SUMMARY

  1.  Seen by the UK consumer as an alternative to beer, cider suffers from the indirect rather than the direct effects of smuggling and fraud. NACM fully supports its fellow trade associations and HM Customs & Excise (C&E) in efforts to protect the UK's legitimate trade and to prevent the further damage to our society that continued fraud will do.

  2.  Some parts of C&E's action following the 1997 Alcohol & Tobacco Fraud Review bring more regulation of, and expense to, legitimate traders. NACM proposes that resources would be better directed towards more intelligence activity and increased action against illegal importers and fraudsters.

  3.  Affiliated members of NACM, working at the craft scale, report their concern that they effectively operate unsupervised by C&E. Having to rely on their own interpretation of C&E's Official Notices or on comment from C&E Advice Centres, they have no direct contact at their cider mills with officers and, rightly or wrongly, fear significant penalties for any accumulated errors they may be making in their records.

  4.  There is also concern that unscrupulous traders are tempted to make and sell cider without payment of duty in the knowledge that the odds are against their being caught.

  5.  The National Association of Cider Makers (NACM) NACM has been established since 1927 as the representative body of the UK's cider making enterprises. In 1998, its members and the members of affiliated associations produced more than 80 per cent of all the cider and perry released in the UK by C&E. The UK is the world's largest cider market and its industry is also responsible for an awakening of interest in cider across the globe. Apart from increasing export sales year on year, the industry is actively developing markets both within and outside the EU. NACM's direct and affiliated members are typically small or medium-sized enterprises (SMEs) but the full range is represented. The size of operation runs from the smallest craft-scale makers producing perhaps 70 hectolitres (1,540 gallons) to the largest operators capable of producing more than 3 million hectorlitres (66 million gallons) each year, if market conditions allow. NACM members are cider and perry makers; they do not operate numbers of retail outlets.

  6.  In this Submission, NACM wishes to record its views on two of the three topics to be examined by the Committee, as set out in the Press Notice of 15 July 1999:

1.  Custom's success in encouraging and enforcing compliance across the range of its responsibilities and tackling the shadow economy.

2.  The impact of non-compliance on compliant businesses (especially in relation to small businesses and the bootlegging and smuggling of alcohol and tobacco).

  7.  NACM's comments may be taken to apply equally to perry unless a distinction is made.

ENCOURAGING AND ENFORCING COMPLIANCE

General

  8.  With some exceptions, regrettably few in number, most UK cider consumers are beer drinkers who occasionally choose cider. C&E agree that cider itself is generally not smuggled into the UK and that instances of fraud involving cider are few, if any. By its nature, the direct effect of fraud involving cider would not be quantifiable and may be negligible. However, if a significant and growing proportion of UK beer consumption is being met by illegally imported or otherwise fradulently supplied beer at prices significantly undercutting legitimate supplies, then the opportunities to trade legitimately in cider are increasingly constrained. Not only that, but illegitimate supplies of beer are sold through wholly unregulated channels allowing potential access to under-age children. NACM therefore works closely with C&E and the Brewers' and Licensed Retailers' Association (BLRA), together with the other alocholic drinks trade associations, in seeking to stamp out duty fraud and smuggling.

Alcohol and Tobacco Fraud Review (ATFR)

  9.  NACM has contributed to this review since its inception, as have all other alcoholic drinks trade associations. NACM is concerned that the ATFR appears to have consolidated a view at C&E that blanket controls are the only satisfactory means of identifying fraudsters among the large population of compliant traders. If so, NACM believes that this view has arisen partly in response to a perceived legal doctrine that, in the case of illegal imports, Single Market rules prevent overt action at the point of entry to the UK against what are blatant movements of exciseable goods. NACM members fully accept the principle of allowing personal importation of duty-paid goods but feel that a robust interpretation of the rules will allow more intelligence to be gathered and used more actively the better to prevent illegal imports and other fraud.

  10.  In addition to new regulation and the risk of penalty involved, considerable time and resource is being focused on exploring measures which would involve compliant traders in very significant expense and which NACM feels fraudsters will find ways of avoiding. C&E and trade associations are cooperating in this work but it is clear that the likely cost of implementing some ATFR recommendations will never be justified by cost-benefit analysis and can only make UK industry less competitive.

  11.  Examples for matters currently being examined with C&E include:

—  the new Warehousekeepers and Owners of Warehoused Goods Regulations 1999 which concern those cider makers who send out cider in duty suspense. While only a few may be affected, the regulations will apply to potentially large volumes of business and certainly introduce new obligations and penalties in circumstances which are still unclear and may be beyond the legitimate trader's power to control.

—  C&E wish to return to an earlier regime of requiring guarantees or other financial security for duty liability. Apart from the direct charges such securities and their allied indemnities bring. NACM is concerned that a demand for securities may act to prevent respectable traders from entering what is a legitimate trade.

—  C&E wish to introduce systems which would allow individual packages to be traced from production to consumption and their duty status identified. Owing to the highly developed nature of the UK's legitimate distribution systems, this would require a wholly unprecedented degree of cooperation and cost at all stages of the distribution chain and would require many years to achieve. It is also possible that the degree of certainty usually required of evidence may not be achievable.

Audit Control

  12.  Until the mid '90s, cider makers expected at least one visit each year from a C&E officer who would examine the Entry Book—the official record of activity every cider maker was then required to keep. This practice was phased out by C&E from 1994 in their move to control by audit of a trader's own accounts. While the medium-sized and larger cider makers' own audit and financial control functions accept that C&E audit is as effective as the earlier system, the craft-scale cider maker finds otherwise. Cider duty itself was re-introduced only as recently as 1976 and most craft-scale cider makers have since relied on officer's visits to ensure that they are not in error.

  13.  For many craft-scale cider makers the audit system does not operate; some have not seen an officer since the change was made. Consequently they must rely on correctly interpreting C&E's Official Notices and on contact with C&E's Advice Centres to make their duty declarations and payments. Overall, the use of an audit system may still be justified in view of the small volumes traded in this sector of the cider market but reputable craft-scale cider makers report that they feel at threat of assessment for duty not paid through error, even though they believe they have fulfilled all their obligations.

  14.  Craft-scale cider makers also report their belief that the lack of policing action by C&E allows unscrupulous operators to make and sell cider without any duty payment in the expectation of never being caught.

THE IMPACT OF NON-COMPLIANCE ON COMPLIANT BUSINESS:

  15.  Apart from suspecting that non-compliant makers of cider may be competing in local cider supply markets (paragraph 14, above), the impact of non-compliance on the cider industry is indirect in that the fraudulent supply of beer in particular will reduce the demand for cider. It is not possible to quantify the effect on the compliant cider industry of non-compliance in the supply of beer but NACM believes that it has contributed to the recent UK cider industry experience:

—  10 quarters (2.5 years) of declining volume since 1996.

—  a resulting 40 per cent. reduction in industry operating margin as prices were reduced.

  It must be said that, following an extended period of investment by cider makers and intended to maximise productivity, the declining trend is now levelling off.

9 September 1999