And the SWA has fiercely condemned the move to introduce paper tax stamps for whisky bottles as an outdated and ineffective way to battle fraud.
But the Government has laid down a challenge to the industry: come up with a better idea or the paper stamps will be brought in.
In an exclusive interview with Whisky Magazine Economics Minister John Heeley said that after considering the problem carefully the Government had been given no choice but to act because the problem of fraud was in danger of spiralling out of control.
The massive fraud problem has arisen because international gangs have exploited a European directive which allows duty to be paid not at the production point but at its final destination warehouse.
Producers are legally selling spirits which they think are destined for European destination.
But the whisky is diverted by corrupt distributors and although the correct paperwork is returned saying that the product reached its destination and duty was paid, in actual fact it never leaves the country and is sold back to unsuspecting retailers for sale.
Although it’s hard to estimate the size of this sort of fraud, the Government believes it accounts for 16 per cent of the value of the spirits market – and it says the figure is growing.
Just three weeks ago the scale of the problem was revealed when corrupt customs officials were given lengthy prison sentences after conspiring in this type of fraud.
Now John Heeley says it must end – even if there is a cost to the whisky industry. And he says that stamps applied at source to show duty has been paid will alleviate the problem.
“We have considered the options very carefully and can see no other way,” he said. “(British Chancellor) Gordon Brown has a great deal of sympathy with the Scotch whisky industry.
“He is a Scot and understands fully its problems. That’s one of the reasons why duty under this Government has been frozen, offering the industry a substantial reduction in tax in real terms.
“But unless the industry can come up with a better way of stopping fraud we have to act. It is the only area of tax fraud we have failed to bring under control.”
Mr Heeley said that the Government would look at ways to help whisky producers with costs of complying with any directives, and said that tax duty would not be raised on spirits for the rest of the lifetime of the current parliament.
But there is fierce disagreement as to how wide-scale the problem of fraud really is, and as to how great the costs will be to the trade.
The biggest fear is that it will have an uneven impact on producers.
Then costs will either mean higher prices for the customer – a potentially fatal outcome given the brittle nature of the premium whisky market – or it will effect production, making small runs of special bottlings particularly from small distillers impractical.
Gavin Hewitt, chief executive of the SWA, said that on Government estimates, there were 200,000 bottles of illegal spirits being shipped every day. That, he said, was both an unproven figure and contradicted other much lower estimates.
Nor did the SWA believe that paper tax stamps would resolve the problem.
“Fraud must be defeated but paper stamps over the top of a whisky bottle is a 19th century attempt to beat 21st century fraudsters,” he said.
“Experience shows that strip stamps do not work and that they have been rejected or abolished by countries across the world. They make a mockery of the Government’s commitment to reduce red tape and costs on industry.
“They would be a hammer blow to Scotch producers, in particular smaller distillers, with compliance costs running into millions of pounds.”
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