The threat of "stamp tax" has united the UK spirits industry behind frantic efforts to convince the government of its folly before the next budget in March. However, the Treasury is demanding something be done to combat rising levels of duty evasion. The onus is on the industry to come up with an alternative or be stamped. Olly Wehring spoke to the leading figures in the debate.

The UK spirit industry is up in arms. Late last year it believed it had beaten back suggestions by the Exchequer to combat tax evasion on spirits with the use of "stamp tax". However, not only is the proposal alive, it is well and truly kicking, with the Scottish secretary, Alistair Darling, warning the Scotch whisky industry last week that it will have to face the introduction of stamp tax (the use of paper stamps over bottle tops to indicate duty has been paid) unless an alternative can be found.

The government estimates that duty evasion is rising at alarming rates. Doing nothing, says Darling, would be "grossly irresponsible". In a letter to the industry on 17th December John Healey, Economic Secretary at the Treasury, wrote: "Spirits fraud is growing. I want to be clear about what lies ahead. We must, and will, introduce tax stamps from 2006 unless you can come up with a compelling alternative."

So, cue a frantic round of politicking in the corridors of Westminster last week. But with no agreement in sight, the debate looks set to heat up further. Just-drinks spoke to the main figures in the saga, to get the inside line on this issue.

The industry - Quentin Rappoport, director of the Wine & Spirit Association

"We agree that there is a serious problem with spirits fraud, but introducing strip stamps is definitely not the solution. Stamps are ineffective as a means of control, as they can be easily counterfeited, even if they have expensive holograms.  Many countries have already tried strip stamps and proved their ineffect. Greece tried them and then threw them out, while Hungary still uses them, and yet illegal spirits currently account for between 15% and 20% of the market. Furthermore, they represent significant additional costs to the industry, which will most likely cripple small companies. The compliance costs would be massive. As far as we can see, we can't believe (Government claims) that one in six bottles (of UK spirits) are fraudulent. We put alternatives forward which, we thought, we were on our way to agreeing to. These included improved training for Customs & Excise officers, better forms of exchanging information between the industry and the authorities and, most importantly, a scheme to prioritise shipments most at risk as opposed to a blanket proposal."

The Scotch industry - Campbell Evans, director of government and consumer affairs at the Scotch Whisky Association

"We would severely dispute the figure the government has for tax evasion. With between 70% and 80% of Scotch being sold in the off-trade, the majority of which is through supermarkets, their figures seem too wide of the mark. There is traceability already available in the current system that is not being fully exploited. There are lot numbers on all bottles (of Scotch). Some of our members claim they can find out within one hour which market - be it domestic or abroad - a bottle is supposed to be heading for from its lot number. There needs to be stricter enforcement, and better use of intelligence between the industry and Customs & Excise. One other suggestion would be to transpose laws from elsewhere in the alcohol industry on to the spirit supply industry. The law for pub- and off-licence-owners states that they need to be 'fit and proper people'. If this law were applied throughout the supply chain (for spirits), then fraud would be much harder to commit."

The Government - a spokesperson at the Treasury

"We take the issue of duty evasion on spirits very seriously. Customs and Excise estimate that one in every six bottles of spirits is sold in the UK without the duty having been paid. This amounts to around £250m a year in lost revenue for the government. Consequently, we have to look at taking drastic measures to regain this lost duty, and the proposal we have put to the industry is strip stamps on spirit bottles. John Healey (the Economic Secretary at the Treasury) is in discussions with representatives in the spirits industry, and if the industry can make alternative suggestions then we would consider them."

The industry - Edwin Atkinson, director general of the Gin & Vodka Association

"Firstly, we do not believe the trend (of fraudulent spirits) is moving upwards, as the government is saying. The government also thinks that it could make £167m revenue through introducing strip stamps. We would question their figures. By introducing the stamps, the compliance costs will certainly be bigger than what the government has quoted. The Chancellor of the Exchequer has challenged us to find alternatives. Some of the considerations we originally suggested are still under discussion in the Joint Industry Committee (JIC) which is currently meeting. The most important thing is that there has to be a range of controls in place to cover the different methods of fraud (within the spirits industry). We are up against a very tight time schedule, as the Chancellor wishes to make an announcement on the matter in his next budget (March 2004). The bottom line is that costs and benefits (of the chosen system) have to be proportional to the size of the problem and the benefit to the treasury."

The producer - Stephen Whitehead, director of group corporate affairs at Allied Domecq PLC.

"We are very concerned by the Treasury proposals on strip stamps as an attempt to reduce fraud. Numerous countries have rejected strips as unworkable and, indeed, the UK government has objected when other counties sought to use this option - most notably with Norway in 1997. The trade associations have begun to make good representation on this issue and are fully supported by their members, including Allied Domecq. To meet the challenge laid down by the government we need to be truly creative. In addition to the proposals surfacing already we would be keen to beef up the joint task force with the Treasury, for example, to design a collaborative European movement control and to look at the potential of new technology such as electronic RFID-enabled container bolts to secure export shipping and give a high visibility of shipping containers."

The analyst - Allan Gray, investment analyst, specialising in the whisky industry, with Sutherlands stock brokers.

"The best alternative I can see is if the Government took up issue in a European context. If the Government could get the European Union to concede that the difference between UK and other European countries' duty limits is too great, then duty harmonisation could be a consideration. One year ago, the duty for spirits in the UK was €3116 per hectolitre, while in France it was only €1450 per hectolitre. If French duty was doubled and UK duty was reduced, that would help reduce fraud on spirits. Naturally, any chancellor would baulk at such a decision, but the situation as it currently stands invites smuggling. The Government could also try to get personal allowances (for bringing spirits into the UK from abroad) reduced. The current allowance is 10 litres of spirits per person. With allowances like this, the magnitude of the problem is colossal. The only other realistic alternative is for the Government to tackle the issue more systematically, and that means to throw more money at the problem: increase the number of Customs & Excise officers, improve training, and pursue more vigorous prosecutions. But by pushing the onus on to the spirits industry through strip stamps, the Government looks like it is tackling the situation without spending much money themselves. The bottom line is that if someone wants to smuggle spirits, then they will."