why is it suddenly reliable enough to estimate fraud in the spirits sector?

John Healey (Labour, Wentworth)

The Select Committee raised that issue at the evidence session that I attended—the hon. Gentleman was unable to be there—and as I explained, the gap analysis to which he refers becomes difficult to apply and unreliable when the scale of the fraud under consideration is small or negligible. However, that is not the case with spirits fraud. The approach that we have developed—and published—since 2001 is based on the belief that there is a serious spirits fraud problem in this country, and that in this case only really tough action will work. Unhappily but inevitably, we need to consider and to introduce duty stamps in order to tackle it.

Michael Weir (Scottish National Party, Angus)

I thank the hon. Gentleman for giving way again. He uses tobacco as an analogy in describing the problems in the spirits industry, just as customs representatives did several times during Scottish Affairs Committee hearings. However, there is one question to which we never got an answer. If simply printing a duty mark on tobacco packets, which have to be printed anyway, is so successful, why cannot the same idea be used for whisky bottles? Why do we have to place paper strips over the top of the bottles, given that—in the light of the cost to the industry of the necessary machinery—that strip is the real problem?

John Healey (Labour, Wentworth)

If the hon. Gentleman casts his mind back to a couple of minutes ago, he will remember that I said that we are prepared to consider such an approach, although I did encourage him not to hold out too much hope. At the hearing, it was the Committee itself—rather than me—that drew a close analogy between tobacco and alcohol. We are dealing here with a very different dynamic in the market and with a different type of fraud, which requires this solution.

This is a problem that we cannot ignore, particularly given that in respect of VAT, tobacco and the illegal use of road fuels, we are reversing the rise in fraud. We cannot ignore it when we have dealt over the last couple of years with cross-channel smuggling of alcohol and tobacco. Spirits diversion fraud is the one remaining area of excise duty where we have a significant problem. It is increasingly at odds with the strategies that we have in place elsewhere and with the successes that we are beginning to achieve.

Duty stamps are only one element—albeit an important one—of the strategy that we are putting in place to deal with alcohol fraud, particularly involving spirits. The pre-Budget report set out a package of regulatory proposals that will help to tighten the supply chain to prevent fraud on all alcohol, not just spirits. We will set a tough outcome target for reducing spirits fraud in the spending review, just as we have for other excise regimes.

Alistair Carmichael (Liberal Democrat, Orkney and Shetland)

The Economic Secretary is generous with his time. The Treasury first became aware of the scale of the fraud in the mid-1990s, when the amount of money coming into the Treasury from alcohol duty fell quite dramatically. Has that position recovered, and what is the trend in respect of money coming into the Treasury from spirits duty?

John Healey (Labour, Wentworth)

The revenue figures are set out, as usual, in the Red Book. I would encourage the hon. Gentleman to concentrate on the nature and scale of the fraud, rather than on Government revenues. The measure is not principally about raising Government revenues, but about driving down levels of fraud—and then consequentially dealing with revenue losses to the Treasury and the taxpayer.

Mark Prisk (Conservative, Hertford and Stortford)

In the documentation—and, indeed, in the Government's presentation—it is claimed that £160 million would be recouped from lost tax revenue. Can the Economic Secretary confirm that the recoupment of tax revenue is based on the Government's argument that fraud is indeed at £600 million? That has been questioned by the National Audit Office and by other Committees of the House. If it is based on that level of fraud, what confidence can we have that £160 million is indeed what the Government expect to recoup?

John Healey (Labour, Wentworth)

As the hon. Gentleman, who studies these matters, well knows, that is an estimate. All such projections for Government revenues are estimates. It is based on the level of fraud that our best estimates and modelling calculate—£600 million a year. For comparative purposes, as I shall explain in greater detail shortly, we have scrupulously estimated the impact and cost of the trade's alternative package of proposals on the same basis.

Mark Prisk (Conservative, Hertford and Stortford)

That is a crucial point. It identifies the gap between what the industry is talking about and what the Government are talking about. As I understand it, the Government believe that the gap is between £70 million and £160 million, but several measures included in the £160 million could negate the gap. Will the Economic Secretary confirm how narrow the gap is? Will he confirm that, given the significant compliance costs for the industry, when the whole package advocated by the Treasury is added up, it does not make overall economic sense?

John Healey (Labour, Wentworth)

I do not accept that it does not make economic sense or that it is not a proportionate measure. Let me be clear that the £160 million is based on our best estimate of the £600 million that we believe is lost to the Treasury each year. That is a cautious estimate, based entirely on the introduction of tax stamps, with no allied measures built into the calculation. It also does not take into account the likely increase in VAT recovery on duty-paid rather than duty-unpaid products, or the likely increase in interception by customs at the frontier.

John Healey (Labour, Wentworth)

I want to make some progress. Other Members will have the opportunity to contribute later and I will certainly do my best to respond to every point that is raised in the debate. Before moving on to specific issues, I want to make a more general statement.

The Government clearly recognise that the UK spirits industry plays a strong and historic role in this country's social and economic life. It accounts directly for tens of thousands of jobs and indirectly for thousands more, especially in Scotland, where it is a key employer. I fully recognise its importance, particularly in rural areas, some of which are represented by hon. Members who are in their places on both sides of the Chamber today.

It is crucial that the spirits market is able to flourish in the UK. By freezing the duty on spirits for the longest period since the 1950s, the Labour Government have, since coming to power, played their part. Now the Chancellor has gone further with an extended freeze for the rest of this Parliament. To support the healthy market, we must put an end to the criminal activity that is an outrageous abuse—I choose my words carefully and I mean it—of the duty system. Let me explain how the fraud works, as it remains inadequately understood even by some in the industry itself.

European law enshrines the principle of free movement of goods across the Union and provides for alcoholic goods to be moved around free of excise duty. Alcohol can be moved and sold an unlimited number of times and over an unlimited period without any duty being paid. The papers that travel with a load of alcohol are intended to secure the integrity of the supply chain. Only when the goods are released from duty suspension on to the market does the duty have to be accounted for.

That system guarantees the laudable right of the free movement of goods within the European Union and, by ensuring that duty has to be accounted for only very near to the time of consumption, provides a valuable benefit to the alcohol trade. In practice, however, it is wide open to abuse.

Successful fraud involves five steps. First, the fraudster sets himself up as a legitimate trader—sometimes by hiring or blackmailing somebody else to front up for him. Secondly, he hoodwinks a spirits producer or distributor into selling him a lorry load of duty-unpaid spirits. Experience shows that cash-in-hand to the lorry driver will ensure that he ignores the official delivery instructions and takes the load to a lock- up instead. Thirdly, he forges a receipt or bribes the recipient warehouse to stamp it for him anyway, and returns it to the dispatcher who will then have so-called proof of legitimate delivery and a legitimate transaction. Fourthly, either through a complicit retailer or by hoodwinking, he delivers the spirits on to the market at duty-paid prices. Pocketing the £5-a-bottle profit, he does not pay the duty, and except in a rare cases where enough evidence is available, he does not go to jail, because once the bottles are on the shelves, no one can tell which ones are duty paid and which are not. Fifthly, he repeats that process—lorry after lorry after lorry.

In short, that is a high-reward, relatively low-risk activity. The distribution system, set out and constrained in European legislation, provides ample opportunity, and the honest trader and drinker form an easy target.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Are there not procedures for tracking down whether the lorries take the right routes and cover the right distances for the delivery? If the paperwork says that it started in A and was delivered to B, the tachograph on the lorry is capable of confirming whether the mileage covered is consistent with making the requisite delivery.

John Healey (Labour, Wentworth)

But if the hon. Gentleman thinks about it further, if the paperwork all appears to be in order and the receiving warehouse apparently confirms delivery—whether it be in Portugal, Portsmouth, some other part of the UK or somewhere else in the EU—how does he believe that anyone is going to be alerted to potential fraud, let alone carry out a detailed investigation? I remind him that the duty suspension system allows the sale and resale time and again of duty-unpaid goods and the movement of such goods time and again in and out of the UK without the duty ever being paid. If the accompanying documentation appears to demonstrate that all is in order, it is difficult to know where the evidence will come from to alert the enforcement authorities—or the honest traders who get hooked up unwittingly in these supply chains—that a problem may exist.

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

A moment ago, the Economic Secretary mentioned complicit retailers. When retailers are found to be passing on to the public illicit alcohol on which duty has not been paid, as happened in London recently, why are the strongest possible sanctions not levied against them immediately? That would send the clear message that the distribution of illicit alcohol is not acceptable. For example, it would be very easy to ensure that such traders automatically lost their liquor licences for six months or a year.

John Healey (Labour, Wentworth)

The hon. Gentleman refers to a recent organised operation undertaken by Customs, trading standards officers and the police. Some of the evidence gathered will contribute to the decision about awarding new licences to some of the traders involved.

Other hon. Members have said that prosecution is the toughest sanction available. They have asked why, in many cases in this exercise, the corner shops were not prosecuted. The problem is that that requires evidence that demonstrates guilty knowledge. Under the current system, that is very difficult to get. In this operation, we have levied sanctions and taken actions that, although they do not amount to prosecution, are nevertheless tough and deterrent. In many cases, the goods in question were confiscated and the vehicles and other means of transport seized. There is therefore a severe financial penalty for the businesses involved, and their continuing operation under licence is also threatened.

Angus Robertson (Scottish National Party, Moray)

The Economic Secretary is outlining the challenges that fraud poses. He is right to do so, and I am sure that hon. Members of all parties support a crackdown on fraud. However, I hope that he will have looked at the experience of other countries that use strip stamps. The grave danger is that fraud will move from what is in the bottle to what is on it. Will the Minister outline the Treasury assessment of the likely parameters of fraud on strip stamps, if they are to be introduced?

John Healey (Labour, Wentworth)

The hon. Gentleman makes an important point. It is possible that the introduction of duty stamps, and their printing, distribution and retention, could cause additional security risks. We have recognised that implementing the system could be a cost to the industry, and we have undertaken to consider with it the operation of the duty stamp system that we plan to introduce. We shall also look at the scale of the risk, and at any appropriate measures to help meet the costs.

Angus Robertson (Scottish National Party, Moray)

The Government do not know the scale of the risk.

John Healey (Labour, Wentworth)

The hon. Gentleman says, from a sedentary position, that we do not know the scale of the risk. The honest response is to say that, at this stage, it is not possible to make a full and quantified assessment of the potential risk. As we develop the plans, the degree of risk will become clearer. As I said, we will also recognise the compliance costs for the industry that may be incurred.

Alex Salmond (Scottish National Party, Banff and Buchan)

rose—

Mark Prisk (Conservative, Hertford and Stortford)

rose—

John Healey (Labour, Wentworth)

The hon. Member for Banff and Buchan (Mr. Salmond) has only just joined the debate. If he will forgive me, I shall give way to the hon. Member for Hertford and Stortford (Mr. Prisk) and then make progress with my speech. I propose to cover some of the points being raised, and I undertake to answer as fully as I can any matters raised by hon. Members in the subsequent debate.

Mark Prisk (Conservative, Hertford and Stortford)

The Economic Secretary has been generous about giving way, and I am grateful. However, this is a very important matter. This morning, another fraud was identified: in St. Petersburg, 2 million strip stamps were lost to fraudsters. I am told that the value amounts to about £10 million. The industry has produced 17 schemes, and the Government have their own proposals, but is the Economic Secretary really saying that no assessment of this danger has been made?

John Healey (Labour, Wentworth)

We are two years away from the introduction of a duty stamp system. Until we know how the scheme will work on implementation, it is not possible to make the quantified risk assessment that some hon. Members are urging. However, we have acknowledged that fraud could be a problem. We will discuss the matter with the industry and develop appropriate plans accordingly.

Angus Robertson (Scottish National Party, Moray)

It is important that the House clearly understands what the Minister is saying. Is he confirming that the Government are introducing an expensive scheme without having made an assessment of the potential for fraud in connection with strip stamps?

John Healey (Labour, Wentworth)

This afternoon, we are introducing legislation to prepare for the scheme. We shall introduce the scheme in two years' time. As part of the work on planning with the industry, we shall deal with the important concerns being raised this afternoon.

I turn now to the scale of the spirits fraud problem, a matter at the heart of the concerns expressed by the Treasury Committee and by some hon. Members this afternoon. To tackle any fraud effectively, we need to assess its scale. Since 2001, the Government have published annual estimates of the scale of spirits fraud losses. Our most recent estimate appeared in December's pre-Budget report, and it showed that around £600 million in revenue was lost through spirits fraud in 2001–02. That equates to a fraud level of around 16 per cent., up from an estimated 14 per cent. the previous year.It was against that background that my right hon. Friend the Chancellor decided that duty stamps were now necessary, unless a similarly effective alternative could be found.

In January, the Scotch Whisky Association put forward an alternative estimate, showing fraud at a level of £100 million and £150 million a year. The National Audit Office's examination of the differences between those estimates recognised the inherent difficulty of measuring illegal activity. It confirmed that the estimate by Customs was reasonable, but suggested that it should be expressed as a range between £330 million and £l,080 million. The report also concluded that the estimate put forward by the SWA should be expressed as a range between £10 million and £260 million, and that it was also reasonable. I make no bones about the fact that the report stated that

"great care is needed in determining what reliance is to be placed on the results at present available."

We accept that, where there is fraud, there will always be uncertainty about its scale, but we do not accept that that uncertainty is an argument for inaction. Everyone accepts that there is significant fraud, and we must take tough action to combat it, even if in some quarters that is unpopular.

I turn now to the alternative measures put forward by the industry. The hon. Member for Hertford and Stortford called it a package of 17 proposals. Our published regulatory impact assessment gives our detailed view of the trade's package, so I will be brief.

I welcome and appreciate the work done over the past year and more by the industry, through the joint alcohol and tobacco consultation group, to develop its package of alternative proposals. The package contained a few potentially useful new ideas, with some limited scope for additional impact on fraud. It proposed variations on ideas already being pursued by Customs, although we have already established that those ideas do not amount to "the answer" on fraud.

However, most of the measures in the industry package are either simply a restatement of established policy, or new suggestions that would have low or no apparent impact on fraud. Those suggestions would take significant time to develop, and some could be illegal under current EU legislation.

As a whole, the package contains a number of inherent weaknesses: First, it would leave the door open to displacement to other types of fraud, most notably inward diversion. Secondly, it could be undermined at any point by a complicit party, in the shape of an unscrupulous trader. Thirdly, and most importantly, the package does not address the issue of identification—the ability for consumers, retailers and Customs officers to distinguish readily between licit and illicit product. As a consequence, the estimated anti-fraud impact of the package fell significantly short of that estimated for duty stamps. Customs cautiously estimates that duty stamps will produce a minimum of additional revenue of £160 million in 2006–07. On a similar basis, as set out in the regulatory impact assessment, Customs confirms that the industry's package of alternatives would be unlikely to have an impact of more than £70 million a year once they were fully operational, and the figure would probably be lower.

It may help the Committee if I draw a more direct comparison between the approach to tackling the fraud problem with the trade's package and the duty stamps. In essence, the trade's measures seek to tackle fraud by tightening weak points in the supply chain, increasing the vigilance of the legitimate trade and Customs, and thereby stemming the supply of fraudulent product to retail shelves. Consumers' and traders' ability to tell whether duty has been paid does not come into play.

By contrast, duty stamps straitjacket the fraudsters on both the demand and supply sides. On the demand side, they ensure that consumers and traders have a clear and immediate visual means of identifying whether a bottle is licit or illicit. Even if some people are none the less prepared knowingly to buy dodgy goods, most will not be. The rules of the game will fundamentally change: people certainly will not be prepared knowingly to pay the full prices they unknowingly pay now for many fraudulent, illicit bottles on which duty has not been paid.

On the supply side, it will be impossible for a would-be fraudster to convince an honest alcohol trader that he is dealing in duty-paid goods if there is no stamp on them. It will be much easier for Customs to finger those caught in the act of diversion fraud. The difference, bluntly put, is between tightening the boundaries of the playing field for fraudsters and closing the ground. It would be misleading to suggest that the decision to proceed with duty stamps rather than the trade's alternative package was a marginal one.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

The worrying thing about what the Minister is saying in assessing the alternative is that the Treasury has found what it sees as all the weaknesses, costs and likely drawbacks of the industry's proposals but has not balanced that with any assessment of the weaknesses, drawbacks and likely consequences of its own strip stamp proposal. He says that someone will know what they are dealing with, but will every customer be trained to see which stamps are fraudulent and which genuine? How is the Committee expected to make a decision now on something that will happen in two years' time when the risks of the Government's proposal have not been assessed, even though they have managed to assess the risks of the alternative?

John Healey (Labour, Wentworth)

The hon. Gentleman has completely made up my mind that I really must proceed with my speech. I was about to move to a section entitled "Problems with Tax Stamps". Let me anticipate the areas of concern that hon. Members will raise and that the Select Committee on Scottish Affairs covered in its inquiry. I hope that that will ensure that those issues need not entirely dominate our debate this afternoon.

First, there is a concern that duty stamps will quickly be counterfeited. I say bluntly that I cannot guarantee that UK duty stamps will never be counterfeited, but we have held detailed discussions with anti-counterfeiting specialists and several leading members of the security printing industry. Anti-counterfeiting technology has improved considerably in recent years and continues to do so. We will consider all the technologies available in coming to a decision on the final stamp design, and there are a number of ways in which security features can help to remove the chance of counterfeiting.

The second, related, concern is the experience of other countries. The fact that several countries have abolished duty stamps in recent years has been repeatedly held up as an argument against implementation in the UK. I have three things to say about that. First, some of the examples given of stamps becoming the source of fraud have occurred in countries in which there is, frankly, a general level of corruption, legal non-compliance and maladministration that is alien to, and simply not comparable with, the situation in the United Kingdom. Secondly, there are examples that serve both sides of the debate: for every notable country that has abandoned the system, a Denmark, a Spain, an Italy or a Portugal can be cited in which duty stamps continue to work well. Thirdly, the reasons why countries have stamps, or why they got rid of them, vary. For example, in Latvia and the Philippines, duty stamps were introduced not to tackle fraud but primarily as a means of revenue collection. Greece was forced to abandon duty stamps because its system discriminated in favour of domestically produced ouzo, which was not required to be stamped.

Those who declare themselves determined to tackle fraud but who continue to oppose our plans have a duty to propose an alternative with an equal impact on the problem.

Ann McKechin (Labour, Glasgow Maryhill)

Will the Minister comment on the fact that many consider the United Kingdom to be a unique market among the EU countries that apply strip stamps? We have a very large spirits industry and a high level of taxation. The combination of those two things makes the UK unique and particularly susceptible to problems of fraud and criminal gangs trying to undermine the system. What measures will the Government take to prevent that?

John Healey (Labour, Wentworth)

We do indeed have a particularly strong spirits industry. We do indeed have relatively high duty rates on alcohol, although we have relatively low tax rates in many other areas. It is not the case, however, that diversion fraud is unique to the United Kingdom. Other EU member states suffer similar fraud, as my hon. Friend will know as a member of the Treasury Committee. We happen to be the only country that has made a systematic attempt to estimate the scale of the problem. At the heart of the difficulty lies the EU-wide duty suspension movement system, and that means that the problem is not peculiar, particular or unique to the UK.

Those who oppose our plans have a duty to propose an alternative with an equal impact on the problem. I must warn that the combined efforts and detailed work of the Government and the industry have failed to do so. After three years, we have reached the end of the road on alternatives. The task now is to design and introduce a system of duty stamps that will have maximum impact on the fraudsters and minimum impact on legitimate firms. The best interests of the spirits industry and of the people who work in it are best served by contributing to the Government's detailed design and implementation work and by influencing the decisions we take to reduce the costs for companies.

Richard Bacon (Conservative, South Norfolk)

I take it from the way in which the Minister's comments are proceeding that he has finished his remarks on the problems with duty stamps. There may be one or two Members who think that he has not referred to one or two such problems. May I point out one of them? There is a risk that genuine strip stamps will be used to disguise breaks in seals for bottles that have been refilled and that genuine stamps, issued by Customs and Excise, will therefore add authenticity to fake product, stealing sales from legitimate traders and revenue from the Government? Will he address that point?

John Healey (Labour, Wentworth)

That concern is one of the drawbacks, which I mentioned earlier, in the proposal to incorporate the duty stamp on the label of the bottle rather than as a strip over the top of the bottle. The fear that legitimate strip stamps will somehow be used to disguise essentially counterfeit product is, in our judgment, unlikely to be realised. What drives the counterfeiter and fraudster are the profit margin and the low degree of risk. If they have to source legitimate duty stamps to put them on counterfeit product, the cost of doing so is likely to make the incentive to perpetrate such a fraud distinctly lower.

The best interests of the spirits industry are best served by its working with the Government to influence the decisions that we take to reduce the costs for companies and to get right the detailed design and implementation work for the duty stamps regime. The industry is now committed to taking that approach, working with Customs in two formal sub-groups of the joint alcohol and tobacco consultation group—one looking at financial security and payment options and the other looking at the scope and design of duty stamps.

We recognise that duty stamps carry a significant compliance burden, and have accepted the trade's estimates of set-up costs of about £23 million and ongoing costs of £54 million, which in turn translate into an ongoing per-bottle price increase of about 13p. We acknowledge the particularly vulnerable position of small companies, in potential finance costs and the possible risk to competition, so we will help to offset and mitigate, as far as we can, overall compliance costs, and in doing so we will respond especially to those pressure points.

David Laws (Liberal Democrat, Yeovil)

The Minister mentioned the proposal's estimated costs to the industry as some £23 million in one-off costs and £54 million in ongoing costs. How much of those costs will the Government compensate the industry for?

John Healey (Labour, Wentworth)

The scale of the compensation will depend on the discussions that we have now begun with the industry and the decisions that we take about the pressure points.

First, we will attempt to implement duty stamps without requiring up-front payment for the stamps. That would prevent increased cash-flow costs, which alone would account for more than 40 per cent. of the industry's estimated ongoing costs from duty stamps. We will have to discuss that further with the industry and ensure that such an approach does not undermine the anti-fraud benefits of duty stamps, but if it becomes apparent that it would be impractical, we will examine other means to keep cash-flow costs down.

John Healey (Labour, Wentworth)

I shall give way to the hon. Member for Salisbury (Mr. Key), as he has not previously sought to intervene. I shall then give way to the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), after which I shall seek to conclude my contribution.

Robert Key (Conservative, Salisbury)

Will the Economic Secretary confirm that when he considers, in consultation with the industry, how much he might be able to offset the initial costs, European Union state aid rules would allow him to contribute £12 million every three years?

John Healey (Labour, Wentworth)

I can confirm that we have considered the EU state aid rules, and that relates to the second point that I was about to outline. We have set aside a £3 million fund for 2005–06 to assist firms with capital investment. Although 80 per cent. of capital costs will fall on the big nine producers—those that handle more than 1 million cases a year—we accept that the burden of compliance costs will be proportionately greater for smaller firms. Therefore, we want to target support on them. Officials are having further discussions with the trade on the details, and we want the trade to take the lead in deciding the principles that we should adopt in allocating the money.

John Thurso (Liberal Democrat, Caithness, Sutherland and Easter Ross)

Will the Economic Secretary bear in mind the particular needs of micro-producers? My constituent, who happens also to be my wife, purchases retail whisky, infuses it with herbs and spices, rebottles it and sells it. Her business is only 500 bottles a year and she is not alone. Such businesses will suffer immensely under the new system. Will the Treasury consider seriously the plight of those small, but none the less important—certainly to me—businesses?

John Healey (Labour, Wentworth)

I do not know whether that is a declarable interest, but it is certainly a handy one to have in the family. The short answer to the hon. Gentleman's question is yes.

Michael Weir (Scottish National Party, Angus)

rose—

John Healey (Labour, Wentworth)

I shall give way to the hon. Gentleman one more time.

Michael Weir (Scottish National Party, Angus)

On the question of capital start-up costs, will the Economic Secretary clarify the cost to individuals in the industry of the necessary machinery? My understanding is that the maximum compensation available will be €100,000 or some £67,000, but the cost of the machines and the disruption to the bottling line will be far in excess of that.

John Healey (Labour, Wentworth)

The hon. Gentleman is getting his compliance costs mixed up. He started by asking me about capital costs, and I have explained that 80 per cent. of the capital cost, according to the industry's figures, which we have accepted, will be borne by the big nine companies. The impact on the running speed of production lines—and, therefore, the potential loss of productivity and output—is clearly costed as part of the £53 million of ongoing costs. If the hon. Gentleman studies the regulatory impact assessment, he will see that that is clearly identified and that we acknowledge that factor because the industry has helped us to analyse it.

Thirdly, the industry was concerned that it would have to bear the production and distribution costs associated with duty stamps, estimated at 1p per bottle. That figure was part of the compliance costs that the industry produced, which were based on no support or offsets. Instead, the cost of printing and distributing the duty stamps, which we put at between £5 million and £10 million a year, will be absorbed by Customs.

Finally, and to help to address specifically the issue of pass-on into average prices, which some in the industry have raised with me, my right hon. Friend the Chancellor has decided to freeze spirits duty for the remainder of this Parliament. The freeze will cost the Exchequer £40 million in 2004–05 and £70 million in 2005–06. It means that, by 2005–06, the tax on a standard bottle of spirits will be 36p lower in real terms than now, which is twice—nay, nearly three times—the estimated average cost of full compliance costs, and £1.33 lower in real terms than if duty had risen in line with expected inflation since 1997.

David Laws (Liberal Democrat, Yeovil)

rose—

John Healey (Labour, Wentworth)

The hon. Gentleman will get a chance to make his own contribution and I would ask him to make the points that he wishes to make then, so that other hon. Members will get a chance to make a contribution. I will respond to him when I wind up the debate.

I draw hon. Members' attention to the overall approach that we have taken, which is to seek to specify at this stage the broad parameters of the duty stamp scheme and to leave some of the crucial but secondary detail to later legislation. We have done that explicitly in response to representations from the industry that it wished to retain flexibility over issues such as strengths of product to be covered, design of the stamp and how and where it should be affixed, and security. I know that the Scottish Affairs Committee is concerned about those issues, which have also been raised by hon. Members. They were included in the Scottish Affairs Committee report, and are for resolution in further consultation.

Unusually, draft Finance Bill proposals and the draft regulatory impact assessment were exposed to the trade for comment before publication of the Bill. Indeed, I ensured that the leading members of the trade had copies a week before we proposed to publish the Bill and the RIA. Draft regulations detailing the mechanics of the scheme will be available by the end of the year, and discussions between the industry and Customs are already under way on framing them.

There is a balance to be struck between maintaining flexibility and providing certainty, and I believe we have struck the right one at this stage. However, I have decided to emphasise that, for changes to the scope of the legislation, orders will be laid before the House subject to the affirmative procedure, so that Members will have a full opportunity to debate those provisions in due course.

As well as establishing the overall framework of the scheme, the legislation will introduce criminal offences for dealing in unstamped spirits. It will also create civil penalties for a range of offences involving interference with or misuse of stamps. Finally, when a person is convicted of "suffering" premises to be used for the sale of unstamped spirits, it will give the courts the power to ban the sale of alcohol from those premises for up to six months. Taken as a whole, those offences and sanctions reflect the tough approach that the Government intend to take to enforcement, in pursuit of our objectives to reduce spirits fraud significantly.

In conclusion, duty stamps for spirits are a necessary, proportionate and effective response to a fraud that, according to anyone's estimate, is cheating the Exchequer and the taxpayer of hundreds of millions of pounds a year. I commend the clause to the Committee.

Mark Prisk (Conservative, Hertford and Stortford)

I welcome you to the Chair, Mrs. Heal, and I thank the Economic Secretary for his patient remarks. They were defensive, and not without good reason, but, as always, he was patient and thoughtful.

The whisky and spirits industry is vital to the United Kingdom economy. For example, nine out of 10 Scotch whisky sales are exported and the value of those is now more than £2 billion. In many parts of the United Kingdom, the jobs that the whisky and spirits industry provides are crucial, particularly to small local communities.

The Government have told us that they wish to impose tax stamps on spirits because they believe that such stamps are the only way to prevent fraud in the UK spirits markets. No one in the House, or beyond, doubts that there is fraud. However, as both the National Audit Office and Ministers have accepted, there remain serious questions about the level and trend of this fraud. What is clear, however, is that if Government policies are to work, they must be based on sound evidence.

The Secretary of State for Scotland told the House:

"It is estimated that about 16 per cent. of the spirits market has been subject to fraud, amounting to about £600 million".—[Official Report, 13 January 2004; Vol. 416, c. 651.]

What is the basis of that assertion? After all, a 16 per cent. fraud rate is neither recognised nor accepted by any of the leading figures in the industry. Both the Scotch Whisky Association and the Gin and Vodka Association believe that the figures given by the Secretary of State are wrong and that they represent a serious overestimate. If one stopped to think about it and consider the figures, one would realise that if the Government figure were correct, it would mean that about 200,000 bottles of spirits were going missing every day.

According to the evidence considered in the National Audit Office report, the problem is that the figures that the Government are basing their estimate on are unclear and run counter to other evidence. Both surveys from the Office for National Statistics—the family expenditure survey and the national food survey—are based on a very complex methodology that does not, for example, reflect the true amount of Customs clearances. Since the report, I gather that mistakes have been admitted by the Office for National Statistics. Therefore, as we have seen from the opening contribution to the debate, the result is a rising sense of confusion.

The Government's briefing to Members issued by the Economic Secretary on 18 March stated:

"Last week's report from the National Audit Office recognises that measuring illegal activity is inherently difficult."

He referred to that in his speech. The briefing went on that the report

"confirmed that that Customs' estimate is reasonable but suggests that given the high degree of uncertainty attaching to such estimates, it should be expressed as a range from £330m to £1080m".

As Members will recognise, that is a pretty wide range upon which to base Government policy. However, the briefing continued:

"The NAO report also concluded that a fraud estimate put forward by the Scotch Whisky Association showing fraud at a level of £100m to £150m should be expressed as a range from £10m to £260m and is also reasonable."

That means that, depending on how one measures the fraud, it might be as low as £10 million but could be as high as £1,080 million. In truth, no one knows for certain. The Government do not know, the industry is not sure and Customs cannot be certain.

Conservative Members accept that there is a problem. However, the very uncertainty—that wide range of values expressed surrounding the scale and the trend of the problem—means that it is even more important that the Government work closely with the industry.

Tom Clarke (Labour, Coatbridge and Chryston)

I know that the hon. Gentleman will accept that there is no monopoly of concern for the whisky industry on either side of the House. In that spirit, may I put to him what appears to be the unanimous view of the all-party Select Committee? It said:

"The industry has been aware of the growing concern of HM Customs and Excise for some time, and it would have been helpful if the industry had responded quicker . . . Evidence from the Scotch Whisky Association did, we believe, illustrate a certain lack of urgency on the industry's part".

Does he think that any Government of whom he could be a member could accept that situation and do absolutely nothing?

Mark Prisk (Conservative, Hertford and Stortford)

I think the right hon. Gentleman realises that, as I said earlier, we accept there is a problem and recognise that action must be taken. However, if that action is to work and to be sustainable, it has to be carried out in partnership. The action that the Government propose is not a partnership. Indeed, that is a reason why we firmly believe that they should think again and that it is wrong to impose the plans outlined in clause 4. A partnership, and not a diktat, should be sought. If the provision is to work—Conservative Members want to ensure that we tackle the missing trade of fraud—it must be carried out in partnership. That is where the Government are making a mistake.

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

Does my hon. Friend accept that the partnership that is necessary must be between Government and all elements in the whisky industry, from distillery to retail? The proposal will impose a burden that will fall almost exclusively on the smallest distilleries, and disproportionately so in constituencies all over Scotland. However, the problem lies further downstream, and that is the further inequity of the situation.

Mark Prisk (Conservative, Hertford and Stortford)

As usual, my hon. Friend makes an excellent point, and I hope that the Economic Secretary will respond to it specifically. As I have said, we are keen to make sure that the end result is as improved as it can be. That is certainly our purpose today.

The proposal is not only based on uncertain evidence, but has been proven to be a rather crude and ineffective measure that could damage the industry and could yet fail to cut fraud. In April 2002, the Chancellor himself dismissed tax stamps as a viable option. In a Budget press release, he said:

"The Government also decided against the introduction of tax stamps on bottles of spirits, which would have significantly increased industry costs, and instead announced plans to work with the industry to tackle the problems of fraud."

If stamps were wrong then, why are they right now?

There are a number of other practical problems here. We know, for example, that tax stamps can be easily forged and the debate has already highlighted this problem. With UK duty at £5.48 a bottle, the incentive for forgery is strong. Indeed, as several Members have pointed out, forged stamps could add authenticity to illegal products while confusing the customer.

The industry has highlighted other practical problems, and I am grateful to the Gin and Vodka Association and the Scotch Whisky Association for keeping me up to date. They point out that

"the nature, design, shape and size of stamp remain to be confirmed".

This raises important issues for individual members of the industry. They also point out that

"no decisions have yet been made on the range of products that will be covered, where this will be decided on the basis of alcoholic strength or type of product."

A whole range of other issues to do with duty deferment, assistance with security costs and the costs of audit and administration has yet to be determined.

Robert Key (Conservative, Salisbury)

As my hon. Friend knows, the headquarters of the Gin and Vodka Association is in Salisbury in my constituency. I would be the last person to wish to vote against any measure that would prevent fraud. However, there is one element that we have not heard much about in the debate—the ultimate consumer of the product. Does he agree that it seems inevitable that if the measure goes through as planned, the consumer of cheaper brands, which are often loss leaders or special sales, will lose out? Those products will become uneconomic.

Mark Prisk (Conservative, Hertford and Stortford)

Indeed. My hon. Friend makes an excellent point. We have not yet considered how this will impact on the consumer. It is right that we concern ourselves with the industry, especially the small firms, but the consumer will be hit as well. I thought I saw the Economic Secretary agreeing with my hon. Friend.

There are a number of issues concerning costs and practicalities. The Scotch Whisky Association estimates that the initial cost will be about £23 million and the increased annual overheads about £54 million, and I gather that the Minister has accepted those figures. I accept that the Government have made offers of help, but they remain incomplete and inadequate. Alcohols Ltd., which is based in Bishops Stortford in my constituency, uses a family firm to bottle its gin. I suspect that this is not dissimilar to the example given by the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) a moment ago. The bottling firm will have to spend £160,000 on new strip stamp machines, but may get only about £17,000 out of the Government scheme; clearly that is wholly inadequate.

Mr. Bill Oddy, the managing director of another small firm, The Drinks Company, said:

"Our costs will rocket and the Chancellor's offer of £3m to aid small firms, with capital investment, is totally out of proportion to the impact strip stamps will have in our sector. It potentially creates barriers to entry, restricts competition, pushes up prices and reduces ranges."

He goes on to make an important economic point that is worth bearing in mind:

"The irony is that"

the scheme

"favours the large, established multinationals, whose high profile consumer brands are most easily traded in the black economy."

There is an acute problem for small firms.

The Minister referred to the fact that some countries have accepted, and many have rejected, this scheme. I gather that Ecuador, Greece and the USA have abolished tax stamps; Belgium, Germany and Norway have now backed away from their implementation; and Poland, where, it is believed, 80 per cent. of the Scotch whisky sold is contraband, has tax stamps.

We have heard from the Government that action must be taken; indeed, we agree. That is why over the last year we have talked to the industry and welcomed its ideas. Since the Chancellor's request for ideas, the spirits and whisky industry has come up with 17 anti-fraud packages—I heard no reference to that in the Minister's speech. The industry's approach is based on something that the Government usually applaud, a risk-based strategy. Focusing on higher risk movements would give us a better chance of securing lost revenue, without unfairly burdening legitimate traders. Sadly, the Government's response to those ideas has been deeply negative.

It is unclear what analysis the Government have made of other countries' schemes. The United States, for example, has a three-tier system of distribution, which links the producer, the wholesaler and the retailer. Yet when one looks through the Government's regulatory impact assessment, the only reference to that system by Customs is solely concerned with how it could use it to implement the strip stamp scheme. Is it the Economic Secretary's opinion that the system would not work on its own? If so, how come it works in the United States?

We come now to the numbers. The most peculiar aspect of this affair is the comparison of tax yields and costs, and what the Government plan and the industry proposes. In the Economic Secretary's briefing to Members he states that Customs' own estimate is that the industry's measure would deliver approximately £70 million per annum in previously lost tax revenue. That compares with the £160 million best estimate for the strip stamp scheme. However, the hon. Gentleman alluded to the fact that that scheme involves a number of other costs to the Treasury, including a £3 million capital fund, between £5 million and £10 million in printing and distribution costs and, as he just told us, £110 million in lost tax revenue over the next three years as a result of freezing spirits duty. What then, when all the aspects of the two schemes are considered, is the net financial difference between them? Based on those figures, either the Government are seriously underplaying the cost of the tax fraud that they expect to recoup or someone at the Treasury has got their figures wrong.

Angus Robertson (Scottish National Party, Moray)

The regulatory impact assessment states:

"The introduction of tax stamps will have a revenue impact of £160 million in the first year of implementation."

How does the hon. Gentleman think the Government have been able to come up with such an accurate figure if they are unable to give even the roughest estimate of the risk of fraud following the introduction of strip stamps?

Mark Prisk (Conservative, Hertford and Stortford)

That is a very good point. We know that the £160 million must be based on the assumption of £600 million of fraud, but we know also that the National Audit Office has said that the assumption is questionable. The amount could reasonably be said to be between £330 million and £1.08 billion, but it certainly could not be said definitely to be £600 million, so the assumption of a £160 million saving is based on evidence that is yet to be proven.

The whisky and spirits industry is, as the Minister said, vital to the country's economy. The Conservative party strongly supports that industry, and of course we also support targeted, effective anti-fraud measures. That is why we urge the Government not to burden the industry with a scheme that clearly has a chequered history. The practicalities of implementing the scheme are becoming clearer to Customs, and not before time. What is clear to Conservative Members, however, is that the Government cannot tackle this fraud without a true partnership with industry, and that means co-operation.

In preparing for the debate I have consulted closely with the industry, including the Scotch Whisky Association, the Gin and Vodka Association and the Wine and Spirit Association. It is their opinion that the Government must think again. They wish to work with the Government, but they feel that the Treasury is becoming deaf to reason, and that is also the view of thousands of people whose livelihoods depend on this vital trade. I therefore say to Ministers, "Think again. It is not too late to delay this measure and give yourselves time to get it right." I say to Labour Members, "Help us to delay the clause because, if it proceeds, it will be bad for the industry but it could be even worse for the Government." This is an ill-considered, hasty measure, and it does not deserve the support of the House.

Irene Adams (Labour, Paisley North)

The Scottish Affairs Committee decided to look at this issue, not just in financial terms, some months ago when it became apparent that the Government might consider putting strip stamps on spirits. When the National Audit Office issued its report, we sent a letter to the Treasury asking it to be very cautious in proceeding with the idea. The figures provided by the industry and the Government were so diverse that we thought that it was not a good idea to proceed unless a more realistic figure became available.

During our investigations, however, the Government decided that strip stamps would be the solution to the problem. I say at the outset that the Committee, the industry and the Government all recognise that there is a very serious problem, and we all applaud attempts to do something about it. The Committee wanted to consider the impact of the proposal on the industry, so we visited a number of distilleries and bottling plants in Scotland and Northern Ireland. We are particularly concerned about the fragile communities that depend on the industry, on whisky in particular in Scotland and Northern Ireland. Those fragile communities are not necessarily those surrounding small island distilleries; they could be based around a bottling plant, such as that in Springburn in Glasgow, a very deprived area that would be seriously affected by this proposal. Morrisons of Bowmore, which owns that plant, does not know if it will be able to keep it going unless the Government get the measure right. The big danger is that firms will start to outsource. Many of the communities in Scotland that depend on the bottling plants would suffer greatly if that process was outsourced. For the purposes of the stamp, the product can be taken anywhere to be bottled. It has only to be produced in Scotland to make it Scotch whisky; it does not have to be bottled in Scotland. I hope the Government will take account of that danger.

Angus Robertson (Scottish National Party, Moray)

I agree entirely with the hon. Lady and draw her attention to a letter I received from the general manager of a distillery in a community that she has just described. The general manager of that distillery writes:

"An important market for us is the UK which represents some 30 per cent. of cased goods turnover. However, we are considering turning our back on the UK market entirely and by 2006 secure other markets for our products, rather than suffer the new tax regime."

He goes on to list the number of jobs that will be lost. Does that concern the hon. Lady as much as it concerns me?

Irene Adams (Labour, Paisley North)

That prospect would concern anyone. The last thing we want to do is lose jobs. I was struck by the hon. Member for Hertford and Stortford (Mr. Prisk) appealing to us for partnership and support. I did not hear that appeal when my constituency was losing 30,000 jobs over the years I have sat in the House. We can all agree that we are extremely concerned about job losses, and no doubt the Government will take the matter seriously.

Some of the other fragile communities that I hope the Government will consider are in places such as Islay and a very small distillery that we visited, which has reopened in the past few years, at Bruichladdich. Only a handful of people are employed there, but one must understand the nature of the community to realise the impact of the reopened distillery on it. A small bottling line has been set up, employing 12 people. That may not mean much in a huge constituency, but in a place such as Islay, it means everything. The firm has used the new deal for disability to employ four seriously disabled people on the bottling line. Those people could never have hoped to get a job anywhere else, yet there they were, in full-time employment with the assistance of the Government. If not for the Government's policies and the new deal, that could never have happened. There is great concern that if the measure goes ahead, the bottling line will have to be closed down. Again, I hope the Government will take particular account of such fragile communities.

In Northern Ireland at Bushmills, where there is a village of 1,000 people, 10 per cent. of them work directly in the local distillery—not outside it, but in the distillery. The whole village is entirely dependent on producing whiskey and, more importantly, on bottling whiskey. The big jobs are in bottling, not in production. Three or four people can produce a malt whiskey, but it takes many more than that to bottle it.

The company has three bottling plants and is a sister company of Jamieson in Dublin. The bottling plants are in Dublin, Bushmills and Cork. The company is considering closing the one in Cork. However, the Dublin distillery and bottling plant has the facility to put strip stamps on bottles, and Bushmills bottling plant does not, so the danger is that the company will move all bottling to Dublin where there is the facility and the capacity. That would shut down not just the Bushmills distillery, but the Bushmills village. When the Government consider the matter, I urge them to look not at the big boys—they will take care of themselves—but at the very small distilleries and, more important, bottling facilities.

The Select Committee recognised that there would be problems with counterfeiting. One of my hon. Friends will have a lot to say about that. A further issue was the theft of strip stamps—£50,000 worth of strip stamps is the size of a paperback novel. One can put that amount of stamps in one's pocket; one does not have to steal £50,000 worth of bottles of whisky to get the value of that. One can walk out the door with a paperback novel-size package of strip stamps in one's pocket, and one has £50,000. It is even smaller to carry than the equivalent amount of cash. Security will be a great problem for the bottling plants when they hold such huge sums. The stamps do not have to be counterfeit—the genuine product will be a great attraction to thieves. To carry that off will be a much easier task than carrying off £50,000 worth of bottles of whisky.

I strongly urge the Government to keep talking to the industry. The industry is not entirely innocent. Three years ago when the Government said they would not continue with strip stamps, the industry sat back and heaved a huge sigh of relief. Instead of looking for the solutions that were needed to combat the fraud, the industry came up with a few voluntary solutions that would never be an adequate answer. It did not at any time seek regulation, and I believe it should have done so, because the voluntary codes were clearly not working.

There was a case in which Customs warned a producer that one of its distributors was not a bona fide company and was diverting some of the product. The answer from the producer was, "Well, as far as we're concerned, they are bona fide and we'll keep using them." That is not good enough for the industry. The problem must be sorted out and there must be regulation. The industry has to be prepared to accept regulation. It must meet the Government half way in overcoming the problems.

We urge that the Government keep talking to the industry. Ultimately, both are victims of the fraud and are not the people who should be injured by the solutions. It is the perpetrators of the fraud whom we all seek to injure by the solutions. I appeal to the Government not to make the solution worse than the problem, to keep talking to the industry, and not to be absolutely sure that the solution is a stamp across the bottle. The industry is happy for the stamp to go round the bottle or on the label, or to have a hologram elsewhere. The difficulty in putting a stamp across the top of the bottle is a grave problem indeed. Owing to the way some of the bottling lines operate—the bottles go directly into boxes, and the boxes are closed and cased—it will mean reopening all the cases to apply the stamp. On such a line, the output is 600 bottles a minute, so it is not a question of adding just a few minutes to the operation. It would mean starting again.

There is a host of issues that the Government must work with the industry to resolve. If the Government are determined that a stamp is the only answer, will they please be sure that they get the stamp absolutely right and that they do not make the solution worse than the problem?

David Laws (Liberal Democrat, Yeovil)

I am glad to be able to follow the hon. Member for Paisley, North (Mrs. Adams) in the debate. Her Committee, a cross-party Committee, prepared an excellent report, which informs our debate. I hope the fact that the report was unanimous will give the Government pause for thought, and will cause them to reflect on the many serious concerns about their proposals and on whether those proposals are likely to deliver the desired results. I hope the Government will recognise the difficulties and risks involved, given that after the 2002 Budget they said they did not believe that the balance of risk and reward justified the proposals going ahead at that time. One wonders whether, in the intervening couple of years, the problems that the Government accepted then have been addressed.

My party has had a close interest in and strong commitment to the fortunes of the Scottish whisky industry for many decades, going well back before my hon. Friend the Member for Gordon (Malcolm Bruce) became Treasury spokesman for the Liberal Democrats and added to the commitment to get the tax regime for the Scottish whisky industry right. Many of my hon. Friends who have whisky distilleries in their constituencies have been lobbying very hard, and have been lobbied very hard, about the consequences of the measures. I pay tribute to my hon. Friends the Members for Argyll and Bute (Mr. Reid), for Orkney and Shetland (Mr. Carmichael), for West Aberdeenshire and Kincardine (Sir Robert Smith) and for Caithness, Sutherland and Easter Ross (John Thurso) for the work that they have done to draw attention to some of the deficiencies in what is proposed and to the potential cost to the industry.

I think that the Government understand that hon. Members in all parts of the House are concerned about the huge fraud that has been present in the alcohol and tobacco industries for many years. Of course, we welcome the fact that the Government have sought to reduce the scale of that fraud in recent years. However, the issue is the size of the fraud, whether the Government's estimates are realistic, and whether the response is proportionate. In addition, will the measures that the Government are proposing work? Will they deliver the benefits that the Government envisage, or will they be undercut, as many people fear, by fraud and other problems?

Furthermore, what will be the cost that will certainly fall to the industry as a consequence? How will smaller firms in particular cope with those additional costs? If there is one thing on which I suspect the Economic Secretary and I would agree in this debate, it is that the extra costs that will fall to the industry are relatively certain. What is uncertain is what the benefits will be. The combination of certain large costs and uncertain large benefits is not a happy one for the Government.

It is worth setting out at the outset the industry's precise concerns about the Bill. Essentially, it has expressed five concerns about the effect of the measures on productivity, investment and profitability. The first concern is that the measures will increase production costs, owing to the cost of new machinery and labour costs. The second concern is that they will increase the costs of downstream suppliers or importers, who will have to arrange for the repackaging and stamping of imported products. The third concern is that they will impose an earlier excise duty point for many small businesses, with an adverse impact on cash flow—something that the Economic Secretary mentioned.

The two other concerns expressed by the industry are that the measures will restrict the trading opportunities of brokers and intermediary suppliers where they have mixed UK and non-UK customers and that they will curtail the opportunities for the storage of spirits, duty suspended, in excise warehouses until the point of consumption. All those concerns add up to a very significant additional cost burden on an industry that is relatively small scale, and in which, as a number of hon. Members have indicated, there are many small producers who will be particularly hard hit.

We hope that the Government will work with the industry to try to formulate proposals that will address those concerns, especially as they have been expressed not only by the Scotch whisky industry, as one might expect, but by the Select Committee on Scottish Affairs, whose report has been mentioned. Concerns have also been expressed by the Confederation of British Industry, which picked out the clause and schedule 1 in this year's briefing on the Finance Bill. It states:

"We are . . . very disappointed to see this measure included in the Finance Bill, since the additional compliance cost to business is likely to be significant, despite 'concessions' in the form of up-front help with cash flow and a freeze on excise duty."

As I mentioned, the Government are very much aware of those concerns. Indeed, they decided in the 2002 Budget not to proceed with this measure on the stamping of spirits, and the details were given in a press notice.

John Thurso (Liberal Democrat, Caithness, Sutherland and Easter Ross)

May I add to my hon. Friend's list another concern that was put to me by the general manager of the Invergordon distillery, which I visited two weeks ago: the burden of extra security that will arise because of having to store strip stamps, which will become a highly saleable and marketable black market commodity? The general manager was extremely concerned about the quotations for extra security and insurance costs, and about other burdens that have not so far been highlighted.

David Laws (Liberal Democrat, Yeovil)

My hon. Friend is exactly right. The Select Committee report picks up on the same issue, to which I shall return in my closing comments.

I was referring to the Government's doubts about the proposal, which were expressed clearly only two years ago in the press notice that was issued after the Chancellor decided not to proceed with such measures. The hon. Member for Hertford and Stortford (Mr. Prisk) referred to the same issue earlier. In the press notice, the Government said:

"It was clear from this consultation process that the introduction of tax stamps would have a severe impact on the productivity and compliance costs of the spirits industry, which— if passed on in full—could have had a significant impact on retail prices for spirits. The Government does not currently consider those costs proportionate to the benefits of tax stamps."

One wonders what has changed in the intervening period. While I accept that, as the Economic Secretary indicated, one of the things that may have changed in his mind is that he has been unable to satisfy himself that there are alternative proposals that will deal with the problems, the fact remains that the Treasury had such doubts about the proposals only a couple of years ago when it questioned whether the benefits would outweigh the productivity and compliance costs. If those problems were an overriding concern in 2002, the same must surely remain the case today.

A number of hon. Members have discussed how large the fraud is. I suppose that it is not particularly surprising that there have been significant disagreements between the Government and the industry on just how extensive it is. The Government will no doubt prefer their own figures, and they will be sceptical of those produced by the industry. As the Scottish Affairs Committee made clear in the conclusion of the section dealing with this matter in its report, however, even the National Audit Office was not satisfied with the figures produced by the Government and the industry. The NAO stated that, in the meantime—in other words, before the issue can be reconciled—

"neither survey can be accepted as unequivocally reliable and great care is needed in determining what reliance is to be placed on the results at present available."

The Committee, which represents all the major political parties in this place, was led to this conclusion:

"Until definitive figures are available, no estimate, whether from Customs or from the industry, can be accepted as accurate. For any Government to introduce important measures that could have major implications for industry and employment, based on what could be inaccurate figures, might be considered precipitate to the point of being reckless."

That is a very strong conclusion, as I am sure the Economic Secretary will agree, from a Committee that represents all political parties and has a predominance of Labour members. The Government accept the lower figure of £70 million cited by the industry in relation to costs. As one is talking about a gap of £110 million in the estimates of how much could be saved, as well as the fact that that gap is based on the Government's own estimate, which is many multiples of the industry's estimate and is extremely uncertain, as the National Audit Office accepted, one wonders whether they have a strong case for proceeding, even before one comes to issues about the potential for fraud in relation to duty stamps. As the Economic Secretary accepted implicitly if not explicitly, the Government still have to do a great deal of thinking about that.

I remind the Economic Secretary of the Committee's conclusions as to whether the Government's measures were likely to lead to the savings that he hopes for. After debating the issue, consulting the industry extensively and travelling to other countries to examine their experiences, the Scottish Affairs Committee concluded:

"We are convinced that there has to be a better alternative to strip stamps".

It was not convinced that the measures, which it described as

"a nineteenth century solution to a twenty-first century problem",

are likely to be effective.

The Government must also answer questions about the costs to the industry and the extent to which it will be compensated. The ongoing costs will be £54 million a year, which is a significant burden, particularly for the many small businesses in the industry. The Chancellor of the Exchequer and the Economic Secretary gave the impression that the industry will be compensated as a consequence of the Chancellor's decision, which he announced with a flourish, to freeze duty on spirits for the rest of this Parliament—most commentators expect this Parliament to run for about a year, so one doubts the generosity of that gesture.

We obviously welcome the freeze on duty on spirits, which the Red Book states will cost some £70 million over the next few years. It is tempting to think of that £70 million as compensation for the industry to set against the ongoing cost of the measures, which is about £54 million per year, and the one-off capital cost of £23 million. I am sure that the Economic Secretary accepts that, although freezing duty on spirits will clearly affect the extent to which the price of the industry's products is forced upwards by additional costs, it will not necessarily impact directly on the industry's profitability and will not necessarily offset the significant ongoing costs.

On offsetting costs, it would be interesting to hear whether the Economic Secretary has a principle in mind if he decides to go ahead with the measures in the Finance Bill. In other words, because the measures deal with a problem that was not caused directly by the industry, do the Government accept their responsibility to offset all costs to the industry, or are they working to another principle?

I apologise if this information is already publicly available, but will the Economic Secretary tell us the additional compliance costs to the industry if it proceeds with its proposals to save £70 million on duty fraud? The £70 million figure must be relevant when we compare the Government's package with the industry's package.

I want to catch up with some of the concrete concerns set out by the Scotch Whisky Association in its briefing paper, which it sent to hon. Members before this debate. The SWA is concerned about the Government's direction, and it hopes that they will not proceed with the measures, or at the very least, that they will delay them to think them out properly.

In its briefing paper, the SWA suggests four ways—I am sure that the Government are aware of them—to mitigate the cost of the tax stamps. First, it argues that the freeze on spirits duty will not bear directly on profits, and it would be useful to hear more from the Economic Secretary about whether his overall package will offset all the extra costs on the industry. The other three areas are duty deferment, security, printing and distribution costs, which my hon. Friend the Member for Caithness, Sutherland and Easter Ross referred to earlier, and capital costs, which other hon. Members referred to.

On capital costs, it has been suggested that the costs to the industry will be mitigated by the £3 million fund for assistance, which will be targeted at small firms. The SWA points out that the £3 million would be spread thinly across the industry in the light of the overall £23 million estimate for capital costs, and there is a particular concern that the extra costs will fall most heavily on smaller businesses, which are least able to afford additional equipment.

The SWA asks the Government to clarify their definition of smaller businesses on which the capital assistance will be focused, and points out that EU state aid rules will apply, which means that it will not be possible to provide assistance of more than €100,000 per firm. A single stamp application machine may cost more than €350,000, and there is concern whether the Government can, under EU law, compensate companies for all the costs, even if they want to do so. If would be useful if the Economic Secretary were to clarify that particular point in his summing-up speech.

The Government have made it clear that they will examine duty deferment arrangements in order to prevent increased cash-flow costs falling on the industry. The SWA briefing note states:

"Depending on the scheme, distillers and importers could face serious cash flow problems as a result of having to finance the purchase of tax stamps upfront . . . It is therefore crucial that the government implement the scheme without requiring any up front payment for stamps. There are concerns, however, that there is little detail of how this will be achieved, nor the damage to industry of not delivering such a measure."

It would be helpful to hear from the Economic Secretary whether the Government can deliver on their commitment, or aspiration, to avoid the up-front cash-flow costs, and if so, when information detailing how the measures will work in practice will be made available to the industry.

My hon. Friend the Member for Caithness, Sutherland and Easter Ross referred to security, printing and distribution costs. The Government have repeatedly told the industry that they will bear in full the production and distribution costs associated with tax stamps, although those costs are a fraction of the overall bill. Will the Economic Secretary confirm that point today and say more about how the system will work in practice, because the industry remains uncertain on that point?

It is clear not only from the industry's representations, but from those from the CBI and the Scottish Affairs Committee, which has members of all parties, that there is significant scepticism about whether the Government have the evidence to proceed with the measure. The scale of fraud is uncertain—according to the National Audit Office, there is no agreement on that point—whether the Government scheme will deliver benefits and solve the problems of fraud is uncertain, and the costs, and the extent to which they will fall on the industry, are also uncertain. Given that the Government are introducing measures with large, certain costs and uncertain benefits, I hope that the Economic Secretary will take the time to think again, even if he only delays the measures to allow time to consider their effect on the industry.

Doug Henderson (Labour, Newcastle upon Tyne North)

I have no constituency interest in the matter, but I have a union interest—over many years, my trade union has been involved in the whisky industry and other spirit industries. I also represent the taxpayers of Newcastle upon Tyne, and I want to examine their interests and those of the industry.

If the public had known about the extent of the fraud in the whisky industry three years ago, they would have said to the Government, "Get on with it. Why should we waste taxpayers' money? That money should come back to the taxpayer." We have an obligation to ensure that the public's interests are looked after. I recognise that one cannot ignore the industry and the people who work in it, and I would not wish to do so, but there needs to be a very tough approach to such fraud.

Angus Robertson (Scottish National Party, Moray)

The hon. Gentleman is absolutely right that we should all keep the taxpayer in mind. In view of that, does he not agree that it is imperative for the Government to outline the scope of potential fraud before introducing strip stamps, which may be a significant disbenefit to taxpayers' interests?

Doug Henderson (Labour, Newcastle upon Tyne North)

I do not see how that can be done until the Government have set out their objectives in Parliament, but instead of saying, "We're going to take on this fraud and this is how we're going to do it", it is much better, as the Economic Secretary said, to have discussions with the industry. The industrialists and trade unionists whom I know would want to have detailed discussions on such a matter, and that makes sense.

I am a Scot, although I do not represent a Scottish constituency, and I sometimes treat myself to reading The Herald, The Scotsman, and, for football purposes, the Daily Record. When I do so, I often see the Scottish National party making assertions implying that the nasty English Government and nasty English fraudsters are ripping off a Scottish industry. SNP Members have been well behaved in the debate so far, and I expect that to continue, but they should bear it in mind that this issue affects the whole of the UK, including Scotland. I do not see how people can be criminals involved in fraud in the Scottish whisky industry unless they have at least bunged the lad on the door of the whisky distillery before they remove the produce.

Angus Robertson (Scottish National Party, Moray)

The SNP, like all parties, is opposed to criminality wherever it occurs. Can the hon. Gentleman back up his assertion by giving the dates of those articles in The Scotsman, The Herald or the Daily Record?

Doug Henderson (Labour, Newcastle upon Tyne North)

I would be happy, if I am allowed to, to place in the Library several back copies of The Scotsman and The Herald that would make it obvious to any reader that my assertion is accurate.

John McFall (Labour/Co-operative, Dumbarton)

If my hon. Friend refers to a debate that took place in the Scottish Parliament a couple of weeks ago, he will see that the SNP tried to claim exclusivity in defending the Scottish whisky industry in relation to fraud and tax. In the all-party group on Scotch whisky, Members of all parties—including, for the past 17 years, myself—have been involved in defending the interests of the industry.

Doug Henderson (Labour, Newcastle upon Tyne North)

I am grateful to my hon. Friend for highlighting that important point. For many years, Members on both sides of the House have been tough in arguing for the Scottish whisky industry. I am not suggesting that the Scottish nationalists have not said their bit or that they should not be entitled to say their bit, but the suggestion that they are the leaders in this campaign must be rejected.

I want to make one observation and ask two questions. My observation is this: I would have thought that the Government would be sympathetic to the idea of acting in a partnership with the industry by adopting its counter-proposals—of which there are 17—if they thought that there was any prospect that that would deal with the problem, because it would avoid all the industry opposition to strip tops on bottles that the Government knew would arise.

The report by the Scottish Affairs Committee contains 17 recommendations. I want to draw the Committee's attention to three. Proposal five is:

"Customs and trade to consider the introduction of a secure, approved device for processing movement documents".

Proposal six is:

"Greater control of transporters involved in duty-suspended movements by Customs introducing a registration process . . . and . . . warehousekeepers providing relevant information to Customs about transporters".

Proposal nine is:

"Warehousekeepers to co-operate with Customs to provide details about booked arrivals of excise goods and to advise them of non-arrivals".

Irene Adams (Labour, Paisley North)

Will my hon. Friend give way?

Doug Henderson (Labour, Newcastle upon Tyne North)

I just want to finish this point. The industry's proposals seem to be a long list of red tape. If that was not the case, Customs and Excise and the Treasury might well have been susceptible to its influence.

Irene Adams (Labour, Paisley North)

Will my hon. Friend make it clear that he is talking about the industry's proposals, not those of the Scottish Affairs Committee?

Doug Henderson (Labour, Newcastle upon Tyne North)

If I gave the impression that these are the Select Committee's proposals, I apologise, but I think that I said that they are the industry's proposals, which are helpfully set out in the Committee's report.

Michael Weir (Scottish National Party, Angus)

Will the hon. Gentleman give way?

Doug Henderson (Labour, Newcastle upon Tyne North)

I am tempted not to, but I suppose that I should.

Michael Weir (Scottish National Party, Angus)

The hon. Gentleman mocks the industry's proposals, but does he not realise that its evidence to the Scottish Affairs Committee made it clear that the difficulty lies not with the distillers, but further down the chain with the warehousemen, distributors and retailers? The Government's proposals are the wrong way round, because they attack the distillery industry instead of the other links in the chain.

Doug Henderson (Labour, Newcastle upon Tyne North)

I have some sympathy with the hon. Gentleman's point. However, if it was possible to deal with the problem further down the line, I am sure that it would be done. If we are to know which bottle is licit and which is illicit, some kind of marking must be put on it before it leaves the bottling plant. It could be over the top of the bottle or around the side—I am not familiar with all the various technologies. If there is a newer technology—

Angus Robertson (Scottish National Party, Moray)

rose—

Doug Henderson (Labour, Newcastle upon Tyne North)

I have given way generously, and I want to finish this point. If there are other technologies that can deal with the problem, I am not resistant to them, and I should hope that the Government would not be. There has to be something that identifies the bottle that everyone accepts and will be absolutely clear in any future legal challenge.

Angus Robertson (Scottish National Party, Moray)

The hon. Gentleman is making the case for marking bottles clearly. He said that he may not be au fait with all the ins and outs of the industry, so let me tell him that every single bottle of Scotch whisky that is produced is already clearly marked with a lot number that makes identifiable the bottle, the distillery, and the time of bottling. Is that not good enough?

Doug Henderson (Labour, Newcastle upon Tyne North)

No, it is not, because it does not say whether the duty has been paid. That is the key issue to be tackled, because it is the basis of the fraud.

I think that I have made enough of my observation. I did not intend to spend so much time on it, but I have been generous in giving way.

I want to put a couple of questions to the Minister. Is the £3 million fund for capital investment assistance an annual figure? Is it set in stone, or might the Government be persuaded to adjust it depending on what they find out from the industry about its needs? I understand that the technology will incur disproportionate costs among small producers, so assistance has to be geared towards them. If the industry says that there is a need for additional support within the European Union rules, will the Government consider that?

My second question in linked to that issue. Have discussions taken place with the Department of Trade and Industry on the extent to which any regional assistance might be made available to the various bottlers in industry, obviously not just in Scotland but throughout the whole of the United Kingdom? Is that a possible other source that could be tapped to try to deal with the issue?

What has been the effect of the tax freeze on the price of a bottle of whisky over the years that it has been frozen? I think that the Economic Secretary said that it was 36p a bottle, which compares to a cost of approximately 13p a bottle without additional state aid on the introduction of the Government's proposals. There are many arguments about whether this is an effective system or not, but it cannot be argued that the introduction of this measure without modification would cause a major loss of jobs as a result of Government action, because the Government have actually boosted jobs by freezing that tax.

Annabelle Ewing (Scottish National Party, Perth)

indicated dissent.

Doug Henderson (Labour, Newcastle upon Tyne North)

The hon. Lady shakes her head, but the Government have effectively given a 36p rebate to the industry—[Hon. Members: "No!"] Yes, they have.

David Laws (Liberal Democrat, Yeovil)

rose—

Doug Henderson (Labour, Newcastle upon Tyne North)

I will not give way.

I know that the trade unionists in the industry in Scotland will welcome that rebate, as it is an important factor in protecting their jobs. Having said that, I know that they will also want to see the maximum support being given to the industry to implement the proposals, and I hope that the Government will do that.

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

I welcome the opportunity to follow the hon. Member for Newcastle upon Tyne, North (Mr. Henderson), who did his best, in the circumstances, to defend what it is clearly the indefensible part of the Finance Bill.

It is important to reflect on exactly what is at stake in these proposals. In Scotland, one job in 50 depends on the success and development of the Scotch whisky industry, and that industry is among the UK's top five export earners. Those are not numbers that we can dismiss flippantly; they are significant. Indeed, with the Government proposing to become indebted to the tune of some £130 billion over the coming years, one would have thought that their first objective would have been to ensure the successful continuance of one of their key industries. One would have thought that they would have wanted to preserve such a successful industry.

Labour Back Benchers have every right to feel let down. My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) reflected on the fact that they had been strangely silent in recent months in regard to backing this proposal as it has unfolded before our eyes. We are seeing a very destructive measure being forced through against the wishes of almost every informed commentator or impassioned observer. Every industry group is opposed to it. The Economic Secretary, for whom I have a lot of respect, did not do himself much justice when he failed to come up with a single industry group or observer who believed that the proposals were the right way to proceed. This is an embarrassing U-turn for the Government to have undertaken over the past three years, although embarrassing U-turns seem to have become the watchword of this phase for the Government.

Rural communities and urban work forces will be significantly and detrimentally affected by these proposals. The hon. Member for Paisley, North (Mrs. Adams) reflected on the work force in Springburn, and she was quite right to do so. Both rural and urban communities are being let down by a Labour Government who have failed to see the impact of what they are doing. That this proposal is to be forced through by a Scottish Chancellor of the Exchequer, aided and abetted by a Scottish Secretary of State, who has once again failed to stand up for our vital Scottish national interests, says much about how the Government now go about their business.

My hon. Friend the Member for Hertford and Stortford reflected on the fact that 80 per cent. of the burden of implementing these proposals will fall on the top 9 per cent. of companies in the sector. It is important to understand exactly what that means for the smallest businesses in the sector. My constituency contains Scotland's southernmost distillery. In my opinion, it produces Scotland's finest whisky, but I probably would say that, wouldn't I? I suspect that we shall hear about some other contenders for that award later. Bladnoch distillery has recently restarted, after a period in mothballs, under the stewardship of Raymond Armstrong. It is in the very early days of re-formation, and it will bring vital diversity to the Scotch whisky industry. The Economic Secretary needs to reflect on the important fact that the Scotch whisky industry is not just about the major names. Its very essence is its diversity. It is about the Scotch whisky shops that we can all go into. The tourists love them, but so do the locals and some Members of Parliament. In those shops, we can see the huge diversity of this vital industry.

Mr. Armstrong informs me that the burden on his newly restarted enterprise in Bladnoch—a very small business indeed—will be in excess of £220,000. He expects to receive very little in contributions towards that, although he has not been able to ascertain much detail from the Government. That will represent a significant burden for his business to overcome. I am happy to accept that the number of jobs involved is not huge, but those jobs are highly significant in a very small community. The local town of Wigtown depends heavily on the tourism sector, and the Bladnoch distillery now plays a key part in that sector. The Government have so far failed to recognise that this measure will affect small, vulnerable rural communities, but they need to do so very quickly before they make a significant mistake.

Critically, Mr. Armstrong made his decision to invest in the restarting of Bladnoch distillery some two or three years ago, at a time when the Government were happily assuring him that they were not willing to contemplate strip stamps. At that time, they were not seen as an effective use of resources to counteract fraud. Now that he is half-way down the road towards restarting and developing an effective and successful business, he is faced with a substantial burden on his cash flow. I am particularly concerned about the increased barrier to entry for new businesses entering the Scotch whisky industry. This measure is another element that will make it more difficult for new businesses to enter an industry that depends on diversity and on small businesses continually coming into the sector.

Mr. Armstrong has also reflected on the security implications of tax stamps. His distillery is in a rural community in the middle of a very disparately populated area. What are the security consequences of having to store a significant number of tax stamps on the premises? The Chairman of the Select Committee rightly said that a pack of stamps the size of a paperback book was worth £50,000. The security implications for that business are not trivial, and should not be dismissed lightly.

In an intervention on the Economic Secretary, I mentioned the Customs and Excise operation in London, which we have discussed on previous occasions. In that operation, some 300 premises were surveyed and visited by Customs and Excise staff, who reported that more than 140 were selling illicit spirits. That is a troubling figure. No one on either side of the House, and no one in the Select Committee who heard that evidence, has not been troubled by it.

But where is the action resulting from that statistic? Is each of those 140-odd retailers now facing an automatic discharge of their liquor licence? Are Customs and Excise lawyers queueing up to take immediate and effective action against people who are obviously knowingly dealing in illicit alcohol? No, there is a complete absence of enforcement action. The strip stamps proposal would have more credibility if it had been embarked on after a period of strong and effective enforcement of the existing system. There is no evidence, however, that that strong and effective action has either been resourced—resources may well be an issue within Customs and Excise—or has taken place. The fact is that fraud is happening—I shall refer later to the debate about its size—downstream from the distilleries. The distilleries, however, must pay the price, and as a result, Mr. Armstrong faces a huge bill to his new business.

The hon. Member for Moray (Angus Robertson), in an intervention a short while ago, said clearly that each bottle of whisky has a lot number on it. As a member of the Scottish Affairs Committee, I have still never been given a satisfactory answer as to why, in the 21st century, when bar codes are commonplace, computer technology is routine and men are sent to the moon regularly, we cannot track a bottle of whisky and its lot number from the place where it is retailed back to a distillery. I accept that it is difficult, and that there may be some complicated transactions, but I do not understand why it is not possible.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

Given the Home Secretary's desire to track every member of this country through a centralised computer system with our biometric details, could not the Treasury at least embrace the idea of trying to track the whisky that is in the bottles?

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

The hon. Gentleman makes an important point. If he is advocating biometric testing for whisky, I look forward to seeing his proposals in due course.

The issue of counterfeiting has come up on several occasions during the debate, and it is worth spending a couple of minutes on it. There are two aspects: first, counterfeiting of the tax stamps; and secondly, the counterfeiting of whisky as a product. Counterfeiting of stamps has been wildly underestimated by the Treasury. I found the Economic Secretary's opening remarks, in which he admitted that no assessment had been completed of the likely level of counterfeiting in relation to his proposal, unbelievable. If that is the case—I would welcome clarification in his winding-up speech—it is a serious omission and undermines significantly the Treasury's case.

The incentives for counterfeiting are massive. Part of the reason that we have a problem is that we have a high-tax product, and a higher-tax product than many other markets. The risks are small, and the reality is that in Taiwan and across the far east printers will be waiting for the nod from the Economic Secretary, at which they will start work on a very sophisticated product. If the Economic Secretary thinks that he can be one step ahead of the counterfeiters, I can assure him that they will be half a step behind him. They will devise counterfeit tax stamps that will undermine the system. The losers will be the distilleries, which will have paid the price for the tax stamp, but will still suffer from fraud.

Angus Robertson (Scottish National Party, Moray)

The hon. Gentleman raises an important point. Has he seen the correspondence from Gavin Watson, who is one of Scotland's leading printers of secure stamps and the like? He wrote to the SWA and, I believe, to the Treasury, and said:

"It is known that there at least 25 Holographic Machinery Manufacturers in China alone, who currently have no reservations in supplying the Equipment to anyone worldwide who wishes to buy, and without the need to display evidence of being a Licensed Security or Brand Protection Supplier."

Does that concern him as much as it concerns me?

Peter Duncan (Conservative, Galloway and Upper Nithsdale)

Absolutely, because it undermines fundamentally the Government's case. The pursuance of counterfeit tax stamps will simply replace the diversion fraud that we are seeing. Counterfeiting tax stamps will be easier and arguably lower risk than many of the frauds that we are seeing now.

I also referred to counterfeit product, which is my other concern. Scotch whisky is a delicate product, for which branding is important. It depends on quality and brand. There is a significant risk that tax stamps will be used to give credibility to below-standard, counterfeit product in a way that the Government have failed to appreciate to date.

No one, on either side of the House, is in doubt that fraud exists in the spirit sector, and that needs to be addressed, but when the Government decide that gap analysis is too unreliable a methodology to assess fraud in wine and beer markets, it strikes me that to use that same analysis to quantify fraud in the spirits market, and on that basis to inflict a significantly expensive and burdensome procedure on vulnerable distilleries and business in Scotland, is more than should be tolerated by the House.

The reality is that the Government are playing fast and loose with a vital industry in Scotland. Scotland expects better from this Government. U-turns are no longer taboo under this Government, and it is not too late simply to say that more can be done to find an alternative. The Scottish Affairs Committee concluded:

"we are convinced neither that strip stamps would be the best way to tackle such fraud, nor that the Government has exhausted all possible alternatives."

That sums it up for me. That is exactly why I shall vote against clause 4, as this is a burden too far for the Scotch whisky industry.

John Lyons (Labour, Strathkelvin and Bearsden)

A number of colleagues have referred to the fact that the Scottish Affairs Committee took considerable time to examine the question of strip stamps. Properly, a number of people have quoted the Committee's conclusion in its report. I want to put it on record that we fully support the Government's and the industry's attempt to tackle spirit fraud. All of us are united in that objective. No one in the House wants to avoid that issue, although there may be differences on how to tackle it.

I, for one, was not against strip stamps at the outset of the investigation. I was quite prepared to listen to the evidence. On hearing the evidence, however, I for one do not think that it is the best way forward. There are other ways of doing it, and I would be more interested in the industry and the Treasury sitting down and agreeing on full traceability from A to Z, which could conclude the matter.

When considering a proposal from the Treasury or any other organisation, we need to ask whether it is viable, and more importantly, whether it is secure. I do not think that strip stamps across the top of the bottle will be a secure system, and I would reject it on those grounds alone. It will be a fragile way of trying to deter fraud throughout the UK and abroad. A number of Members have mentioned the cost of a stamp—£5.48—which indicates the attraction of fraud and counterfeiting. According to the industry, the strip stamp will cost 1p or 2p to produce, but the £5.48 cost makes forgery attractive in the first place.

Earlier in the debate, a number of Members referred to the fact that other countries had already experienced strip stamps, and I will repeat some points and perhaps add some new material. In Ukraine, in January 2004, within three weeks of their introduction, more than 60,000 bottles were found with a forged hologram strip stamp, which were seized in that country. In Hungary, 15 to 20 per cent. of the market remains illicit. In Bulgaria, 60 per cent. of the spirits trade pays no excise duty. There are major problems in some of those countries.

As was mentioned, some countries have already abolished tax stamps, such as Ecuador, Greece and the USA. Some countries have thought about it and pulled back, such as Belgium, Germany and Norway. A number of people have referred to the fact that if we have strip stamps, the spirit in the bottle might as well be replaced with some poor-quality spirit, as the strip stamp may deliver international acceptance. That is a real danger.

Michael Weir (Scottish National Party, Angus)

Research shows that a large proportion of the Scotch whisky sold in Poland, which uses strip stamps, is counterfeit.

John Lyons (Labour, Strathkelvin and Bearsden)

I think that the same will apply in many other countries in future. The whole industry could be undermined if a poor-quality spirit became linked to the name of Scotch whisky, or anything else for that matter.

China was mentioned earlier in connection with counterfeiting. I raised it when the Treasury gave evidence to the Select Committee. A letter from Drew Samuel, managing director of Gavin Watson, one of the leading makers of security products, warns that the whisky industry faces financial disaster because of crime gangs' access to sophisticated technology. Mr. Samuel says that in China alone 25 manufacturers are supplying sophisticated hologram-making machines on a "no questions asked" basis, and are prepared to use them in that country or sell them abroad for purposes of tax fraud. There is clearly a market out there: people are prepared to do this.

Mr. Samuel says:

"The skill of the counterfeiters has been grossly underestimated. Apart from the ease of apparently authentic numbering, holograms have been globally downgraded as a protection."

More and more people are going to find it easier to counterfeit whatever strip stamp we design. Mr. Samuel adds:

"There appears to be . . . a 'headlong rush' towards a so-called 'solution', which in its projected format could only create more problems than those it would solve."

That was, I think, the conclusion of the Committee, whose Chairman has already mentioned the issue.

The Treasury should take account of evidence from other international quarters. It is not just the Scotch Whisky Association that is saying that. We met trade unionists in distilleries all over the place who confirmed their opposition to strip stamps, and the Scottish Parliament decided that they were not the best answer. As I have said before, any decision that could unite the Scottish Parliament must have something going for it. A reasonable case has been made by the Committee and by Members, and I urge the Treasury to act on it, even at this late stage. The industry has made it clear that it wants to be receptive to any further approach, and I think that we should use this opportunity to come up with an alternative to strip stamps.

I am not a betting person—they sit elsewhere in the House—but I would give short odds on someone trying to counterfeit a strip stamp very soon if it goes over the top of the bottle. That will happen as sure as night follows day unless the industry and the Treasury reach an agreement that would prevent all the pain.

Angus Robertson (Scottish National Party, Moray)

Like many other Members who are present, I am an active member of the all-party Scotch whisky industry group. I declare a further interest, in that more than 50 per cent. of Scotland's malt whisky distilleries are based in my constituency.

Despite my implacable opposition to the introduction of strip stamps, I want to begin with a word of genuine commendation for the Minister. He has been extraordinarily generous in debates, and also with his time: he has met me, and other members of the all-party group, to try to persuade us of the Government's case—although he does not seem to have persuaded anyone. Let me add that I agreed with most of what was said by both the hon. Member for Paisley, North (Mrs. Adams), who chairs the Select Committee, and the hon. Member for Strathkelvin and Bearsden (Mr. Lyons).

Last week we learned that the previous year's Scotch whisky export figures had been excellent. According to the SWA, the export value of Scotch in 2003 was £2.37 billion, the second highest amount ever. The export value of malts bottled in Scotland has exceeded £300 million for the first time. Blends bottled in Scotland are up by 3.5 per cent. The industry feels buoyant in the belief that there are great opportunities for new markets offering exciting prospects abroad. The United Kingdom figures, however, show a decline, just when the Government are planning to introduce strip stamps—a move which, according to Members in all parts of the House, will make the industry less competitive at a time when it is having to fight for its market share in the UK.

According to the SWA figures, Scotch sales were down in volume in the UK during 2003 by 113 million bottles. The tremendous export figures are a triumph for the industry and for workers all over Scotland—not just in rural communities like Moray, where much of the whisky is distilled, but throughout central Scotland, where much of it is bottled and many of the labels are printed. Many of the tourist attractions are there as well—for instance, the Scotch Whisky Heritage Centre on the Royal Mile. This is a truly national industry which employs people throughout the country, and all who work in it should be tremendously proud of the success that they managed to produce in last year's export markets. I am sure all Members hope that the sales will go from strength to strength in the coming years.

We should, however, also take account of the depressed domestic market figures, which should serve as a salutary warning to the Government and to all of us who must decide whether strip stamps will help or harm the industry. Will they make the industry more or less competitive? Will they damage jobs? We have an opportunity to make that decision today, and I hope that we shall do so in a decisive manner.

A number of Members have referred to the regulatory impact assessment produced by Her Majesty's Customs and Excise. It is a very important document, which outlines the Government's case and weighs no action to oppose strip stamps against alternatives suggested by the industry. What worries me is the paragraph just after the short one on counterfeiting that consists of only three sentences. It concerns the revenue benefits to the Government of the introduction of strip stamps. It states with certainty that

"The introduction of tax stamps will have a revenue impact of £160 million in the first year of implementation."

That is a significant and very exact figure. I do not know how it is possible to come up with it when it is not possible to quantify the level of strip stamp fraud.

As sure as night follows day, if the value to criminals moves from what is in the bottle to what is on it, counterfeiting will take place as it has in other countries. We would all condemn that, just as we condemn the diversion that currently takes place. Given the resources available to the Treasury and to Customs and Excise—which, interestingly, lists at the back of the annexe to its report an impressive range of countries that have been consulted, from Albania to Vietnam—was it not possible for those who drew up the report to ask how serious the problem was? If they did not do so, why was that? If they had, surely there would be projections from all those countries.

Many Members have seen figures from countries that have introduced strip stamps. Tens of thousands of bottles for sale in Poland bear legal strip stamps, but contain counterfeit alcohol. Alternatively, the spirit is genuine but the strip stamps have been fraudulently copied. We know of examples of the percentage of the market that is accounted for by fraudulent activities where there are strip stamps. I am certain that someone in the Treasury would want to know what the figures are. After all, the Treasury and all of us, I hope, are looking at taxpayers' interests. How is it possible for the Government to give an exact figure about how much benefit there is to be to the Treasury when they cannot give us the slightest indication of how much of the market will be impacted by fraudulent strip stamp production and use?

Mark Prisk (Conservative, Hertford and Stortford)

I do not want to upset the hon. Gentleman's flow because he is setting out a powerful case. However, does he share my concern that the Government have said that their scheme will generate £160 million and that the industry will generate £70 million, but the Government are willing to give £110 million in tax back by not increasing excise duty? Is not that peculiar mathematics?

Angus Robertson (Scottish National Party, Moray)

To me it is voodoo economics from start to finish. I do not see how the figures add up. I still find it extraordinarily difficult to work out why we are here in the first place. After all, only three years ago, the United Kingdom Government wrote to the Norwegian Government in detail explaining why strip stamps were not a good idea. Everyone agrees that fraud is a bad thing but if the application of strip stamps was discouraged in Norway by a UK Government three years ago, why are strip stamps suddenly so acceptable?

The professional work of Gavin Watson, one of Scotland's leading printing companies, has been raised a couple of times, but neither I nor the hon. Member for Strathkelvin and Bearsden have alluded to the logic of what that firm has said. Is not it extraordinary that a company that could be producing strip stamps and making money after their introduction is warning us all that it is not the best way forward? Even companies with a potential commercial interest in producing the strip stamps think that they are a daft idea.

For many people in the industry, including trade unionists, the RIA is long on promises. It says that that the Government will mitigate industry costs if they go ahead with the scheme, yet at this stage there is no detail of the offset package that the Government are set to bring forward. Indeed, the offset issue merits just one and a half pages of an 83-page document. The £3 million contribution towards capital costs in such a significant industry is a drop in the ocean compared to the £23 million estimated capital cost in the first year.

As someone said earlier, the pot will be spread thinly across the wider industry. Given that it is meant to be targeted at smaller firms, it may apply only to a few companies. As there is no definition of a smaller firm—it is not clear what that means in the Treasury's estimation—even small players in the industry may not qualify, depending on claims from other sectors. The Government need to consider how to assist firms in meeting the security costs.

Without being specific about the distilleries involved, those who know Speyside will know that, when one drives from Aberlour and looks to one's left, one sees some of the largest warehousing anywhere in the European Union. For those hon. Members who are keen on arithmetic and understand how much spirit is being produced, it does not take long to work out that one is talking about billions of pounds worth of product. At the start, I said that the export market was worth £2.37 billion. In one distillery alone in my constituency, there is vastly in excess of that figure maturing, producing a nice angel share, keeping people locally employed.

The security ramifications of the introduction of strip stamps are not a technicality. It is incredibly important, particularly in a region with more than 44 working distilleries and a significant number of bonded warehouses, too. It is important not just for the whisky-producing areas but for areas of the country, predominantly in the central belt, where the whisky is bottled.

If the Government are to go ahead with the scheme, and I genuinely hope that they do not, it remains crucial that they honour their promise to implement the scheme without requiring any up-front payment for stamps. Concerns remain that Customs and Excise has not thought through how that will be achieved and that subsequently it will be put into the "too difficult" category, with the industry left to face crippling cash-flow problems. The Government have said that they will meet printing distribution costs. Many people are concerned, however, that the Bill leaves open the threat that the industry may have to bear the cost at some time in the future. From reports that emerged from meetings with Customs and Excise, it appears that there is little idea about how the system will operate, or the scope, design and nature of the stamps. That is worrying given that the clock is ticking and distilleries will need to start planning for April 2006.

Earlier, I said that the Economic Secretary had been very generous with his time. He was very generous when a leading small to medium company from my constituency, Gordon and MacPhail, came to explain the nature of its business, which sees it stocking more than 800 products. Those products in large part are special bottlings that do not necessarily go on sale at the standard 40 per cent. by volume domestically, or 43 per cent. by volume for export. They bottle at cask strength and everything in between. That means that the strip stamps that are set to go on the bottle have to be specially made for that strength of whisky. How quickly will that firm and similar firms get those strip stamps? What happens if they get special orders for products that they are expected to dispatch within a day or two? How long will it take Customs and Excise to provide those special labels that will go on bottles? We have not heard an answer to that yet.

We are at a stage in the issue where we are fully informed. We have received information from the National Audit Office, Customs and Excise and the Scottish Affairs Committee in its excellent detailed report. Many hon. Members have travelled around Scotland, Ireland and the States learning about the pros and cons of strip stamps. People who know about the industry and about the issue know that the time has come to make a decision. Someone on the Government side used the word "exclusivity". There is no exclusivity of concern about strip stamps but the time is coming to make a decision. The Scottish Affairs Committee reported that it was

"convinced that there has to be a better alternative"

to strip stamps. The Chair of the Committee said earlier in the debate that there is a danger that this solution could be worse than the problem. The chief executive of the Scotch Whisky Association, Gavin Hewitt, said yesterday:

"MPs will have a further chance to debate tax stamps"

He said:

"We urge members in all parties to reject tax stamps".

We are being asked to vote against tax stamps. Nearly one month ago, Scotland's Parliament voted overwhelmingly, by 111 votes to four, on the issue of strip stamps. Labour, Liberal Democrat, Conservative, Scottish National party and others—the others were the Trots, who are not in favour of business—voted for a motion that noted

"with disappointment the announcement by Her Majesty's Government in the 2004 Budget of the introduction of tax stamps on whisky and other spirits; recognises that the compliance associated with the measure will introduce a heavy burden on the Scotch whisky industry; and therefore calls on HM Treasury to engage in further discussion with the industry on the impact of these measures with a view to reaching a satisfactory outcome which deals with tax fraud and would lead to the decision being reversed."

We have the opportunity to reverse that today. I note that at about the same time the First Minister, Jack McConnell, rightly, told the Scottish Parliament that he was "disappointed" about the introduction of strip stamps. While the leader of the Scottish Labour party said he was disappointed about that, the chairman of the all-party group on Scotch whisky made a powerful speech in replying to the Budget, in which he said that he was dismayed that the Government had made a decision to go forward with strip stamps.

I think that now is the time—now is the hour—to ditch strip stamps. The case for them is flawed and discredited. It has been discredited and opposed by cross-party Westminster Committees and all-party groups. It has been voted against overwhelmingly in the Scottish Parliament, by 111 votes to four. First Minister McConnell says that he is disappointed. The Chairman of the Treasury Committee, who is also the chairman of the all-party Scotch whisky group, has said that he is dismayed.

If democracy is to mean anything, this daft measure has to be withdrawn or voted down. The Scotch Whisky Association and workers in the industry have called for that, and the SWA reiterated that call yesterday. That is what we as Members of Parliament need to do today. MPs either vote for this industry and its important jobs, or they do not because we vote to introduce strip stamps. There is no room for ambiguity. We must all take our responsibilities seriously and stand up for the whisky industry and the workers of this key national employer. Voters would find it inexplicable if MPs broke the general and political consensus that this is a bad deal, and it would be inexplicable to speak against it and then vote for it. Strip stamps are bad for competitiveness and bad for jobs, and they will lead to a new domestic criminal growth industry: the fraudulent counterfeiting of tax stamps. All of us, in all parties in the House, should vote against them.

John McFall (Labour/Co-operative, Dumbarton)

I am delighted to be able to participate in this debate. The hon. Member for Moray (Angus Robertson) said that I was dismayed. I am dismayed, but there is one thing that dismays me even more: the obtuse tactics of Scottish National party Members. The opportunity to put right, and into context, their comments is extremely important.

I commend the Government for their actions on the Scotch whisky industry; the Labour Government have been a good friend of the industry. The freeze on duties, the longest since the 1950s, allied to duties for the next two years, adds up to a cumulative total of £1.33 off the duty on a bottle of whisky. With that £1.33 off, this Government have been good to the Scotch whisky industry over the years.

I also commend the report of the Scottish Affairs Committee. I have consistently told the Government that I am dismayed at the introduction of the tax stamps, and I commend the Committee report for several of its points, such as that in paragraph 9. However, we must all recognise that, at heart, the Government's proposals are aimed at tackling fraud in the spirits industry, and unless we have meaningful alternatives for tackling that fraud, this exercise is meaningless. It is important that the industry and the Government find ways of tackling fraud.

I commend the Committee report for its comments on the National Audit Office report, in paragraph 11. The Committee seems to be saying that the Government are making a decision that is illogical in terms of its implementation because of flawed figures. It is important that that issue is tied up.

Geoffrey Clifton-Brown (Conservative, Cotswold)

The hon. Gentleman refers to paragraphs 11 and 12 of the Select Committee report, which are on the NAO report. Paragraph 11, referring to the Customs and Excise estimate of £600 million in lost duty, says that the range

"should properly be expressed as . . . £330m to £1,080m",

and also refers to the Scotch Whisky Association's estimated range of "£10m to £260m".

Paragraph 12 goes on to say that

"it is difficult to accept that both methods are reliable when they result in such widely different estimates of consumption. It is therefore clear that further work needs to be done by the Office for National Statistics, with Customs and the Scotch Whisky Association".

Does not the hon. Gentleman think that the Government should at least postpone their proposals until the proper statistical evidence can be gathered, so that we know the real loss in revenue with greater accuracy?

John McFall (Labour/Co-operative, Dumbarton)

Those points have already been made most eloquently by my hon. Friend the Member for Paisley, North (Mrs. Adams); if the hon. Member for Cotswold (Mr. Clifton-Brown) had been in his seat, he would have observed that we have severe reservations on that matter. We acknowledge that point.

Paragraph 20 of the Scottish Affairs Committee's report mentions flaws in the "physical nature" of the stamps. The Economic Secretary was good enough to accept an invitation from me to visit Scotland, and he visited the Allied Distillers plant at Dumbarton in my constituency. He saw for himself the thin, sticky labels becoming snagged in the machinery, being constantly ripped up and not adhering to the bottles properly. He then saw that they had to be manually recorded and stuck on to a list on a clipboard so that the distillery could claim the refund from them. That is a laborious process, and I ask the Economic Secretary to look at it again. It is important to put on record that whereas for the large firms in the industry—Diageo or Allied in my constituency—that strip-stamp process is a nuisance, for small companies it could mean existence or non-existence. The Economic Secretary must bear that in mind when he replies on this issue.

I agree that the industry has been slow. The Committee was right to refer to that and say that it would have been helpful if the industry had responded more quickly. The evidence in paragraph 28 on diversion, and the fact that nothing had been done about it, suggests that there must be some form of regulation.

I state again today that strip stamps are not the best way to tackle fraud. The hon. Member for Moray mentioned Gavin Hewitt, but I have news for the hon. Gentleman. I have here a letter from Gavin Hewitt dated 21 April, which does not read as a stirring declaration asking Members to vote against the proposal; the Scotch Whisky Association does not say that at all. It has realised from discussions with me that the all-party group comprises parliamentarians from all parties who do not take a political view on the matter, and Gavin Hewitt from the SWA reinforces that.

Angus Robertson (Scottish National Party, Moray)

rose—

John McFall (Labour/Co-operative, Dumbarton)

The hon. Gentleman has had his turn. I shall read out exactly what Gavin Hewitt has written to me:

"We and many independent observers remain convinced that tax stamps are a mistake".

I think that we can find an echo of support for that on both sides of the Committee. However, he goes on to say,

"but we recognise the reality of the Budget announcement. The industry will work with Customs to deliver a workable scheme, at the same time ensuring—in line with ministerial commitments—that costs to industry are mitigated."

In that letter, the Scotch Whisky Association—the trade body for Scotch whisky—is saying that it will work with us. I want my colleagues and I to work with the Treasury and the industry, on the industry's behalf, to ensure that we get a sound outcome, because the industry has accepted the reality of the situation.

Angus Robertson (Scottish National Party, Moray)

I agree that Members on both sides of the House should work with the Treasury in the interests of the industry. Will the hon. Gentleman confirm that the SWA still opposes strip stamps, and is he saying that its chief executive did not issue a press release yesterday in which he urged Members—from all parties—to reject tax stamps in today's debate?

John McFall (Labour/Co-operative, Dumbarton)

Is the hon. Gentleman saying that the chief executive of the SWA told Members of this House to vote against the Budget today? If so, I shall take the matter up with the chief executive, because I have a letter from him declaring that he will work with us. The hon. Gentleman might have done better to have a personal chat with the SWA, instead of reading from a press release. In fact, I shall follow the example of my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) and place this letter in the House of Commons Library, so that everyone can read it.

Let my colleagues be in no doubt that the Scotch whisky industry is saying that the Budget announcement is a reality, and that it will work with it. I am taking my line from the SWA.

Mark Prisk (Conservative, Hertford and Stortford)

As Chairman of the Treasury Committee, the hon. Gentleman is very thorough in his approach to this issue. My discussions with the SWA made it clear that a year's delay was considered to be the most practical solution, and we tabled an amendment to that effect. Does the hon. Gentleman agree with that view?

John McFall (Labour/Co-operative, Dumbarton)

The issue is meaningful negotiation. I shall deal with that issue later, and in doing so I shall take on board what the hon. Gentleman says. I agree that these are crucial and important matters, but the question is: can they be resolved through discussion?

In its letter to me, the SWA said:

"The industry held a most disappointing meeting with officials on 20 April. While the clock is ticking very fast, there appears to be little developed thought on many of the fundamental issues. We are pleased that the industry is being consulted on the terms of the scheme and the associated secondary legislation, but it is of major concern to us that so many central issues have not been addressed . . . If the industry is to engage in meaningful discussion, this situation must change quickly. Tax stamps are set for introduction in April 2006, but companies will need to test their equipment and systems, build up stocks and organise changes in their supply lines from January 2006 at the latest."

I ask the Economic Secretary to provide the industry with greater clarity on a number of issues, including offsets. The SWA states that

"Ministers have consistently and publicly said that the government will mitigate costs through offsets. This is stressed"—

as the Economic Secretary himself said—

"throughout the Regulatory Impact Assessment; but at our recent meeting"

Government officials

"had nothing concrete to offer on offsets; all the emphasis was on getting the money as early as possible".

Will the Economic Secretary comment on that? The SWA further states that officials

"were unable to comment on industry suggestions, for example, for an extension of the duty deferment period; and . . . appeared, in contradiction to all previous pronouncements, to suggest that they were not convinced that there would be significant costs to the industry to offset."

The industry is also concerned about guarantees. The SWA states:

"No other tax (VAT, corporation tax etc) requires companies to provide guarantees for payment of tax up front. Those companies with duty deferment accounts already have guarantees in place. We therefore see no justification for introducing further additional guarantees to cover tax stamps."

On capital assistance, which has already been mentioned, the SWA says that

"the government has promised to make available £3m towards the industry's first year capital costs of £23m. This is required to be directed at 'smaller firms'."

We would all agree with that. The SWA continues, however, by stating that

"it is not fair to put on industry the burden of deciding how to carve up this capital assistance among the companies concerned—as many as 160. Clear guidelines are needed. Without this, planning cannot take place."

On products, the SWA states:

"Perhaps even more surprising is the lack of clarity on which products will require stamps and which will not."

My hon. Friend the Member for Paisley, North asked a question, to which the Economic Secretary responded, about where on whisky bottles the stamp will be placed. That is a very important issue. The SWA states that

"it has been suggested that stamps should apply only to those categories where fraud is a problem; but this raises serious competition issues and possible distortion of the market. For example, why should liqueurs be exempt if special bottles of rare malt whisky are included?"

The Minister will see that there is a great opportunity for detailed discussions between the industry and the Government.

Flexibility is another issue. The letter states:

"The companies, the market and product range are hugely diverse. One scheme for all may not be the right answer. Companies with an unblemished record on compliance and payment should not be treated the same as a newcomer to the market without a track record. As far as possible, we should be aiming for a level playing field for large and small companies to avoid competition distortion."

The industry has told me very clearly that it wants to play a

"constructive and collaborative role",

but finds it

"depressing that the policy of tax stamps has got this far, when officials are only now grappling with the complexity of the practicalities."

I should like the Economic Secretary to give the industry some reassurance on its concerns. The industry will work with Customs and Excise, but needs

"the certainty of Ministerial guidance to officials to ensure that their undertakings to the industry are turned into action and reality."

In view of Gavin Hewitt's letter to me and his clear statement that the Budget is a done deal, where do we go from here? How can Members adopt a constructive and positive agenda working alongside the industry? Do we stand aside and be negative, providing no answers to the problem? Do we turn a blind eye to £600 million-worth of fraud, when we are here to work for the best interests of the taxpayer? The industry recognises that, and I suggest that we work, as the industry says, with the Government to secure a good solution to the problem.

If I were saying that all on my own, I might be subject to charges of cynicism, but the chief executive of the Scotch Whisky Association is telling me that. Let me make it absolutely clear to the Committee that the chief executive would never say in any discussions that Members of Parliament should vote against the Budget. He would tell me that the Scotch Whisky Association is a non-political body, which is best served by all parties collectively working here for its advantage.

David Laws (Liberal Democrat, Yeovil)

I would not want the hon. Gentleman to push his case too far. Surely he is not suggesting that the Scotch Whisky Association would not be happier if Members of Parliament voted down these proposals?

John McFall (Labour/Co-operative, Dumbarton)

It is saying very clearly that it does not want to participate in the political debate. It is non-political. It is clear from the letter that the SWA gives us its support to work with the Government to secure a manageable solution to the problem. As parliamentarians we have to work for the benefit of the industry. The all-party group—I see its secretary in his place—will do all it can to work for the industry on behalf of all parliamentarians here. In the next few days I will meet the Scotch Whisky Association again to discuss the way forward.

As chairman of the all-party group I have had constant contact with the industry, and as Chairman of the Treasury Committee I have questioned the Chancellor on these proposals. Today, I am taking the opportunity to speak in the debate and question the Economic Secretary. MPs have done all they can to get these proposals dropped, but we must work with the industry, and the contact between Ministers, the industry and parliamentarians has to be meaningful. The dialogue should be intense. I hope to hear that the Economic Secretary will work with the industry and us and that he will communicate what we are saying to the Chancellor. No one in the Treasury, including the Chancellor, need be deaf to reason on this matter.

The whisky industry is one of the most successful in our manufacturing sector. As I have said to my hon. Friend the Economic Secretary and others, we cannot afford to jeopardise its competitiveness and reduce its productivity. It accounts for more than £2 billion in trade. It is therefore essential that we maintain its competitiveness and productivity.

I speak for the all-party group and the SWA when I say that we will work with the Treasury to ensure that the costs to the industry are mitigated. However, that dialogue must be constant if we are to ensure a good deal for everyone.

Alan Reid (Liberal Democrat, Argyll and Bute)

I hope that the Committee will vote to ditch clause 4. That is what the SWA has asked us to do today.

The Chancellor announced in his pre-Budget report that he planned to introduce the tax stamp scheme. Since then, the scheme has been investigated by the National Audit Office and the Scottish Affairs Committee. The NAO investigation cast doubts on the accuracy of the fraud estimates used by the Chancellor to justify the introduction of the stamps. Just yesterday, the Scottish Affairs Committee concluded unanimously that tax stamps were a bad idea and should not be introduced.

The view that tax stamps would be ineffective is shared by the US Government, who abandoned their own scheme 20 years ago because it was ineffective. Several other countries, most notably Norway, Belgium and Germany, looked at the idea but decided not to go ahead with it. The Department of Trade and Industry wrote to the Norwegian Government advising them not to introduce the scheme. Given all that evidence, I do not know why the British Government should be so hell bent on introducing the scheme. Many other countries that have introduced the tax scheme, among them Poland, Hungary and Ukraine, appear to be fighting a losing battle against fraud and forgery. The Scottish Parliament, including all the Labour Ministers and Labour MSPs, also voted overwhelmingly against the scheme. I am therefore very disappointed that the Government should be going ahead with the plan, despite all the evidence that I have mentioned.

We all agree that there is a problem with fraud. Where it exists, it must be tackled. However, we must ensure that anti-fraud measures are introduced only when we are satisfied that the benefits will outweigh the costs. All the evidence shows that tax stamps fail that test.

The industry will face great costs and risks. The hon. Member for Paisley, North (Mrs. Adams) spoke about the Select Committee's visit to Islay, where members spoke to the management of the distillery and bottling hall at Bruichladdich. The venture had been closed for many years, but was reopened a year or two ago when a group of local business people decided that the market conditions were right. At the time, they thought that Government policy was to oppose tax stamps. Their small bottling hall will face tremendous extra costs if it is forced to put tax stamps on bottles. The restrictions on European state aid were referred to earlier, and they make it unlikely that the Government's compensation scheme will be able to pay the full costs that that small bottling hall will encounter in buying the machinery needed to apply the tax stamps.

Bruichladdich is a small village on the Rhinns of Islay, where alternative employment is very hard to find. As the hon. Lady said, a very high proportion of jobs could be at threat in that remote community, even though the actual number of jobs involved is relatively small. There are no other job vacancies on the island for people who lose their jobs in the bottling plant. It is therefore important that the Government realise that any threat to the Scotch whisky industry risks devastating the employment prospects in, and the economies of, small and remote communities such as Bruichladdich. That is true of other areas on Islay, and of Jura, where the distillery is by far the biggest employer.

The SWA put forward alternative proposals, which the Government estimated would deliver a saving in duty fraud of £70 million. I point out that that could be achieved without all the risks involved in the Government's tax stamp scheme. Surely we should implement the risk-free measures first and evaluate their success before we proceed to more risky measures?

Tax stamps fail the cost-benefit test for three reasons. First, the Government's estimates of fraud are clearly dubious. In addition, the danger that the stamps will be counterfeited means that they are likely to be ineffective. Thirdly, tax stamps will impose a serious financial burden on the industry.

The Government's estimates of duty fraud are arrived at by means of what is known as gap analysis—that is, using consumer surveys to measure consumption, then subtracting recorded legitimate sales to arrive at the level of duty fraud. That method depends heavily on the consumer surveys, which means that it depends on consumers accurately recalling how much alcohol they have consumed. I will leave the Committee to judge how accurate that type of survey is likely to be.

The Government plan to introduce an expensive scheme on the basis of the results of such surveys. Common sense tells us that that is not a sensible method on which to proceed, but we can look at the results of the surveys. The Customs and Excise annual report for 2002–03 noted that its gap analysis method for beer found that duty fraud on beer was negative. What rational conclusion can we draw? The analysis for beer says that duty fraud is negative, and the analysis for whisky suggests that duty fraud is high. The only sensible conclusion is that beer drinkers recollect, after their drinking bouts, that they have drunk a lot less than they actually did, while whisky drinkers think they have drunk a lot more. We cannot draw any sensible conclusion about duty fraud. No wonder the National Audit Office has concluded:

"Great care is needed in determining what reliance is to be placed on the results at present available."

That conclusion that great care is needed is a warning that the Government should heed. It is important to remember that if the Government have seriously overestimated duty fraud, the reduction in fraud that tax stamps bring will be proportionately reduced.

How effective are tax stamps likely to be? I spoke earlier about the failure of tax stamps in other countries, and even our Government seem to have doubts about how effective they will be. They estimate that the stamps will reduce duty fraud by only about a quarter, which does not indicate much confidence in the scheme's effectiveness and which seems to reflect the problems that other countries have had. We all know from the evidence given by other Members that forgeries will be so good that it will take a very experienced Customs officer to spot them. Shopkeepers and customers will still be taken in by the forgeries. Raids by Customs and Excise officers on shops and car boot sales will still be needed to spot the forgeries. I do not see what the benefit will be of having very good forgeries stuck on bottles. The whole idea of tax stamps is that somebody will be able to tell at first glance that if there is no tax stamp on the bottle, there is a fraud. We all know, though, that good forgeries will quickly appear, which will completely rule that out.

The Government estimate that the package of measures proposed by the industry would reduce fraud by about £70 million a year, which compares with their estimated reduction from tax stamps of £160 million a year. Their estimate of the extra savings from the tax stamps is therefore only £90 million a year. Yet their estimate of the annual ongoing costs is £54 million, and never mind the start-up costs. The saving appears, therefore, to be only £36 million a year, assuming all the Government's optimistic estimates are correct. I think the risk is too great for a saving of just £36 million a year, and that is without taking into account start-up costs and security costs.

Security costs worry the industry tremendously. Each stamp is a small piece of paper worth £5.48. Many bottling plants are in out-of-town industrial estates, and those plants will have millions of pounds worth of what is effectively cash sitting in their premises, for the tax stamps are as good as cash to any thief who breaks in and manages to steal them. What sane company would store millions of pounds worth of £5 notes in an out-of-town industrial estate? The police advise companies not to keep cash on their premises and to get it into the bank straight away. If tax stamps are introduced, bottling plants will have to store more cash equivalent on their premises than the local bank has cash. Thieves will no longer want to rob banks: it will be their ambition to rob the bottling hall. Bottling plants will be a magnet for thieves and, therefore, the insurance industry will be very worried. We all know that the insurance industry does not like to insure cash, so insurance premiums will have to rise considerably.

We have also heard about the problems for the production line that will be caused by the complicated process of applying tax stamps to the bottles. If marks have to be introduced, it would be much more sensible if they were in the form of modern laser marks or stamps on the labels. They would be much easier to fix on the bottles than the complicated process of applying tax stamps.

We do not know the scale of the problem that we are trying to solve, we do not know how effective the proposed solution will be and we do not know the full cost. However, we do know that the scheme is a great risk for a relatively small return. If the Scotch whisky industry has to cut back its production because of falling sales caused by increased prices, the outcome will be devastating for small communities, such as those that have been mentioned on Islay and Jura. I appeal to the Government not to proceed with tax stamps but to adopt the Scotch whisky industry's alternative package.

Kate Hoey (Labour, Vauxhall)

I apologise for not being in my place at the beginning of the debate. I wish to put forward the views of the Gin and Vodka Association on the issue, and I must declare the interest in my constituency, which includes the distillery for Beefeater gin, the only true London gin, and a small organic gin distillery, which also bottles in the constituency. I would like my hon. Friend the Economic Secretary to give me some more comfort on the prospects for very small producers, because the extra costs imposed by the scheme will mean that some will go under.

I also wish to raise the question about Bushmills in the excellent report by the Scottish Affairs Committee on the whisky industry. As I come from Northern Ireland, I feel especially strongly about that. Bushmills is one of the great tourist attractions in Northern Ireland, and I wonder whether my hon. Friend the Economic Secretary can really give us an assurance that the people of the local community will not be affected if the industry moves south to the Republic of Ireland. That would almost certainly have a bad impact.

I also question the whole basis of the scheme. I have tried to understand the logic behind it, but it is difficult to fathom—other than as a way to raise money. I appreciate that my hon. Friend the Economic Secretary shakes his head at that, but the Treasury does want to raise money and is also committed to tackling fraud. However, no argument has been made that proves to me, or to the Gin and Vodka Association, that the scheme is the best way to achieve those aims. It is unbelievable that we propose to go ahead with the scheme without the proof that it will work. What is the point of a substantial number of companies going out of business if we then discover, two or three years later, that the scheme has made no difference to levels of fraud?

Angus Robertson (Scottish National Party, Moray)

If the case has not been proven and if the scheme would damage businesses in Northern Ireland, Scotland, England and Wales—which now has a Welsh whisky company—is it not now imperative for all of us to vote against it?

Kate Hoey (Labour, Vauxhall)

I still have not decided whether to abstain or vote against the proposal. I want to see whether my hon. Friend the Economic Secretary can give any more assurances that will satisfy both the small company in my constituency and Allied Domecq, which is responsible for Beefeater gin. I want some assurance that the measure can be, at the very least, delayed. I do not understand the desire to rush it through. It does not seem that it will tackle fraud; it is merely a knee-jerk response that says that fraud will be tackled. I do not think that it will work, so at this very late stage I ask the Economic Secretary to think again and, at the very least, to accept that it should be delayed for one year, if not longer, until we have the facts about the real effect that it will have on fraud.

Richard Bacon (Conservative, South Norfolk)

It is always a pleasure to follow the hon. Member for Vauxhall (Kate Hoey). I have had great affection for her ever since I stood against her for Parliament. However, the combined efforts of many months of putting out thousands of newspapers saying that I was zooming to victory in the race for the Vauxhall constituency merely increased her majority from 10,000 to about 18,000. Nevertheless, I remember the contest with great affection.

I am glad that the hon. Member for Dumbarton (Mr. McFall) is now back in his place, because I want to congratulate him on what I can only describe as the magnificent mental gymnastics in his speech. He said that he was dismayed by the Government's decision to introduce tax stamps, and I should have thought that the obvious corollary to being so dismayed would be to vote against the Government on this issue. At times his gymnastics were so magnificent that I lost his flow—so fast did he pirouette—but I think I understood him to say that he would support the Government tonight.

John McFall (Labour/Co-operative, Dumbarton)

Let me be clear. I spoke because I received a letter from the Scotch Whisky Association saying that this was a done deal in the Budget. It wants to reach the best outcome for the industry and it asked me, as the Member of Parliament for Dumbarton and as the chairman of the all-party whisky group, to help the association. I said that I would help it by negotiating with the Government. That was very clear and it is acceptable to me and to the association. I hope that it will be acceptable to everyone with whisky interests and who considers the industry as a whole and not in a partisan, narrow and bigoted way.

Richard Bacon (Conservative, South Norfolk)

I commend to the hon. Gentleman an article by Daniel Finkelstein that appeared in The Times this morning. It said that when any politician begins a sentence with the words "Let me be clear" we should start worrying.

I commend the hon. Member for Moray (Angus Robertson) on his powerful speech. It seems to me that four central points have emerged in the debate. The first is that the scheme will impose very high costs on legitimate players; the second is that it will be very damaging to small businesses; the third is that it almost certainly will not work; and the fourth is that it will encourage a whole new area of organised crime.

The Government are not new to fostering organised crime. The Roques report entitled "The Collection of Excise Duties in HM Customs and Excise" came out in July 2001, and Mr. John Roques studied the issue in great detail. He pointed out that Customs and Excise had often encouraged the scale of the fraud because, after identifying diversion fraud, it let loads run rather than knocking them. Paragraph 7.5.3 on page 149 is headed "Decisions to allow loads to run" and it states:

"Of the seven cases where substantial investigations took place before the knock,"—

in other words, before the intervention occurred—

"it was typically the case that large amounts of revenue were lost after the diversion of alcohol was identified."

The report adds that

"in one case I reviewed, it continued for over a year and in another for over two years. This resulted in a large amount of revenue being lost as a result of loads being allowed to run."

I know that things have improved since, and I am sure that that is what the Economic Secretary will say when he winds up. He will be right; things have improved since. However, we must remember that background.

The Government boast—the Economic Secretary did so in his opening speech—that they are one of the few Governments, if not the only one, to have made a reliable estimate of the amount of fraud that is going on, so it is extraordinary that they have not estimated the amount of fraud that is likely to occur from the introduction of tax stamps. There is consistency in their approach. Perhaps we are being a little unfair on them. The idea that one does not do a proper estimate, that one does not carry out a thorough survey or assessment and does not obtain a thorough understanding of the issues—in the case of tax credits, they knew that something would not work but they introduced it—has been common practice in Government IT projects for many years. The policy is now being extended to other areas.

My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) mentioned the statement that the Chancellor made in April 2002, when he appeared to be against tax stamps. Since then there have been U-turns on everything from student tuition fees to the EU referendum, so it is no surprise that there should be a U-turn on this matter. I hope that the Economic Secretary will consider making another U-turn, and I have a suggestion, which I will put to him later, as to how he might accomplish that manoeuvre slightly more elegantly.

The hon. Member for Paisley, North (Mrs. Adams) made a very powerful speech. I was shocked to hear that 50,000 tax strips can be contained in something the size of a paperback book. If that is not enough incentive for a whole new area of organised crime to develop, I am not sure what is. I do not think that the Treasury has given anything like enough thought to that. We have seen in the case of SIM cards for mobile phones a whole new area of fraud—VAT carousel fraud, for example—because the cards are so small, so portable and so valuable. Exactly the same will happen with tax stamps; instead of stamping out a problem, they are much more likely to make it worse.

Solving the problem of diversion fraud involves a simple issue: full traceability. As the hon. Member for Moray said in his very good speech, there is full traceability now, in the sense that one can identify the precise time at which a bottle of whisky was created in the distillery and track it at every other point in the process. If we can have full traceability for beef and other products, we ought to be able to achieve it for whisky as well. The answer is to head down that route rather than having tax stamps.

The Economic Secretary mentioned the National Audit Office a number of times; indeed, it is fair to say that he prayed it in aid. I do not sit on the Scottish Affairs Committee, but I do sit on the Public Accounts Committee, and when the Committee considered the Customs and Excise standard report on 26 January, we were so concerned about the disparities between the estimates from Customs and those from the industry that we asked the NAO to do further work.

The Economic Secretary, who was quite fair in quoting the NAO report, said that there are substantial uncertainties inherent in any estimate of spirits fraud. He neglected to say, although I think that my hon. Friend the Member for Hertford and Stortford may have mentioned this, that there are differences between the two models even when estimates are presented as a range of possibilities. However, the NAO was careful to say in its conclusion that further work was needed by the Office for National Statistics, by Customs and Excise and by the industry, in the form of the Scotch Whisky Association. That point was made briefly in an intervention by my hon. Friend the Member for Cotswold (Mr. Clifton-Brown).

There is a way forward for the Economic Secretary. I know that he is a fair man, so I do not think that he could honestly say that he has carried the House with him on this. The Government have quite a reputation for rushing ahead with proposals that are not fully thought out, although the Prime Minister has issued a memo saying that that may be a bad idea. I suggest that rather than doing a humiliating climb-down on this clause now, the Economic Secretary should step back a little. Why, instead of doing a U-turn, does he not do two L-turns? In responding to the debate he should say that the House has clearly not been persuaded, that there are some serious concerns and that we are about to spawn a whole new area of organised crime, so we should work harder with the industry. As the NAO said, further work is needed.

In a few months, the hon. Gentleman should come back to the House, having done all that work, and say, "We have decided that tax stamps are not the way forward," thereby completing the second L-turn. I promise, at least on my own behalf, that if and when he does that, Conservative Members will not crow; we will welcome it as a sensible policy from a Government who, just once, have listened to the debate rather than storming ahead with something that plainly will not work.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

I echo the remarks of the hon. Member for South Norfolk (Mr. Bacon) on the importance of recognising that, if the Government came to understand the concerns expressed in the debate, saw that the proposal in clause 4 will not be effective, and decided to take another road, we would constructively welcome that. The purpose of the debate is, after all, to engage with the Government, challenge their proposals and persuade them to come up with better alternatives. There would be no loss of face if the Government decided, at this 11th hour, to make that decision.

In a press release on Monday, the Scotch Whisky Association said:

"We urge members of all parties to reject tax stamps".

That is the advice on the way to go. Of course, we are here to make our own judgment on the issues before us, and the concerns expressed by the Scotch Whisky Association help to inform our decision. We do not have to take its advice, but it should be considered carefully. On the merits of the case made by the Government, the arguments put so far and the issues raised by Members in all parts of the House, it would be sensible for clause 4 not to go forward.

Despite the title of the report from the Scottish Affairs Committee, it is important to recognise that the proposal is for a spirit tax stamp, not a whisky tax stamp. It applies to all spirits throughout the country, not just in Scotland. It is a UK matter. I remember that on Second Reading my hon. Friend the Member for Somerton and Frome (Mr. Heath) was worried that cider brandy from his constituency would be affected. The hon. Member for Vauxhall (Kate Hoey) highlighted the fact that it would apply to gin, too. Although gin is a London product, much of it comes from Scotland. Spirits bottling is a major industry in Scotland. As whisky must come from Scotland, other spirits have migrated there because of the economies of scale and the production processes.

As a member of the Scottish Affairs Committee in the previous Parliament, I welcome the fact that the Committee has carried on our inquiry into the drinks industry in Scotland. We recognised how important the industry was to Scotland. I welcome the work of the Committee under the chairmanship of the hon. Member for Paisley, North (Mrs. Adams) in producing such a useful document, bringing together the evidence to inform our decision. It would be a recognition of the power of the Committee system in the House if we acknowledged that, on the basis of that extra information, it would be appropriate for clause 4 not to go forward, without the Government losing face.

The Economic Secretary opened the debate with wide-ranging remarks on clause 4, but as several hon. Members pointed out, he did not address the balance of the Treasury's analysis of the reliability of the strip stamp proposal, set against other proposals. The Treasury seems much more able to see the flaws in other proposals than the flaws that must exist in its own proposal. It would make a more convincing case if the Treasury had offered an assessment of the flaws, how those were taken into account, and the net benefit of its proposal. Instead, it seems to be saying, "We'll find out what the flaws are once we've introduced it and tested the ability of the criminal fraternity to work round it." It is more important for legislation to second-guess the criminal fraternity and avoid creating another trap that will only make more legislation necessary in future.

The Economic Secretary dismissed my remark about tachographs. My point was that the key part of the diversion fraud was the lorry not going to the proper destination. The proposals from the Scotch Whisky Association highlighted in proposals 5 and 6 in the Scottish Affairs Committee report focus on the key way of tackling the problem, if the Treasury were truly minded to do so. An audit trail showing the point at which diversion occurs would be the most effective way of preventing it. If the stamps were forged, diversion would still occur—the forged stamps would be put on at the diversion warehouse and the criminals would be back in business.

What I find most disappointing, notwithstanding the extra burdens being imposed on industry, is the potential failure to achieve a solution to a problem identified by the Government and recognised across the House. A voice that seems to be absent from the debate yet again is that of the Department of Trade and Industry. The chamber of commerce recently expressed concern about the Government's failure to deal with the extra burdens of red tape introduced by successive regulations under the present Government. The DTI was somewhat dismissive of those concerns. The DTI was able to convince the Norwegians not to introduce a tax stamp, but does not seem to have succeeded in convincing the Treasury not to do so in this country. That once again calls into question the role of the DTI in making sure the voice of business is heard.

The proposal will affect business at all levels. When we focus on small business, there is a danger that we will not recognise that any extra burden on big business is an economic burden on the economy that should be avoided if at all possible.

During the previous Scottish Affairs Committee inquiry on the drinks industry, we visited bottling plants. When one sees the processes involved in handling the bottles, one recognises that sticking in an extra piece of machinery or function creates a burden that will always be there, and which will slow down the plant and add to costs.

My hon. Friend the Member for Yeovil (Mr. Laws) made the important point that, if the Government forgo a rise in duty, it does not automatically mean that the money goes back into the industry to cover costs. Price competition means that the duty cut will also go to the consumer. That might increase sales, which would increase turnover and help with profits, but there is no straight correlation between duty forgone and the cost of introducing the stamp.

As many hon. Members have said, small businesses face particular challenges. Smaller bottling plants involve a major capital investment. I hope that the Economic Secretary will outline exactly what the Government mean when they talk about helping small businesses and what level of business they are referring to. My hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) spoke about his wife's microbusiness in his constituency. I wanted to address a problem that a small business has raised with me. Let us consider a business in which two bottling production runs occur every year—one every six months—and the product is stored in cases and sold by mail order as and when orders come in. The orders might come from the United Kingdom or from somewhere else; perhaps that would be Scandinavia in the case of the business in question. Somebody who is running a small business that has just been started up and has been going for only a few years will not have made a full assessment of the market.

Under the current system, the spirit will sit in the case waiting to go to market. If it goes to the UK market, the duty will be paid in this country. If it goes abroad, the duty will be paid in the other country. Under the Government's proposals, the stamps can be put on—the duty will be paid up front, even if there is some deferment; in this case, the deferral could last some time—but if the cases go to Sweden, the business must reopen them, rip off the stamps and somehow get a refund for those damaged stamps. Conversely, if there are no stamps on the bottles, the business will have to open the cases and put stamps on the bottles that are going for UK consumption. If such a business were larger, we could argue that it should have a feel for the market, take a few risks and have some cases without stamps and others with them. The whole point of trying to reduce the burden on businesses, however, is to allow them to flourish as effectively as possible in their market. With an unnecessary burden of having to try to assess which cases need stamps and which do not, the growth of the business in question will be undermined.

In the light of all the contributions that have been made, I urge the Government to recognise at this late stage that they have not made the case for the clause. They have certainly focused the mind of the industry on concrete alternatives; perhaps they made clear just how concerned they were about the problem. There may have been a breakdown in dialogue with the industry, but that dialogue is clearly under way again, and the industry is constructively engaged. The Government have certainly brought the issue back on to the agenda. They should not proceed with the clause, and they should re-engage with the industry on all the constructive alternatives, deal with the heart of the problem of diversion fraud, recognise hon. Members' concerns and not impose this extra burden on a very important part of the Scottish economy and the UK drinks industry.

John Healey (Labour, Wentworth)

We have had a very full and thorough debate. A number of points have been made, and a number of them have been made several times.

I welcome the affirmation of the hon. Member for Hertford and Stortford (Mr. Prisk) of his party's determination to tackle fraud. I hope that we will see a similar determination in later deliberations on the Bill, when we discuss other types of fraud and tax avoidance. He shares my view that we need to work closely with the industry. We have done just that, and we will do so in future. He described such work as partnership. That partnership is already under way, and it involves not only the spirits producers; the joint alcohol and tobacco consultation group, which I mentioned earlier, includes not only producers, but retailers, hauliers, warehouse keepers, ferry operators and airline companies.

We are ready to work with those who want to work with us to obtain the maximum impact from the system of duty stamps, the minimum impact on legitimate firms, and the best measures to help to deal with the costs for the industry. I give way to the hon. Member for Hertford and Stortford, but if members of the Committee will forgive me, I shall then make progress and respond to the points raised in this thorough debate, rather than encouraging further contributions.

Mark Prisk (Conservative, Hertford and Stortford)

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 (Labour, Wentworth)

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.

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 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

"the Scottish Parliament should be responsible for the setting of all national taxation within Scotland."

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 (Scottish National Party, Moray)

Will the Minister give way?

John Healey (Labour, Wentworth)

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 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 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.

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

"The job of the industry and the British Government now is to ensure that the proposals are implemented in a way that is most effective and that will have the least impact on productivity and competitiveness."—[Scottish Parliament Official Report, 18 March 2004; Vol. 60, c. 6829.]

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.

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.

Clause 5 — Rates

Andrew Tyrie (Conservative, Chichester)

I beg to move amendment No. 2, in page 4, line 9, leave out "£0.0664" and insert "£0.0435".

I have no interest to declare—so far as I am aware—beyond having a very large rural constituency with a coastline. Many of the farmers and boat-owners who live there will be hit by the red diesel fuel hike.

I want to begin by making a few general observations about clause 5, and in particular about the scale of the hikes involved and the enormous amount of tax being raised. The clause raises a further £1.6 billion in excise from fuel duties, nearly £1 billion of which is over and above revalorisation. These are very large increases in taxation on millions of people. There is an increase from 47.1p to 49p per litre for both low sulphur petrol and diesel, and an increase for fuel oil for home heating of 1p above revalorisation. Of course, all duty increases are to be frozen until 1 September 2004, as the Economic Secretary will doubtless point out in a moment. But as the chief executive of the Road Haulage Association said recently, this freeze

"serves only to delay the pain. Come September, UK road hauliers will be operating at an even greater disadvantage compared with their foreign competitors".

We will return to the issue of biodiesel when we go Upstairs into Standing Committee. The only point that need be made today is that maintaining the 20 per cent. incentive for biodiesel does little or nothing to encourage its use, as my right hon. Friend the Member for Fylde (Mr. Jack)—unfortunately, he cannot be here today—so clearly illustrated in a speech last year. Everybody who has looked at this issue agrees that the differential is too small to be meaningful. Yesterday, the Government published a consultation paper the title of which—"Towards A UK Strategy for Biofuels"—admits as much. In other words, there is no strategy at the moment. Regrettably, the consultation paper tries to argue that a differential of 20p might work, but nobody else thinks that such a differential will be enough.

My amendment seeks to highlight the hike in red diesel, which dwarfs even the large hikes that will occur elsewhere as a result of the clause. The Bill proposes increasing fuel duty on red diesel from 4.22p to 6.64p per litre. That is an increase of 57 per cent.—a huge hike—which will come into force on 1 September. The purpose of my amendment is to ensure that the rate of duty on red diesel increases not by 57 per cent., but broadly in line with inflation.

Of course, this is the second large hike: last year's Budget imposed a hike of 35 per cent. Indeed, the Government are accelerating the rate of increase. Last year, there was a 1.1p increase, and this year there was a 2.4p increase; I wonder whether there will be a 3.7p increase—if the Government get the chance—next year. There is a policy at work of steadily raising the tax on red diesel and narrowing the differential, but it is not being articulated as such. I shall come back to that point in a moment, and consider whether there is what amounts to a policy and whether it is in fact coherent.

This is a very large revenue-raising measure indeed. I estimate that increasing the fuel duty for red diesel to 6.64p per litre will raise about £141 million in a full year, and I should be grateful if the Economic Secretary confirmed that figure. That estimate assumes no behavioural effects, which, of course, there will be. People will use less red diesel; indeed, raising £140 million in this way will cripple some. They will either go out of business—it will be the straw that breaks the camel's back—or will simply use less red diesel.

It is worth looking into who is going to pay the £140 million that will be raised. Red diesel is used primarily by farmers in tractors and other off-road vehicles; by the quarrying industry, so building costs will go up; and by boat users. I have not seen an accurate breakdown of the share of the burden between those groups, but I hope that the Government have, if not a precise view, at least an estimate of the share of the burden. I would be grateful if the Minister could provide the House with a breakdown. If they can give me that information, it will be a sign that they have thought carefully about this. It is safe to say that everyone will be hit and that some will be badly hit. I should like to discuss two groups that will be particularly hit by the hike.

First, there is the motor boat and yachting industry. It is a large and growing industry, particularly significant in my constituency, and subject to vigorous global competition. The increase will reduce its competitiveness. As the Economic Secretary knows, the leisure boat industry also benefits from an EU derogation from harmonisation of fuel duty for a transitional period, so is the hike part of the preparation for the removal of that derogation? Do the Government intend to negotiate an extension of the derogation, which expires at the end of 2006? Will the hike in red diesel duty be seen as the harbinger of further, even larger, increases for the leisure boat industry? Many people will be listening to the Economic Secretary's reply.

Farmers will be the most gravely hit group. Many farmers in my constituency are, in effect, small business men. They are just recovering from a ghastly crisis of many years. Farm incomes have more than halved over the past 10 years. There has been a deep and prolonged recession in the industry. Farmers earn, on average, only half the average national wage. The most crucial consideration—I hope that the Government start to think it through—is that now is not the right time to clobber people in the agricultural sector, who have already been hit so badly. I believe that doing so is an insensitive move—and it will be seen as such.

Why are the Government acting in this way, and do they have a policy? The stated policy for the hike that was given last year was:

"We understand the value of the rebate to those who depend on it, but we are keen to pursue and meet our environmental objectives."—[Official Report, 13 May 2003; Vol. 405, c. 255.]

In other words, it is viewed as an environmental measure, but the trouble is that that argument does not square with the Government's stated objectives and means of achieving them, as set out in the policy document, "Tax and the Environment", which was released at the time of the pre-Budget report of 2002. To the few Members present in the Chamber, I would particularly commend page 28, paragraph 6.19, of that document, which makes it clear that Government policy is quite different from the apparent policy for red diesel.

That document argues that the best way to meet environmental objectives is to tax vehicles that make use of the road system. After all, they are the ones that contribute most to pollution, congestion, noise, accidents and damage to roads. I believe that that is a reasonable viewpoint. The logic of the red diesel differential is, by implication, exactly the same. The vehicles that use red diesel are not road vehicles, so they should not be subject to the same level of tax.

It is true, of course, that red diesel contributes more pollution pro rata than forecourt diesels and the ultra-low sulphur fuels, but even that argument does not wash very well. We are increasingly told that it is other particulates, not just the amount of sulphur, that matter most. In any case, if the argument were environmental, all the logic of the Government's own policy documents would point to increasing road fuel duties by slightly more. I do not advocate that, but it would be a way for the Government to find the extra £140 million. However, they have not done that.

In addition, the Government have destroyed what remains of the environmental argument for a hike by raising the rate for ultra-low sulphur red diesel by the same amount as the more environmentally unfriendly variety. What, therefore, remains of the environmental argument for raising the red diesel rate? I think that it hardly exists as an argument.

Environmental concerns have nothing to do with this proposed hike. It is a tax grab on groups, such as farmers and boat users, about whom the Government do not care much. After the tax revolt of 2000, the Government regard them as an easier target than road users.

The truth is that the Government need the money. Tax revenues are not as high as forecast, even though growth in the economy remains strong. The Chancellor has already spent the money that will be obtained, as he cannot afford to renege on the very large increases in public spending that he has announced. A number of people will have to pick up the tab for the shortfall. One such group is made up of boat users, members of the quarry extraction industry, and—most important of all—farmers.

Instead of producing all their other explanations for the narrowing of the differential, the Government would have done far better simply to say, "We need the money." I hope that when Conservative Members occupy the Government Benches again—and that may be sooner than people think—we will have the courage to say that, when we come to the House with proposals for tax increases whose main purpose is to enable us to get our hands on the money.

In 1981, the then Conservative Government introduced a large rise in fuel duties, and the Chancellor at the time had the courage to say, "We need the money." However, after another Conservative Government raised fuel duties in 1995, the environmental argument was peddled a little. That did not cut much ice with the current Paymaster General, who is sitting opposite me. On 23 January 1995, she told the House of Commons:

"Pitching the . . . tax rise as an environmental measure is cynical".

That is pretty much what I think about the Government's claim that the red diesel rise is an environmental measure. I hope that they abandon that argument.

Not all environmental arguments for hikes in fuel duties are bogus. In fact, there is much that is good in the Chancellor's 2002 document, to which I referred a moment ago. Nor are other arguments for narrowing the differential between excise levels on red diesel and road diesel always—at all times, and in principle—invalid. There may be something to those arguments, but raising red diesel duty now takes a great deal of justifying. It will hit a lot of vulnerable people who have had a very tough time already. As the Paymaster General also said on 23 January 1995:

"People living in rural areas will be badly affected."—[Official Report, 23 January 1995; Vol. 253, c. 99.]

I agree with that. We should reject this hike. If the Government persist with it, I shall be forced to press the amendment to a Division.

David Laws (Liberal Democrat, Yeovil)

I shall be fairly brief, as the hon. Member for Chichester (Mr. Tyrie) has set out the case quite clearly. He made his concerns clear, and even managed to mention his constituency interests in respect of the leisure boat industry. He did that very effectively, and I commend him for it. I promise the Committee that I shall not speak at such length about my constituency interests in agriculture but, as the hon. Gentleman said, the proposals would have a very real effect on that sector.

I have two concerns about the measure. First, as the hon. Member for Chichester said, it is a tax grab masquerading as an environmental measure. The relevant line of the Red Book increases revenues by some £450 million over a three-year period. That is a very significant amount of money. If the Government see the proposal as part of an environmental strategy, there is no reason why the increased revenue could not be offset in some other area to stimulate more environmentally helpful activities.

The second reason for concern is the sheer size of the increase—57 per cent. on the duty for red diesel. That is a huge rise in just one year, and we hoped that the Treasury would see the advantages of moving tax policy in much smaller increments, particularly when changes of this type have a big impact on particular sectors. The hon. Member for Chichester mentioned the impact on farming, and that sector has estimated that the change will add 10 per cent. to on-farm fuel costs, which is extremely damaging at a time when agriculture has been under such pressure for a number of reasons, including depressed prices of many products and commodities. We would hope, therefore, that a change of this type would be accompanied at the very least by some measures to offset the impact on the farming sector.

Another area of concern, referred to by my hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) at the time of the Budget statement, is the potential impact on the railway industry, which also uses red diesel. The change will increase costs in a sector of the economy that should have better environmental and lower pollution characteristics than other parts of the travel sector, and it is in that sense a retrograde step. We would have expected the Government to take offsetting action to stimulate environmental improvements elsewhere.

Our concerns, therefore, are the size of the tax grab, the fact that money has not been switched to other sectors to compensate some of those who have lost out, and to stimulate other environmental improvements. We also think that the Treasury should seek to avoid the magnitude of the rise over a short. I have no doubt that the Minister will be unwilling to rescind the measure, but it is regrettable.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

I want briefly to reinforce the argument against such a large rise in a rate of duty in just one year without a clear strategy behind the rise or a clear indication of the principles on which people should plan. The hon. Member for Chichester (Mr. Tyrie) rightly highlighted the leisure boating industry, and as treasurer of the House of Commons yacht club I can certainly reinforce that concern. However, all small boat users, leisure and commercial, will be affected, and while larger fishing boats can reclaim duty, the smaller fleets, which are lower users, will be hit.

Will the Economic Secretary clarify whether red diesel is used for heating, particularly in large public buildings such as rural hospitals and schools? Will they be hit by the duty increase?

John Healey (Labour, Wentworth)

This has been a short but interesting debate on the range of issues that arise from hydrocarbon oil duties, which are dealt with in amendment No. 2 and clause 5. In considering the amendment, it is important to bear it in mind that the main rate of duty on ultra-low sulphur diesel is 47.1p per litre. The duty on rebated gas oil—red diesel, as it is commonly known—is just 4.22p per litre. The amendment would limit the increase on rebated gas oil to a simple increase in line with inflation, which would be 0.13p per litre. I am interested to note, and glad, that Opposition Front Benchers endorse the need to increase duty on fuels at least in line with inflation, but the amendment does not take account of wider policy objectives.

The misuse of rebated oils as a road fuel cost the Exchequer £650 million in 2002—money that could have been spent on any of our priorities, rather than lining the pockets of criminal fraudsters. In Budget 2002, following our success in tackling tobacco smuggling, we launched the UK oils fraud strategy. The aim is simple: to reduce the illicit oil market to no more than 2 per cent. by 2006. To do that, we put in place new control regimes for rebated fuels, and there are now more Customs officers working with the trade, identifying fraudsters and stopping their criminal activities. Although it is still early days, that approach is proving successful. The total value of oil fraud detected has increased from £8.3 million in 2001–02 to £13.2 million in 2002–03, an increase of almost 60 per cent. The number of detections of oil fraud is also up and the number of fuel laundering plants disrupted and dismantled is also up.

As with all criminal activity, the nature of oil fraud committed is constantly changing. The strategy and our operational response as a customs and law enforcement agency must change to keep up. We are therefore constantly reviewing the effectiveness of the different approaches and adapting them as required.

In response to a question asked by the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), I can say that it was against that background that we decided to narrow the differential between red diesel and road diesel in the Budget. That in itself will not solve the fraud problem, but reducing the differential between rebated fuels and road diesel eats into the launderers' profits and makes the fraud less attractive.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

What is the final target differential in this so-called strategy on fraud?

John Healey (Labour, Wentworth)

The hon. Gentleman asks me for the philosophy and principles behind the decision encapsulated in clause 5, and I have laid them out for him. We have not set a specific target, but we have set out our direction. I hope that I have explained in summary some of the background to the Budget changes, and I also hope that it explains why I have to reject this amendment. The duty increase on red diesel announced in Budget 2004 helps to reinforce our strategy to tackle road fuel fraud. The proposed duty increase on rebated fuels will raise £80 million in 2004–05, not £141 million, as calculated by the hon. Member for Chichester.

Andrew Tyrie (Conservative, Chichester)

I gave the full-year amount, but I think that the Economic Secretary gave the half-year figure that took into account the freeze until September.

John Healey (Labour, Wentworth)

Yes, that is the revenue that we expect, and the other figures are set out in the Red Book. The Opposition may say that this proposed increase will hurt the farming industry especially, but let us not forget that users of rebated fuel oils pay only a fraction of the duty charged to regular motorists. This measure is also spread across many users in different sectors, rather than unduly affecting the farming community. The hon. Gentleman asked for a breakdown of the burden. The statistics that the Department for Trade and Industry regularly collects from the oil industry show agricultural use accounts for only about 7 per cent. of red diesel consumption. The full breakdown of consumption by sector can be found in the DTI's digest of UK energy statistics.

Andrew Tyrie (Conservative, Chichester)

If the total amount is so small, might not the Economic Secretary consider a targeted exemption from the increase to give some relief to farmers, who have taken some severe hits recently?

John Healey (Labour, Wentworth)

We must always strike a balance. Any targeting increases complexity and I have tried to explain how the decision on red diesel rates has been made to reinforce the wider strategy to tackle fuels fraud. If one were to allow exemptions, one would weaken the impact.

It is interesting to note that the amendment is limited to rebated gas oil: it does not seek to mitigate the increases on the other rebated fuels, such as fuel oil, light oil used as furnace fuel and ultra-low sulphur gas oil, which are also provided for in clause 5. I will be generous and assume that that was an oversight, but it means that amendment No. 2 is only a partial proposal. It gives me the opportunity to point out that each of those fuels is, to some degree, in competition with the others.

The hon. Member for Chichester also asked about the derogation for leisure marine use. The derogation expires on 31 December 2006, and we have an opportunity to try to renegotiate it if we wish. We shall consider the approach that we shall take in the run-up to that date, and we will ensure that we consult widely before we settle on our approach. I emphatically make it clear that the rate change proposed this year is not, as the hon. Member for Chichester suggested, a harbinger of further increases for the leisure boat industry in the run-up to the expiry of the derogation in 2006.

Like the hon. Gentleman, I want to talk more widely about clause 5, which will change the rate of excise duty for hydrocarbon oils and biodiesel from 1 September this year. It does not set rates for sulphur-free fuels, but the changes that it will make, combined with the separate definition of sulphur-free fuels set out in clause 7, mean that sulphur-free fuels will become the new main road fuels.

Under clause 5, the duty rates for ultra-low sulphur petrol and diesel are increased by 0.5p per litre above inflation, which will create the differential for sulphur-free fuels that my right hon. Friend the Chancellor announced in the Budget of 2003. The differential means that sulphur-free fuels are set to come on stream much more quickly than had otherwise been predicted.

Our initial indications are that sulphur-free diesel will replace ultra-low sulphur diesel almost immediately after the introduction of the new duty rate in September and that sulphur-free petrol should have entirely replaced ultra-low sulphur petrol by the end of the year. These fuels will therefore be widely available for all motorists in the UK well ahead of the EU mandatory date of 2009. As hon. Members will be aware, as well as offering environmental benefits in themselves, sulphur-free fuels will enable the development and introduction of new engine technologies, giving drivers much greater fuel efficiency savings.

Some people have suggested that the duty should have been frozen, and the hon. Member for Chichester did so in his speech, but that would have a significant impact on a significant source of Government revenue. Each duty freeze represents a real-terms cut in revenue that is vital for maintaining the provision of essential public services. Inflation increases in all duties need to be made to maintain revenue. Even the delay in increasing the duty until September has a price to the taxpayer and to the Exchequer in terms of revenue forgone—about £300 million.

We decided that, with the introduction from 1 September of the differential to switch the market to sulphur-free fuels, the benefits of making changes only once during the year outweighed the hit on Government revenues. It also means that we can reduce the compliance burdens for the oil industry and increase the certainty for motorists at the same time. On that basis, I urge my hon. Friends to reject the amendment and to support the clause.

Andrew Tyrie (Conservative, Chichester)

It is a pity that the Economic Secretary did not begin as he ended, which, although he wrapped it up a little, was to say, "We just need the cash." The Government are short of cash and need the money. Instead, we have had a succession of red herrings—if I can use that term—on red diesel.

I shall briefly pick up on a few points of concern. Just about all we heard from the Economic Secretary was bad news. We had something well short of a commitment even to try to renegotiate the derogation for the leisure boat industry to which I referred. We heard a bizarre remark from him suggesting that my amendment did not seek to mitigate the other fuel duty increases, thereby implying that I supported them. However, he clearly had not listened to the opening few minutes of my speech, in which I hope I made it clear that I was concerned about the increases. On a point of absolute clarification, he and the country should be left in no doubt about the Conservative party's concerns about the increases in fuel duty that are set out in the clause.

The plain fact is that we have not heard a rationale; we have heard only a series of cobbled-together statements. The environmental argument seems to have been taken off the agenda altogether this year. However, although Mr. Environment has disappeared, Mr. Fraud has appeared to justify the clause. The Minister seems to be saying that by narrowing the differential by a few pence, he will sharply reduce the incentive to commit fraud. Either he knows something that we do not about the elasticity of demand for this product, or, much more likely, he intends further sharp hikes in the duty on red diesel, to take it to a point at which the differential would be narrow enough to undermine fraud. That tells us that the Government do have a plan, and it is for further increases that all those who use red diesel commercially should be very worried about.

On the basis of what the Minister has said, I have no confidence that this red diesel hike will be the end of the line, or even near it. We will have more hikes if Labour gets the chance. It is extremely important that a firm marker be put down, and I would like to press the amendment to a Division.

Clause 20 — Groups

Mark Prisk (Conservative, Hertford and Stortford)

Clause 20 inserts a new section 43AA into the Valued Added Tax Act 1994. It does so to stop what the Treasury sees as abusive arrangements whereby a jointly owned entity can join a VAT group even though it is run by and for the benefit of an external third party.

We believe that the Government should delay implementation because the potential unintended consequences of the measure could prove damaging to UK jobs, and that they should first seek to sort out the underlying anomaly. At the heart of the issue is the nature and role of companies outsourcing work and the rapidly increasing trend towards offshore outsourcing. I think that it is fair to say that offshore outsourcing has changed almost beyond recognition during the past two or three years.

In just the past few months, HSBC, Norwich Union, Lloyds TSB and Abbey National collectively outsourced about 9,700 jobs to India, and in a cost-conscious global economic environment, that trend is likely to grow. Commercially, many financial institutions prefer to outsource non-core activities to service providers, which are often companies that specialise in an activity and are therefore able to maximise efficiency. Because financial institutions such as banks are exempt for VAT purposes, they do not charge VAT to customers, but the quid pro quo is that they cannot recover input VAT when they buy services and goods. Services or goods cost banks 17.5 per cent. more than they cost companies that are not exempt.

If a bank reorganises and decides to outsource a back office function or other similar function, it will incur an additional 17.5 per cent. cost that it, unlike other companies, cannot recover. However, if a bank were to outsource to an overseas supplier in, for example, India, in many instances it would not face the 17.5 per cent. charge. UK back office suppliers, and therefore the many locations in this country that have a strong reputation in that field, often find themselves at a significant price disadvantage against their overseas competitors.

Nigel Roxburgh, the co-founder of the National Outsourcing Association, recently pointed out:

"If one has to claw back . . . the 17.5 percent tax, the best way in which to do it would be to move offshore. The . . . proposal could inadvertently help offshore suppliers, which are not subject to this tax".

Clause 20 fails to address that anomaly, and instead changes the rules, which the Government perceive are being abused.

The anomaly should be addressed first, so that if and when a bank chooses to outsource a call centre or similar activity, companies based in, for example, Wentworth, Bristol or Bolton can compete on level terms with Mumbai, Hyderabad and New Delhi. Creating a level playing field for British workers should surely come before a tax clampdown. Indeed, if these proposals lead to more offshore outsourcing, the tax yield will, ironically, fall. That is a classic example of how careful Governments must be in clamping down on alleged tax avoidance—hit too hard or hit inaccurately, and the end result is the reverse of that intended.

Allied to that is the danger that the tax clampdown does not work as intended and exacerbates the situation. In response to the Government's consultation, the Law Society said:

"We strongly believe that these proposals will not achieve the Government's aims and may well give rise to increased opportunities for avoidance . . . We also believe that the need for new legislation is not yet demonstrated, given the powers that HM Customs admit they already have, but have chosen not to use."

Serious experts in the field clearly have their doubts. Although I recognise that the Government adjusted the final proposals after the consultation, I must say to the Economic Secretary that corporates and their tax and legal experts have serious reservations about whether the proposals will achieve their stated purpose.

There is a third reason why the Government should not seek to proceed with their plans. The Department of Trade and Industry is currently engaged in two reviews that relate to offshore outsourcing. One is a review of UK call centres and their competitiveness, and the report on the initial study will not be published until next month at the earliest. The other is the trade and industry White Paper, which is due to be published in the summer, although that may, of course, become the autumn. Both those reports need to be considered carefully by Ministers, then by this House, yet the clause contains a tax proposal that will have a direct impact on all these issues and cuts across those reviews. Surely, before pushing ahead with implementing the tax, the Government should consider the situation as a whole and report back to the House. Whatever happened to joined-up government?

There are three reasons why we believe that the Government should delay the implementation of the clause. First, we want to ensure that any unintended consequences of the change have been carefully considered and are understood by business, which is not the case at the moment. Secondly, we want to enable the whole question of the international competitiveness of call centres and other service providers to be considered in the round, and moving ahead with the tax before the reports are published makes that difficult to achieve. Lastly, we want to encourage the Government to focus on the first priority, which should be to create a level playing field for British workers who are trying to compete with overseas companies. Business and Government need time—not necessarily a year or two; perhaps only a matter of months—to get this right. I hope that in his reply, the Economic Secretary will recognise that and explain why the Government are putting a tax squeeze ahead of creating a level playing field for British workers.

David Laws (Liberal Democrat, Yeovil)

We understand and support the stated aim of clause 20, which is designed to prevent large companies from avoiding VAT on high-value taxable services that are bought in by third parties. However, the question for us and for those whom we have consulted is whether the manner in which it is implemented will involve tests that are too complex or unworkable in practice. It is fair to say that practitioners have differing views on whether the Government's consultation on the clause was effective. The Chartered Institute of Taxation commended it, noting that the proposals in the Bill differ significantly from the initial proposals and stating:

"This is a case where consultation has worked well."

However, several other practitioners told us that their comments about the potential complexity of the provisions were ignored and that they are worried that they will impose a large regulatory burden on many firms and their advisers. It has been pointed out that the clause gives substantial powers to the Treasury and that once it has been brought in it may be difficult to remedy any problems at a later date. Although it is recognised that Customs needs to be able to deal with the abuse of VAT grouping, many practitioners believe that the clause as drafted is inappropriate and that the regulatory impact assessment understates the complexity of the proposed tests. They do not think those tests can necessarily be delegated to relatively junior employees, as is implied in the cost assessment that was carried out, and do not believe that the time and cost estimates are realistic. Several are aware of cases in which applying even the existing tests, which are less onerous than those in the Bill, required a long period—up to a day—in consultation with an in-house barrister. In practice, most businesses would need to seek professional advice in relation to applying the tests.

Our concern, which touches to some extent on the points raised by the hon. Member for Hertford and Stortford (Mr. Prisk), centres on whether the Government have yet listened sufficiently to the views of practitioners and have put in place tests that are simple enough to be applied relatively straightforwardly without adding to burdens on business. If the Government took a little more time to consult the practitioners, they might be able to address their concerns.

John Healey (Labour, Wentworth)

The Committee will be aware of the Government's commitment to reducing the revenue losses that have historically faced the VAT system and, in particular, of our commitment to tackling artificial VAT avoidance schemes and closing loopholes in the law that allow tax leakage. This was set out by the Government in "Protecting indirect tax revenues", which we published alongside the pre-Budget report in 2002.

VAT grouping is an area in which we have seen some aggressive tax avoidance. As a result, the Government proposed changes to the rules on VAT grouping eligibility in the 2003 pre-Budget report. The original proposal was to align the grouping rules with the rules on consolidation of subsidiaries in group financial accounts. A consultation paper was formally published on 23 November 2003, and a summary of the responses to it was published alongside the Finance Bill on 8 April this year. The summary spelled out the Government's modified proposal, which we developed in the light of the comments from respondents, and I hope that the hon. Member for Yeovil (Mr. Laws) will accept that we took the views of practitioners into account. Indeed, the hon. Member for Hertford and Stortford (Mr. Prisk) acknowledged the modification, and the way in which we had responded to the points raised in consultation.

It might help if I briefly explain the nature and operation of the grouping rules. I think that the hon. Member for Hertford and Stortford will then see that this is not a measure directed at outsourcing. Grouping is a business facilitation measure. Members of a VAT group are treated, for VAT purposes, as a single taxable person. This means that no VAT is charged or reclaimed on supplies of goods or services between the group members. In short, companies in the VAT group are in the same VAT position as divisions within a single company.

One benefit of VAT grouping is not having to register all the companies in the group separately for VAT. There is also a tax benefit when a member of the group would otherwise be unable to recover all the VAT incurred on purchases from other group members—for example, a partly exempt bank, insurance or property company. The Government accept this revenue cost as part of the normal operation of grouping, as part of our interest in seeing this business facilitation measure continue. However, some businesses attempt unfairly to exploit the VAT grouping rules in order to avoid tax and gain a tax benefit that goes beyond the normal operation of grouping. Some might argue that they are merely correcting the flaws in the VAT system. Others might argue, as the hon. Member for Hertford and Stortford did, that the new proposals on VAT rules will somehow act against business decisions to outsource in the UK and force outsourcing operations abroad.

I do not accept that argument. Our evidence shows that VAT is not a decisive factor for companies deciding whether or where to outsource. For example, recent research shows that a decisive factor is the cost per employee for wages and property, which is £27,000 a year in London and £18,500 in Sheffield. It is probably slightly less in Wentworth. However, it is £6,500 in Mumbai. Those figures show the significant cost savings that are often behind decisions to outsource.

The call centre industry in the UK does not think that it is in serious decline. The Call Centre Association surveys its members quarterly, and it published its most recent findings in December 2003. When its members were asked:

"Do you agree with the claim that the call centre industry in the UK is in significant decline?",

76 per cent. said no and only 12 per cent. said yes. The 76 per cent. who said no expected offshore growth to continue, but they also expected it to be outpaced by market expansion, leading to continuing growth of the industry in the UK. Indeed, some noticed a trend to repatriate work to the UK because of quality difficulties experienced offshore. I think that the hon. Member for Hertford and Stortford overstated his case on that point.

Howard Flight (Conservative, Arundel and South Downs)

To revert to the point that the Economic Secretary was making in leading up to this, will joint venture company situations, where it may be administratively appropriate to be part of a group, be possible under the new measures? My understanding is that they would effectively be ruled out as a result of where the lines are being drawn, although there may be a perfectly good practical and non-tax avoidance case for them.

John Healey (Labour, Wentworth)

It will depend on the nature and application of the test that we will devise and implement in secondary legislation. Principally, it will turn on who draws the principal benefit from the joint venture company. I shall explain further as I make progress.

The measure that we propose does two things. First, it amends the law on VAT grouping to make it clear that a company or other corporate body cannot be in two VAT groups at the same time. That clarifies the position but does not change anything in practice for existing VAT groups. Secondly, the measure will stop abusive grouping arrangements by changing the rules for VAT grouping eligibility. Currently, a company is able to join a VAT group even though it is run by, and for the benefit of, a company that is not part of that VAT group. Those are the criteria that we want to tighten up.

Howard Flight (Conservative, Arundel and South Downs)

That reply leads on to the second related point. Can the Economic Secretary assure the House that there will be sufficient clarity in the secondary legislation in relation to this territory? Many in the business community are concerned that there will be greyness. Can he assure us that, without it being too extensive, it will be as clear as possible?

John Healey (Labour, Wentworth)

If the hon. Gentleman will bear with me, I will come on to that point. I am confident that I can provide that degree of assurance in relation to clarity. There will also be consultation, which will also answer the point made by the hon. Member for Yeovil about concerns over complexity.

The arrangements that we want to tackle result in a substantial revenue loss to the public purse, which is estimated this year, if we took no action, at £75 million. Alongside those losses to the Exchequer, the companies concerned obtain a significant advantage over their competitors.

Since 2001, Customs has used its "protection of the revenue" powers to stop such abuses when it finds them. This has been well known, and Customs has published business briefs on its actions and activities. Nevertheless, the abuse has not stopped. The reason is that Customs can take action only once it has found a company using the scheme, which could be some years after the event. Even then, Customs cannot recover the VAT that has already been lost, so there is a limited downside risk to entering one of these schemes at present.

A further concern that has been raised about the current position is that, with the ability to challenge and close such schemes resting on Customs' revenue protection powers, businesses have complained that there is a degree of uncertainty about what is and is not unacceptable. The legislative solution proposed in clause 20 resolves those concerns.

These schemes create unfair competition, which should be rectified without the delay that the hon. Member for Hertford and Stortford urges. The revenue saved by such action against these schemes this year is estimated at £50 million. The change is not being sprung on business without notice or without dealing with their concerns. Most respondents to the consultation accepted the need to act on the abuse to get, as one person put it, a level playing field. However, they said that the proposed changes would impose extra costs on VAT groups generally, in order to tackle a small minority of abusers. We responded to those concerns. The clause that we are examining today does not change group eligibility criteria for the vast majority of VAT groups who are not involved in this abuse. Instead, it gives the Treasury power to make an order that can change the eligibility criteria in limited circumstances, targeted at the situations in which abuse can arise.

I can confirm that the order will be subject to parliamentary scrutiny under the affirmative statutory instrument procedure. I can also confirm that I will ensure that it is published in draft in advance. I hope that that helps to deal with the anxieties expressed by the hon. Member for Yeovil, and will give the hon. Member for Arundel and South Downs (Mr. Flight) an opportunity to scrutinise the provisions for the "greyness" that is worrying him.

The clause is not about outsourcing; it is intended to prevent abuse of the VAT grouping eligibility rules, to level the playing field for compliant businesses—particularly small businesses—and to give businesses in general more legal certainty. It constitutes an effective response to aggressive VAT avoidance. It is what is needed, and what is needed now. It is a proportionate and timely response, and I commend it to the Committee.

Question put and agreed to.

Clause 20 ordered to stand part of the Bill.

Clause 28 — The Non-Corporate Distribution Rate

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 3, in page 22, line 26, insert 'and—

(c) the company does not retain at least £10,000 of its distributable profits for the period.'.

The amendment seeks to deal with a specific aspect of the problems caused by the clause and the related schedule. I think there is a general view that the clause and the whole territory constitute an unfortunate example of the Government's incompetence, and their tendency to meddle for spin reasons without fully appreciating where their measures will lead. As we all know, the Finance Act 2002 introduced a zero per cent. rate on the first £10,000 of profits. During the debate on that, the Government were well warned that it would cause massive incorporation by small businesses. We have already heard much quoting of the Paymaster General's "gift horse" comment—that she realised that it was a big fiscal inducement to incorporation. Now the volume of lost revenue appears to be significantly greater than the Government anticipated, and we have been presented with a rather hasty and not fully thought out measure to deal with the problem.

In his Budget speech, the Chancellor claimed that he expected small businesses to retain £10,000 worth of profits. That was, I think, a somewhat disingenuous excuse for these measures, which present a variety of problems. For one thing, an unfair arrangement will operate when companies that have paid tax on past profits want to distribute those profits in a subsequent year. Our understanding is that they will be liable to the new 19 per cent. tax. In the past they could have borne tax of between 19 and 30 per cent., so there could well be an element of double taxation. Companies that are currently not profitable but are distributing earlier years' profits will also be penalised for past investment, as they too will pay 19 per cent. on the profits distributed.

We think it should be made clear that paragraph 9 applies only when companies continue to be under the control of those who had control immediately before the degrouping. The definition of a group for the purposes of new section 13AB and schedule 3 is very wide, and will treat companies with little economic interest in one another as being grouped. Surely what is needed is an amended version of the definition that applies for the purposes of corporation tax on chargeable gains, in order to go on applying the definition of a group to companies likely to have a significant common interest.

The proposals are particularly harsh on small businesses with modest profits where the owners need to withdraw profits in order to live. In a sense, the only people who can benefit from the zero per cent. band are now those who have profits below £50,000 and do not need to withdraw more than £10,000 as a dividend. The tax relief thus ends up particularly benefiting the passive type of income-generating businesses, hobby businesses or businesses with spouses.

The 19 per cent. rule sounds simple, but in practice, because it makes dividends payable out of after-tax income, the calculations that it leads to are quite complex. Let us look at the calculation of profits available to be paid out as dividends where taxable profits are, say, between £10,000 and £50,000. If P is taken as the algebra for the profit for a full year, the calculation for distribution is P x 0.7625 x P + £2,375 ÷ 0.9525 x P + £2,375. It is not at all straightforward.

If dividends paid in one year exceed current taxable profits, the excess is carried forward and treated as paid in the following period, so again small businesses need to record the carry-forward, or they may be caught out by an unexpected tax bill. Double taxation credit relief where it may be relevant is ignored in applying the new 19 per cent. rule. The new rule is worked out first and any double taxation could reduce it afterwards.

We tabled three amendments, two of which have not been selected. Amendment No. 3 has been drafted to provide some mitigation for small businesses. In a brief conversation with the Paymaster General, she mentioned to me that the situation that the amendment seeks to achieve may already obtain, but that is not the perception of the various accountants with whom we have spoken. If it is, it is very fortunate, but the issue is that the zero rate band takes effect on the first pound of distributed profits. If a company distributes profits, it has a 19 per cent. tax charge on whatever is distributed. Our amendment is designed to meet the Government's declared objective better than the proposals as we understand them and as others have understood them, and to be less harsh on small businesses. It is relevant to about 300,000 small businesses.

Our two other amendments sought to defer the new tax by a year, largely because the Government have made it clear that the new 19 per cent. non-corporate distribution tax is intended to be temporary. If it is temporary, the last thing small businesses want is perpetual chopping and changing of their tax arrangements. It therefore seemed to us that there was a case for waiting until the Government had made up their mind what they wanted to do. Others have suggested that the new NCD rate should take effect only once undistributed profits at 1 April this year had been paid fully, to avoid the double taxation problem to which I referred.

There are also some deeper administrative problems with the Bill. As the Chartered Institute of Taxation has pointed out, the Government need to clarify the interpretation of the proposals and their interaction with IR35 legislation, preferably making it clear that there will be no double charge on the individual or company where that company has engagements within the intermediary legislation, and that it could be treated as having made a deemed payment.

There are various other specific issues that need to be addressed, and I hope that the Paymaster General will be able to assure us that they will be satisfactorily dealt with in the forthcoming further consultation on the arrangements. There is concern that the new provisions will discriminate unfairly against small companies that qualify for accelerated allowances and SME—small and medium-sized enterprise—research and development tax credits, because their taxable profits may be considerably less than their distributable profits.

Is it possible to provide examples to explain further how sub-paragraphs 8(3) and (4) of schedule 3 will impact on the differing accounting periods of group companies? Is it intended that the agreement to apportion the new tax between group companies should be a stand-alone claim, or will that be incorporated into the corporation tax return?

A nine-month time limit exists for making an agreement to transfer excess non-corporate distribution tax between group companies. However, there should be a move towards standardising time limits. In the case of companies, there is a 12-month filing deadline after the end of the accounting period, so why is there a nine-month time limit here? Would it not be sensible to standardise the limit at 12 months?

There seems to be a discretionary power in the arrangements to vary an allocation to an officer of the board. Will there be safeguards on the rights of the company to allocate that to its advantage?

There is a deeming provision, and it appears that if some shareholders waived their entitlement, it would be possible for a minority shareholder that is a company to be treated as a parent company if it received more than 50 per cent. of the dividend paid. Is that result intended?

There appear to be no new legislative provisions dealing with the elimination of the possible new double charge in relation to IR35. The relevant section is broad enough to deal with that, but it would be helpful to have confirmation that it will be interpreted thus, and to have clarification on that matter.

The non-corporate distribution rate is defined as

"such rate as Parliament may from time to time determine."

The rate is not specifically linked to the small companies rate of corporation tax, and we would welcome clarification on whether that is deliberate or whether it is intended that the non-corporate distribution rate may deviate from the small companies rate of corporation tax in future.

If the nil-rate band is withdrawn in the future, can we have an assurance that the current provisions in relation to the non-corporate distribution rate will also be withdrawn?

I wonder whether the original draft provisions deal fairly with a company in receipt of franked investment income when, in reality, it may well be the franked investment income that is being distributed. I hope that the Minister can assure us that there will be a fair and reasonable approach to the issue of franked income.

We question whether the existing provisions are fair, in that a group can decide how to allocate an excess of the new tax, whereas the parent must utilise as much of the new tax as it can.

In summary, many complex issues arise from the proposals. Our particular concern is for the impact on small businesses. If the Government were bona fide when they introduced the zero per cent. rate to help small businesses, it seems all the more important that the unintended consequences of their measures should be tidied up so that they do not fall harshly on small businesses. That is why we stress amendment No. 3, which is designed to ensure that small companies are not hit with a 19 per cent. tax charge on the first pound that they distribute.

David Laws (Liberal Democrat, Yeovil)

Clause 28 and amendment No. 3 are the story of an accident waiting to happen to tax policy. As the Paymaster General will doubtless graciously acknowledge in her response, when the Government's zero per cent. rate was introduced, many tax practitioners—and even many politicians—suggested that there was a serious danger that lots of people would decide to incorporate for tax avoidance purposes, resulting in a far higher cost than the Government anticipated at the time. Of course, the fear was that the Government would respond, which is precisely what happened, despite their telling us at the time that they were conscious of those risks and believed that their estimate of the revenue loss was reliable.

In the year after the Government introduced the zero per cent. tax rate, there was an increase in new incorporations of some 43 per cent., and as a result the Government's anticipated tax loss ballooned to approximately £1 billion a year. Clause 28, which is their response, rows back from the earlier zero per cent. tax rate, but because they do not want to reverse the process altogether, there is a 19 per cent. non-corporate distribution rate—the mechanism through which they intend to get the money back.

Following this year's Budget, the Institute for Fiscal Studies said in its briefing to the press, Members of Parliament and others that many practitioners and economic commentators had anticipated this problem when the measure was introduced. It also reflected on what this fiasco tells us about a Government who said that, in terms of tax policy, they would pursue stability for small and larger businesses. Robert Chote, director of the IFS, pointed out that many small companies have gone through some four different tax regimes in not many more years. The 20 per cent. small business tax rate was followed by the 10 per cent. rate, which was followed by the zero per cent. rate. Now, we have the zero per cent. rate, plus a 19 per cent. distribution rate. Of course, in a couple of years' time there will be a discussion paper and—if we are lucky—pre-Budget consultation. That will probably be followed by an entirely new tax regime, which will affect incorporated and unincorporated small businesses. What we are debating today might then be a complete irrelevance—who knows?—because the Government are likely to present us with something entirely new.

It is very depressing to have to deal with such a problem. When we reflect on today's debate on whisky duty and tax avoidance in the spirits industry, and on the persuasiveness of the Government's case in that regard, we realise how badly wrong Governments can sometimes get it. Indeed, this situation is a prime example of how wrong Governments can be.

Many of the tax practitioners and economic commentators who were conscious of this problem in the past year felt that, in many senses, the best way to deal with it was simply to cancel the zero per cent. tax rate, and to cancel the starter rate altogether. They felt that it was better to go for a much simpler system, rather than introducing the non-corporate distribution rate. The Government have not chosen that path, and one can imagine the Chancellor's embarrassment and the effect on his reputation had he announced in his Budget that he was doing away with the starter rate just two years after introducing it.

There remains real concern at the way in which the Government have decided to solve this problem. John Whiting, of PricewaterhouseCoopers, said that clause 28

"has a lot of disappointing features—fundamentally it is hard to get away from the simple point of "why do it?". Bringing in such a change, requiring nearly 8 pages of the Finance Bill, seems hardly appropriate when one thinks that this is a measure to get at the smallest company. This will undoubtedly force more small businesses to take professional advice if only to make sure that they are complying with this new self-assessed charge."

When we debated the issue briefly on Second Reading, I told the Paymaster General that, at the time the measure was introduced, I was invited to a presentation by one of the tax practitioners in my own constituency. His task was to persuade the many businesses there that it would be a good idea to pay the required fees to the tax advisers in order to take up the opportunity of exploiting the 0 per cent. tax rate. The major concern was whether any Government suffering the likely loss of revenue would suddenly change course within a couple of years. I made the terrible mistake of saying that no Government could possibly change course in such a short period and that they could rely on the fact that, at least until after the general election, they would be safe. Now these people, to whom I dare not go back, are not only going to have to pay the money to incorporate into the system in the first place, but probably pay for more advice on how best to manage the consequences of the Government's U-turn.

Clearly, the Government considered some alternatives to their proposed structure in the run-up to the Budget. Indeed, the regulatory impact assessment runs over a variety of options. It comments that increasing or abolishing the starting rate of corporation tax would run counter to the Government's aim of maintaining low rates corporation tax to encourage growth and enterprise. However, that makes an interesting counterpoint to paragraphs 23 and 24 of the same assessment, which predict that, once it is fully in operation, the new measure will raise in the order of £0.5 billion a year. One wonders whether the Government are really so concerned about not raising the tax burden on small businesses. Why do they not acknowledge that this measure will have the same effect, and recoup revenues that they did not anticipate spending when they introduced the 0 per cent. tax rate?

It would be fair to point out, as the regulatory impact assessment does, that the revenue raised by the measure is in many ways what the Exchequer inadvertently gave away a couple of years ago. As the assessment also admits, the measure will affect only companies generating less than £50,000 a year, and it goes on to say that it will help to ensure that the tax paid by those companies is more closely aligned to the tax paid by the self-employed, thereby improving the fairness of the tax system. One wonders why, if that is a priority and objective, the Government took the action that they did a couple of years ago, which made the playing field less level and gave people incentives to incorporate. That is the key to the whole issue and to the way in which the Government should pursue their policies in future. One wonders why, in any logical tax structure, there should be a significant differential between incorporated and unincorporated tax status, and whether we should be providing incentives through the tax system to change status in a particular way.

Paragraph 5.95 of the Red Book states that the Government propose

"to consider the strategic issues raised by these developments, to ensure that the tax system reflects the realities of today's changing labour market and business environment. A discussion paper will be issued at the time of the 2004 Pre-Budget Report."

Presumably, that gives it all away. We now discover that the new regime that the Government want us to approve today may not last long at all. Who knows, we may get a discussion paper in future with the conclusion that the different treatment of incorporated and unincorporated businesses makes no sense. Then—again who knows?—we may find in a couple of years' time, perhaps without any consultation whatever, that there is a new tax regime for small businesses.

It must also be a matter of concern that, before the introduction of this measure in clause 28, there was no consultation, and no proper discussion following the pre-Budget report. The regulatory impact assessment merely uses the specious excuse that consultation was not possible because of Budget confidentiality—a remarkably thin excuse for something that could affect 800,000 small businesses throughout the country.

There is great disappointment that the Government have acted in that way. I hope that the Paymaster General will assure the House that she will not subject the same companies, in a couple of years, to any further instability in the tax system. We need an undertaking that the new system is permanent, or that the Paymaster General will think again about introducing it until she has conducted the review referred to in the Red Book. In that way we can move—in one go, and without going through a fifth stage of instability—to a new tax system that deals coherently with smaller businesses, be they unincorporated or incorporated.

The Chartered Institute of Taxation raised a particular point about the proposal. The shadow Chief Secretary to the Treasury touched on this matter earlier, and I shall quote directly from the institute's discussion paper on clause 28. It states:

"There is one area where we feel that significant unfairness can arise as a consequence of the proposals. Where companies have paid tax on past profits but reinvested those profits and now wish to distribute them, they will be subject to the new tax. In some cases these profits will already have borne tax at 19 per cent., and, in extreme cases such as where the business is declining, perhaps even at a higher rate of 30 per cent. They will now potentially be taxed again, and we have received representations from tax advisers whose clients are not currently profitable but who are distributing earlier accumulated profits and suffering this double charge."

I hope that the Paymaster General can deal with that concern when she responds to the debate. I am sure that she would not want the proposals to have the effect that has been described. In addition, I hope that she will reassure the House that the problem that we have experienced over the past two years will not be repeated. We need clarification on the matters that have been raised, but more than anything else, I hope that the Paymaster General will give an undertaking that the Government will delay the implementation of the proposals until there is a coherent system of taxation for smaller businesses. Alternatively, I hope that she will offer an undertaking to ensure that there will not be any further instability in a year or so, when the Government's review is complete.

John Gummer (Conservative, Suffolk Coastal)

I refer the Committee to the declaration of my interests in the Register of Members' Interests. I want to suggest to the Paymaster General that she reflect on the debate and imagine herself in the place of the owner of a small business affected by the proposals. What will be the effect on people trying to do all that is needed to run a small business? Small businesses are about people doing everything from accounting to selling, and all the rest of it.

When a mistake is made, it is difficult for a Government to reverse it. I understand that, and it would be curmudgeonly to press the point too hard. However, the problem is that a bog up has been made, and it is increasingly difficult to know what the Government mean about the simplification of the tax system. What do they mean about their care for small businesses? Small businesses are finding it more and more difficult to handle changes in the tax regime without resorting to the sort of expensive professional help for which the Government should not be providing an employment exchange.

A measure such as this makes it extremely difficult for honest people to run their businesses in a cost-effective way. I beg the Paymaster General to think again, and to see whether the proposal can be made much more simple. I hope that she will accept some of the recommendations that have been made, and that she will put off the effects of the measures until simplification has been achieved.

I suspect that most small business people will make neither head nor tail of much of what has been said in this debate. That is not proper for people trying to earn wealth for themselves and for the rest of society. For that reason, the Government are condemned on this issue—as they are on many of the matters referred to in the Bill.

Robert Smith (Liberal Democrat, West Aberdeenshire and Kincardine)

The right hon. Member for Suffolk, Coastal (Mr. Gummer) spoke about trying to achieve a simplified tax system. That is very important, and a goal that many people who take part in these debates aspire to, although we rarely see the outcome of their attempts.

The burden on people in business, and the complications that they face, are becoming very depressing. The Government have promised to bring in a new companies Bill to streamline the law in that area, but it is languishing in draft form. The final version never seems to come any nearer. The Government also promised to make life simpler for small businesses by having a basic de minimis system of regulation for them, and a more complicated system for larger concerns. Yet the way that the Treasury has made tax matters more complicated means that life has become increasingly difficult to understand, especially for people whose main priority is to get on and run a business.

If the Chancellor were genuine about wanting small business to assist in making the economy grow, he would try to make more use of the expertise of small business people in respect of their particular businesses. He would not be looking to their overall commercial skills in accountancy and tax law. What we need is a climate that allows small businesses to focus as much as possible, within the wider world with which they must comply, on the thing that drove them into the business in the first place.

As the Paymaster General knows, my constituency contains many people who operate small businesses, and she and I have had many exchanges on IR35 over the years. One frustration expressed to me by many constituents in the run-up to this debate is that they have been lured into a trap. Having gone to all the expense of incorporation, they feel trapped, in that the benefit that the Chancellor said they should get for going through all the hoops is to be taken away. It is much more difficult to unincorporate than it is to sort out the mess that they have got into, and for those people, there is a real compliance burden.

I reinforce what my hon. Friend the Member for Yeovil (Mr. Laws) said: if yet another upheaval in the whole system of taxation is coming down the tracks, especially if it affects smaller companies, it would make sense to bring the whole thing together so that people need climb only one learning curve during the main transition to take the whole thing on board.

I am worried by what I have heard about the distribution of past profits. This is where the Chancellor's gimmick has backfired and created even more of a muddle. He created the gimmick to get headlines, which was the start of the problem. Having done that, he then had to create a solution that did not leave too much egg on his face. That might tackle some of the problems his gimmick created, but it creates a trap for people who never intended to exploit the gimmick but who were lured in. The solution will hit them on their past profits, unless the Paymaster General has some reassurance to offer on that. I urge her to go down the road of stability and embrace what has been offered to her by my hon. Friend. She should try to bring the whole thing together, genuinely practising what the DTI has preached about a simpler climate for small business by delivering that climate.

Dawn Primarolo (Labour, Bristol South)

In responding to the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and the right hon. Member for Suffolk, Coastal (Mr. Gummer) on the approach that businesses should make to professional advisers, I want to say two things. First, as businesses consider whether to be incorporated, they, and presumably their advisers, may read Tolley's Tax Digest, which lists a huge number of points about the tax consequences for or the obligations on someone who is self-employed, in a partnership or who chooses to incorporate. The decision for a company on whether or not to incorporate has far more complexities, particularly if the company wants to plan its growth and move from self-employment to expand, than whether there is a zero rate on the first 10 per cent. of profits. In addition, the Government made it absolutely clear when we introduced that zero rate that we intended reinvestment of profits into the company for growth. That was the purpose of the rate—to encourage growth, not to have money taken out as dividends or as salary by another name.

I shall come to the points made by the hon. Members for Yeovil (Mr. Laws) and for Arundel and South Downs (Mr. Flight). Let us be clear, however. The Government's intention has always been to remain neutral with regard to the operation of the tax system on whether a self-employed person decides to incorporate. At that point, those people need to take advice. The Government placed a mechanism in the tax system that meant that if companies chose to incorporate and to reinvest the first £10,000 of profits, they would be taxed at a zero rate, in order to help them to grow. That remains the case.

I am always happy to see measures intended to promote business growth, but the amendment would not achieve what the hon. Member for Arundel and South Downs suggests, as I told him earlier. In fact, it would work against the companies with the smallest profits—the very ones that we want to see grow. For example, a company owned by an individual with profits of less than £10,000 in an accounting period can, inevitably, only retain less than £10,000. It has no more profits to retain. However, the company would be liable for the non-corporate distribution rate if it paid a dividend. I agree that that might act as an extra incentive for the company to grow and earn profits exceeding £10,000, but such an incentive is neither equitable nor good for business.

The amendment has a substantial flaw. Corporation tax works so that it smoothes the transition from one rate to another, but the amendment provides that a difference of £1 of profits retained could have a tax impact greatly exceeding £1. For example, a company retaining £9,999 of profit would be liable, under the amendment, to the non-corporate distribution rate in relation to profits matched by its non-corporate distribution. However, if the company retained £10,000 of profit, it would not be liable at all at that rate. That is unduly harsh. The clause has no such unfair distortion. It is important to make that point because the hon. Gentleman challenged me on it.

The amendment would have a further harsh consequence. There is no provision to adjust the £10,000 threshold to take account of a shorter accounting period. For example, the threshold for a company with a six-month accounting period would not be reduced, under the amendment, to £5,000. The amendment would also put groups of companies at a disadvantage. If a group had two trades, the £10,000 threshold that is proposed would apply to its retained profits for both activities. However, if it made commercial sense to separate the activities into two subsidiaries, the £10,000 threshold would apply to both. In other words, the amendment would increase the threshold to £20,000 of retained profits.

Clause 28, as drafted, suffers none of those drawbacks. It will encourage all businesses with small profits to retain some or all of them, so that they can be applied to investment and growth. That is precisely the point that I made when addressing the issue in deliberation on the Finance Bill in 2002. By contrast, the amendment would favour companies with £10,000 or more profits available for reinvestment and would put less fortunate companies at a disadvantage. I do not believe that that was the hon. Gentleman's intention, but he will be voting on a highly defective amendment—if he is prepared to take my word on that.

Howard Flight (Conservative, Arundel and South Downs)

I am inclined to bow to the Paymaster General's superior knowledge and advice. However, as I understand it, the amendment would have the effect— granted, it is somewhat arbitrary—that if a company with profits of £10,000 or more retained up to that amount, NCD would not apply. That is because the clause that the amendment would add to the Bill would make it a reverse condition. Arbitrary though it would be, it would exempt a certain category of company from NCD.

Dawn Primarolo (Labour, Bristol South)

I could see that that was what the hon. Gentleman sought to achieve, but that is done by the clause as it stands. The amendment would not achieve his aim, because he is setting the hurdle at £10,000 and anything beneath that would be liable to the NCD. However, our proposals cover cases up to £10,000, and that point needs to be made.

I shall deal briefly with the point about whether the clause is temporary and amounts to a strategic change in direction. I make it clear to all the hon. Gentlemen who have spoken in the debate that it is not a strategic change of direction. I have tried to point out that the Government have introduced a wide range of measures—both regulatory and tax measures of all types—to help business. I will not go through all of them. We believe that it is important that we continue to assist with reinvestment to help companies to grow. However, we will deal with cases in which money is being taken out.

The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system.

David Laws (Liberal Democrat, Yeovil)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

I would like to make progress so that I can answer the hon. Gentleman's questions, but I will give way briefly to him.

David Laws (Liberal Democrat, Yeovil)

I was not sure whether the Paymaster General was coming to my question, so may I ask her whether she can give us a cast-iron guarantee that, if the clause is passed, there will be no change in the business tax regime for small businesses even after the review that was referred to in the Budget has taken place?

Dawn Primarolo (Labour, Bristol South)

I was going to come to that point, but it is probably best if I deal with it now. It is not possible for any Minister to say that there will never ever be a change, but I point the hon. Gentleman to the consultation document that he mentioned. At all points, the Government's strategic direction is to look at small and medium-sized enterprises, their dynamism and ability to contribute to growth and to consider whether the tax system responds to their requirements. For example, he should look at the Budget discussion document on access to finance.

The hon. Gentleman asked me a similar question in Committee in 2002 about whether I thought I had got the balance right when he pressed me on the issue of incorporation and non-incorporation on the zero rate. I believe that the balance is right and that we are assisting companies to grow. We will, of course, act in the way that Parliament would expect us to do if the provision is used in a way that the Government never intended. I could have not been clearer in the Committee about what the zero rate was for and about the reinvestment of the £10,000 of companies' initial profits.

The hon. Gentleman was right to say that the starting rate was never meant to encourage businesses to incorporate solely or mainly for the short-term tax and national insurance advantages. I am perfectly prepared to admit in the House that we did not anticipate the significant numbers that would be prepared to incorporate without taking proper regard to the wide-ranging and important commercial considerations that need to be taken into account when deciding whether a company is limited. We set up a model and the provision was discussed in Committee in 2002. We have debated the issue at length, but tax planning and encouraging companies to behave are important issues that the Government need to take on board to a far greater extent. We shall do that in the Finance Bill.

I shall briefly respond to the specific points raised by the hon. Member for Arundel and South Downs. The measure is not retrospective; it is solely concerned with determining the rate at which current, and sometimes future, profits are liable to corporation tax, so the hon. Gentleman's point about the measure being applied to the same profits twice does not apply.

The hon. Gentleman said that the scheme is unfair if the distributions are made out of reserves or in other ways, and that the Bill should give credit for the tax paid. As I said, the measure is simply a mechanism for determining the rate at which a company's current, and sometimes future, profits should be charged corporation tax; it is not in any way a tax on distributions past, present or future.

The hon. Gentleman also said that the measure hits the smallest companies when larger companies can get off free. That is not so. The measure applies to all companies with profits liable to corporation tax at below 19 per cent. if they make distributions to non-corporate persons.

I turn now to what the hon. Gentleman called the triple whammy on small business: IR35, section 660A and now the non-corporate distribution rate. He knows that IR35 is not an attack on genuine business; it tackles intermediaries such as service companies where individuals are avoiding tax. Neither is section 660A an attack on small business; the Revenue is applying legislation to those using a company or partnership to avoid tax. There is no question of a double whammy or a double tax on any of these companies. The hon. Gentleman referred to the nine-month time limit. Nine months is only a minimum time, and it ties in with the due date for payment of corporation tax—that is all. There is nothing conspiratorial about it.

The hon. Gentleman also referred to the question whether companies need to bother with the scheme, and he said that they need to know about all the legislation. That is not so. A company will know whether it is in a group, so it will know whether provisions in part 2 apply to it. Companies have advisers who know all this, as the hon. Gentleman knows.

The hon. Gentleman touched on the provision for an inspector of the board to allocate liability to other companies, and he wanted to know what safeguards there are. The measure also provides for companies to amend those allocations, so no further safeguards are necessary. It is not a one-way street in which the Government simply impose conditions.

Finally, the hon. Gentleman asked about the deeming provisions in paragraphs 14 and 15 of schedule 3. Of course, the Revenue will be issuing guidance explaining exactly how those measures work. I have spoken to him before about the marginal bands and the way we ease progression from one band to the next.

I have dealt with the point made by the hon. Member for Yeovil about incorporation and self-assessment. The point about complexity is sometimes a little overdone. The hon. Gentleman has only to cast his mind back to the arrangements for advance corporation tax, which applied to these businesses before it was abolished—that involved 50 pages of legislation.

The purpose of the clause is to fulfil the Government's intentions to deliver support to companies and encourage them to reinvest their profits, rather than distributing them. That is important, and all outside the House have welcomed the way the Government have approached the issue. Many thought that we would use national insurance or income tax.

New businesses are thriving under this Government. More than 1 million new businesses have been created since 1997, a net increase of 117,000 businesses, demonstrating that the tax system and our economic policy enable companies to open up, grow, develop, be productive and create profits for their investors. That is precisely what the clause provides, and I hope that, on that basis, the hon. Member for Arundel and South Downs will not press his amendment.

Howard Flight (Conservative, Arundel and South Downs)

There is an apparent lack of clarity about the effect of our amendment. Our understanding of its effect is that if one retained the first £10,000, one would not be subject to the non-corporate distribution rate at all, because the amendment would add a requirement about a company not so retaining at least that sum. I will take on trust the Minister's comments that she does not believe the amendment has that desired effect.

Our opposition is, however, to clause 28 as a whole. The Paymaster General and the Chancellor have been a little disingenuous in the argument that the zero rate was always about retaining profits. I well recollect pointing out in the Finance Committee precisely how it would be used—businesses would incorporate, and would then withdraw via dividends at a lower tax rate, saving national insurance. I recollect an extremely conscientious colleague of the Paymaster General asking me whether that was really how things worked. I explained and he expressed great surprise. For the Government to argue that it was not absolutely clear that giving a biased tax rate to incorporation did not serve as a massive encouragement to sole traders to incorporate, then to distribute by dividends, is not a fair comment.

In view of the debate, I beg to ask leave to withdraw the amendment, but I urge my right hon. and hon. Friends to vote against the clause, given the whole background to it.

Amendment, by leave, withdrawn.

Clause 57 — Introduction

Mark Prisk (Conservative, Hertford and Stortford)

Mr. Deputy Speaker—

Alan Haselhurst (Deputy Speaker, Saffron Walden)

Order. I remind hon. Members that when we are in Committee, the correct forms of address to the Chair, which apparently have not been widely observed today, are "Mr. Chairman" or by name.

Mark Prisk (Conservative, Hertford and Stortford)

Thank you, Sir Alan.

Clause 57, together with schedules 11 and 12, introduces fundamental changes to the running of the construction industry scheme, which is a special tax deduction scheme that reflects what one might describe as the traditional cash basis of the construction industry. The changes that the Government propose have significant ramifications for subcontractors—

Mark Prisk (Conservative, Hertford and Stortford)

You are very kind, Sir Alan.

The revisions that the Government propose, which will affect subcontractors, mainstream contractors and deemed contractors, include stiff penalties for non- compliance once the new scheme commences in April 2006. Conservative Members welcome the extensive consultation that the Treasury has engaged in on this complex matter. It is clear from my discussions with, among others, the Construction Confederation and the British Property Federation that the final proposals make important concessions to the concerns of those affected. We welcome that.

As I understand it, the Government have set out three broad aims that they feel that the revised scheme should meet: first, that it should reduce the regulatory burden of the scheme on construction businesses; secondly, that it should improve construction businesses' compliance with their tax obligations; and thirdly, that it should help construction businesses to get right the employment status of their workers.

In judging the Government's plans, we sought to measure them not only against those aims, but against several practical concerns in the industry. The first main change that is proposed is that subcontractors who are holders of valid CIS4 registration cards, or CIS5 or CIS6 gross payment certificates, on 5 April 2005 will be automatically migrated to the new scheme. Indeed, a unique taxpayer reference number, or UTR, will be allocated to each subcontractor, which will dispense with the need for them to hold cards after the relevant date.

Secondly, the current system of registration cards, certificates and vouchers will end on 5 April 2006, to be replaced by a verification procedure via the telephone or correspondence or over the internet. Will the Minister confirm that this verification procedure will not apply to contractors who make a payment after the beginning of the new scheme, but who have made a payment to the subcontractor in the current or previous two years?

In the absence of the detailed rules, which will be introduced in secondary legislation, it is quite difficult to assess how bureaucratic this process could prove to be. Can the Minister provide the House with some assurances as to the scope and length of those rules, and will she tell us what progress has been made on their preparation?

David Taylor (Labour/Co-operative, North West Leicestershire)

I should declare an interest in this matter, in that, in a past life, I dealt extensively with subcontractors in the construction industry. Does the hon. Gentleman believe, as I do, that despite the very welcome rationalisation of the structure of payment for subcontractors, the burden for very small subcontractors of employment status verification checks will be very significant? Medium-sized and larger companies will be set up and able to carry out the checks routinely, but the smaller firms will not. Some of them could have their future jeopardised, if we are not very careful indeed.

Mark Prisk (Conservative, Hertford and Stortford)

As usual, the hon. Gentleman makes a very good point, and it is one to which I am very sensitive. We must ensure that the smallest of our enterprises—this might be difficult for the Government to see, let alone to understand—which are trying to ply a legitimate trade are able to do so, particularly in the construction industry, where they might have, shall we say, less legitimate competitors. I would like to add a further question to the Minister. What rights of appeal will there be in cases involving genuine mistakes?

Through the periodic returns, contractors will have to verify the employment status of subcontractors, which they will do by certifying that none of the payments in the return relate to a contract of employment. There will be a penalty of £3,000 in cases of non-compliance. I understand that the Revenue will be providing a web-based tool to help contractors to decide whether a subcontractor is employed or self-employed. However, in the light of the previous debate and many other discussions that we have had on employment and self-employment, and given Treasury Ministers' own considerable difficulty in being able to apply their highly academic minds to the question of who is and who is not self-employed, does the Paymaster General not recognise that asking small contractors to make these assessments could prove an excessive burden to people who are, after all, not employment lawyers?

Further to those points, the industry has highlighted a number of practical issues, to which I shall refer briefly. First, there is the question of the registration of subcontractors for gross payment, to which the clause refers. The draft regulations currently prescribe a minimum turnover test of about £30,000. Does the Paymaster General accept that this could prove to be an issue for some of the smaller businesses that we were discussing earlier? Is she therefore prepared to reconsider that figure?

Next, we come to the impact of the scheme's compliance test on joint ventures and special-purpose vehicles. In order to register for gross payment, subcontractors will need to meet a compliance test and a turnover test. This could prove quite an issue for joint ventures and SPVs that cannot qualify for a certificate under the current rules, even though their members have exemption certificates. The danger is that this measure could affect private finance initiative schemes, if a joint venture or SPV were set up and gross payment status could not be achieved because there was insufficient turnover in that entity. Will the Paymaster General assure us that the Government will be able to accommodate such joint ventures and SPVs, given the practical difficulty that I have described?

Next, we come to the individual verification for each legal entity. Under the current rules, a parent company or managing agent can inspect the certificates held by a subcontractor, and is able to do so on a once-only basis in relation to one certificate. That allows them to satisfy themselves that any company within a group is appropriately registered. The new rules that we are discussing prescribe individual verification for each legal entity, not per group. Clearly, that is far more onerous than the situation at present. Can the Paymaster General tell us whether that is strictly necessary?

Lastly, the strict application of the compliance test provides for one mistake, and the certificate will then be removed, admittedly subject to appeal. There is a real danger that that could penalise innocent errors, especially during the initial year or so, as the new scheme is introduced. Has the Paymaster General considered whether there is a case for a three strikes rule? Can she set out exactly what she means in the legislation by the term "reasonable excuse"?

In updating the scheme, and this clause, it is extremely important that the balance is struck carefully between tackling systematic tax avoidance and creating such a bureaucratic burden for legitimate companies that their costs rise and they find themselves undercut by black market firms. If that happens, it would be bad for the construction companies, their clients and customers, and for tax revenue. In that context, I hope that the Paymaster General will respond positively to the points that I have raised.

Dawn Primarolo (Labour, Bristol South)

In responding to the hon. Member for Hertford and Stortford (Mr. Prisk), I need to point out a couple of things.

First, the scheme for which we are legislating was introduced by the previous Government in 1995. That scheme came under sustained criticism for its complexity with regard to implementation of the arrangements. After long discussions with the industry, to remove some of what were perceived as, and what were, burdens on the industry—which I shall explain briefly—it was agreed that the Revenue would move to an electronic system.

In relation to clause 57 and the rest of the clauses with some small changes that are beneficial to the construction industry, many of the arrangements are the same as those for the existing scheme. At this time, the Government have not made any significant changes to the scope of the scheme, as regards either who or what is within it. The hon. Gentleman could therefore have asked the same questions in 1995 of the Conservative Minister at that time. The issue at present is how we can try to move forward.

Some form of scheme has been existence for more than 30 years, and that is because the industry has a poor record in complying with its tax obligations. Unfortunately, that has not changed much. But the world has of course moved on, and more businesses want to engage with government electronically and move away from paper records, and the revised scheme facilitates that. It is the same scheme, but it moves away from paper towards electronics, as the industry wanted. The current paper-based scheme of certificates, cards and vouchers will therefore be replaced by a scheme that offers an Inland Revenue-run verification service, which will inform contractors how they are to be treated in relation to particular subcontractors, and which will inform the contractor if that subcontractor's status changes.

David Taylor (Labour/Co-operative, North West Leicestershire)

On a number of occasions, the Paymaster General has referred to consultation with the industry. I assume that by that she means consultation with the construction industry in the narrowest sense. I would be happy to hear whether that consultation included links or liaison with the accountancy firms who more commonly speak for the very small subcontractors and contractors in the construction industry rather than the formal organisations.

Dawn Primarolo (Labour, Bristol South)

Consultation is being undertaken not just with advisers from the industry, but with trade unions and trade bodies both large and small. Lately there have been discussions with the Federation of Master Builders, representing the smallest firms. My hon. Friend is right to draw attention to the disproportionate impact on the smallest businesses as a result of turnover tax. The turnover test causes them some concern. Things would be much easier if we could have "deemed employment", which would enable us to know immediately whether someone was genuinely self-employed or on PAYE. That is at the heart of this scheme.

The hon. Member for Hertford and Stortford asked about the verifying of payments made during the transition. Clause 77 excepts a contractor from the requirement to verify a subcontractor if a payment has been made in the current or previous two tax years prior to the transition. The hon. Gentleman also asked about penalties. When a penalty is imposed for a compliance failure such as a late return, the usual rights of appeal will apply.

As for the completing of an employment declaration, contractors are currently required to ensure that they engage people on the correct basis. If they are employees, the contractor should operate PAYE. The declaration merely underlines the importance of considering employment status, which has supposedly been part of the operation of the scheme for some time.

Both the hon. Gentleman and my hon. Friend the Member for North-West Leicestershire (David Taylor) mentioned the turnover test, which currently protects the tax flow to the Exchequer. The Government have agreed to consider with the industry other options that might provide the same protection.

The regulations are currently out for consultation. As the hon. Gentleman says, the details will need to be examined closely. When we have received the submissions, we will note comments and changes that might be made to the regulations. They will be recirculated for consultation with the industry. The industry is currently responding fairly, as is often the case when issues such as this are involved. They can see that there is a problem, but they do not know what the solution is, and they do not like the solution favoured by the Government .

It is a bit like the issue of tax stamps, if I dare return to that long debate. It is incumbent on those who want to engage in constructive consultation with the Government, and in the improvement of schemes, to come up with solutions as well as criticism. I hope that, on that basis, the House will support the clause.

Question put and agreed to.

Clause 57 ordered to stand part of the Bill.

Clauses 58 to 64 ordered to stand part of the Bill.

Schedule 11 agreed to.

Clause 65 ordered to stand part of the Bill.

Clause 66 — Cancellation of Registration for Gross Payment

David Laws (Liberal Democrat, Yeovil)

I beg to move amendment No. 40, in page 68, line 25, after 'it', insert

'twice within a period of five years'.

The aim of the amendment is to clarify one small aspect of the construction industry scheme, and clause 66 in particular. The concern is that subsection (1)(b) appears to be quite draconian, as just one error could lose a subcontractor his certificate. The preferable alternative suggested in the amendment is that an error in two returns in a five-year period would trigger the loss of the certificate. Another alternative is to introduce the concept of some type of serious error, although that introduces subjectivity and presumably the Government would need to define "seriousness" in terms of the amount of money lost.

Subsection (8) provides that, if the gross payment registration is cancelled, the person may not reapply for gross payment status within one year of the cancellation taking effect. The subcontractor must, however, be registered for payment under deduction. I hope that the Paymaster General will clarify whether the draconian interpretation of subsection (1)(b) is merited, or whether we are missing something that will satisfy us that our concerns are not justified.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman asks for reassurance about the regulation-making powers. I think that he interprets in an unnecessarily draconian fashion the conditions under which registration would be withdrawn.

The clause provides for regulation-making powers. The regulations, which are subject to discussion, will require the return to contain a declaration to the Inland Revenue. Without wishing to anticipate exactly what the industry may say, I think that I can assure the Committee that the declaration will be subject to the "two strikes" point that the hon. Gentleman made. It will require the contractor to confirm that he has properly considered employment status.

Therefore, I do not think that the hon. Gentleman need worry. I wonder whether he will consider looking at the regulations when the consultation has been completed. I will happily forward them to him, so that he will be able to reassure himself and those outside the Committee, who clearly have a concern.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the Paymaster General for that clarification. Obviously, there will be an opportunity to look at the regulations to establish precisely how the Government have defined the penalties. With that reassurance from the right hon. Lady, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 66 ordered to stand part of the Bill.

Clauses 67 to 69 ordered to stand part of the Bill.

Clause 70 — Periodic Returns by Contractors Etc

David Laws (Liberal Democrat, Yeovil)

I beg to move amendment No. 41, in page 70, line 44, after 'that', insert

'he has taken appropriate steps to confirm that to the best of his knowledge'.

The hon. Member for Hertford and Stortford (Mr. Prisk) has touched on the issue already, as has the Paymaster General. I seek clarification about the intention of the clause, in particular the requirement to say that a contract was not a contract of employment. The Paymaster General will understand why people are concerned about having to sign up to that requirement and the uncertainty that there may be in some circumstances. The amendment invites her and the Government to make a judgment about the intention and the information available, rather than to pursue a particularly draconian approach. I hope that she can reassure us that this provision will be interpreted sensibly, too.

Dawn Primarolo (Labour, Bristol South)

Again, as with the gross payments to which amendment No. 40 referred, what is important on the question of the declaration is that we have a workable scheme. On both the gross payment and the declaration, we are seeking, in conjunction with the industry, to ensure that we have regulations and rules that are achievable and carry a disincentive for those who seek deliberately not to comply but that, equally, are sensitive enough to recognise that sometimes errors are genuinely made.It will be important to ensure that in the operation of the scheme and the regulations—this applies to declaration as well as to gross payments—that balance is correctly achieved.

Again, I am happy to make sure that the hon. Gentleman receives information on that, if he is particularly interested in the consultations and how the matter will be handled. However, I can tell him and the Committee of the whole House this evening that the issue is proceeding with the industry in a reasonable and constructive manner, and I am therefore confident that there will not be the kind of unwelcome and draconian side-product that the hon. Gentleman has identified. I hope that he will bear with us a little longer and, rather than press his amendment, see the outcome and the draft regulations. If he is still not happy then, of course he will be able to return to the matter at a later stage.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the Paymaster General for that clarification. It is clear that the Government's intention is similar to ours, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 70 ordered to stand part of the Bill.

Clauses 71 to 76 ordered to stand part of the Bill.

Schedule 12 agreed to.

Clause 77 ordered to stand part of the Bill.

To report progress and ask leave to sit again.—[Charlotte Atkins.]

Committee report progress; to sit again tomorrow.