Border skirmishes

The fevered debate over the UK's place in the European Union may have subsided somewhat since the night of 1 May, but a European issue close to the hearts of anyone engaged in selling alcohol re-emerged with a vengeance a few weeks ago.

In challenging the Government's proposed penny-on-a-pint increase in beer duty in the High Court (Caterer, 18 September, page 9), Kent brewery Shepherd Neame has put the long-running debate over comparative EU duty rates under the spotlight. Shepherd Neame alleges that the rise will run counter to the Treaty of Rome which provides for the harmonisation of duty rates in EU member states, and has asked for a judicial review which is likely to lead all the way to the European Court of Justice.

The timescale for this action is uncertain, but there is no doubt that it will be protracted. What is interesting is that the case could be referred directly to the European Court of Justice, usually the recourse for cases once they are thrown out by British courts. In any case, Shepherd Neame will be subject to the standard two-year wait, at least, before being heard by the European Court.

However, the brewery's vice-chairman, Stuart Neame, believes that the Government should think long and hard before proceeding with the January rise, given that a subsequent ruling could result in huge claims for compensation. "If a judge does decide that there is a case to answer, I think it would be wrong for the Government to go ahead with an increase in January," he says. "I think there are very serious concerns if the Government imposes a duty increase which will cause further damage to licensees, particularly in the South-east. It will cause more pubs to close, which is an irreversible process. If the Government decides to proceed with that increase, it has got to be confident that it can correct any problems if it subsequently proved illegal."

It is particularly significant that this ground-breaking case has been brought by a pub operator rather than a retailer. The arguments over cross-Channel shopping and smuggling have raged since 1993 when the borders of the single market were effectively opened. However, as the alcohol bought by the British in France is destined for home consumption, attention has focused on the damage being done to the UK's existing take-home drinks market. Quantifying the precise level of impact on the pub, restaurant and hotel trade has been extremely difficult.

Brewers, wholesalers and analysts alike consider it unlikely that a huge proportion of the bootlegged merchandise is finding its way into the mainstream trade. Alcohol bought legally by cross-Channel shoppers is by definition for home consumption, but to what degree it replaces purchases in pubs is difficult to gauge. "I don't think that any substantial quantity of bootlegged beer is being sold in pubs," says Neame, "but the way it works is that customers do not go to pubs as often as they used to. They stay at home, watch a video and drink French beer."

Shepherd Neame has conducted an econometric study to estimate the impact on the on-trade. While the company knows that its own pub business, based predominantly in Kent, has been hit the hardest - it has had to close 45 pubs since 1993 - it estimates that as a national average, pubs are losing about 4% of their turnover to the cross-Channel business.

As the Treasury reflected on the Shepherd Neame petition, Customs and Excise released data on the cross-Channel alcohol trade - legal and illicit - indicating that, far from stabilising as some have alleged, the problem is getting worse. Customs and Excise reported that the cross-Channel trade has increased by 5% over the past year. It now accounts for nearly 5% of the total UK beer market, and the Brewers and Licensed Retailers Association (BRLA) estimates that this could rise to between 7% and 8% by 2000 - the equivalent of two million pints of beer a day - if nothing is done to address the disparity in French and British duty rates.

This comes as no surprise to pub operators such as Shepherd Neame, along with other pub owners, independent licensees, retailers and wholesalers from across the country whose sales have suffered as consumers have crossed the Channel in droves to stock up with cheap beer, wine and spirits. At the same time, bootleggers have prospered, expanded and become more organised and sophisticated.

Neame even suggests that what he sees as the Government's misguided policy of raising duty rates in line with inflation, representing a shift from the last government's general commitment to freezing or lowering rates, has come about as a result of misleading information from customs authorities. "Customs and Excise has constantly underestimated the problem," says Neame. "The press releases are very unhelpful. They focus on the busts and give the impression that the problem is under control."

When announcing the January rise, the Government also put into motion an internal review of the question of the cross-border trade. However, to the dismay of the BRLA, the review is to concentrate on how this trade can be policed rather than focusing on the nub of the problem, the duty rates themselves. "The Government has already indicated that a drop in duty rates will not be one of the results," says Tim Hampson of the BRLA. "More customs officials is not the answer."

It is also extremely doubtful that a government so tightly bound in terms of its public expenditure commitments is likely to sanction the kind of increase in customs resources which would make any sort of meaningful dent in the huge bootlegging market. In any case, Hampson points out that only 50% of the cross-Channel trade is illicit. Having more customs officers does nothing to redress the damage being done to the UK drinks trade by perfectly legal cross-Channel shopping.

Pub operators are also dismayed by the fact that the Government appears unwilling to take account of the substantial body of data put together by the BRLA indicating that a phased five-year programme of duty reductions would within two years have a positive impact on the Public Sector Borrowing Requirement once all contributions to the Exchequer, such as income tax and corporation tax, are taken into account.

In a memorandum to the Treasury last year, the BRLA stated: "A duty decrease which leads to increased sales of beer and greater usage of pubs and clubs has a beneficial effect upon the UK economy to an extent that few, if any, other products can achieve."

The crux of the BRLA's argument is best illustrated by the stark fact that the pubs and clubs sector generates around £11.4b in revenue for the Exchequer, but only £2.4b of this comes through beer excise duty itself. The work, while commissioned and paid for by the BRLA and conducted by Oxford Economic Forecasting, uses the Treasury's own financial models in extrapolating its figures.

The debate between the Treasury and the drinks industry regarding the questions of how much of the cross-Channel business replaces existing UK sales, and how precisely a reduction of duty rates would impact on the economy, has rumbled on since 1993.

But the Shepherd Neame case could bring it to a head, as it will take the duty rate question into the wider debate over how the Government should handle its relationship with the EU, at a time when the more highly publicised arguments over monetary union will be raging.

A key issue in the monetary union debate is the degree to which it may compromise the Government's control over fiscal policy. It is hard to imagine that a case which could lead to the European Court of Justice declaring a UK government tax policy illegal will not grab a few headlines.