Fight to save duty-free sales goes on

GERMANY AND Britain moved last night to overrule the European Commission's controversial verdict on the ending of duty-free sales.

The Commission said there was no justification for a reprieve but Gerhard Schroder, the German Chancellor, reacted furiously, demanding a five- year extension.

In a statement last night he threatened the Brussels bureaucracy he would put the matter on the agenda of the Berlin European Union summit next month unless it immediately drafts proposals for a five-year extension and puts them to finance ministers. The Commission's attitude, he said, was "incomprehensible" given that it accepted there would be up to 53 000 job losses.

British ministers and campaigners for duty-free sales vowed to fight on, calling on Tony Blair and other EU heads of government to overrule the Commission's recommendation that abolition should go ahead as planned at the end of June. EU diplomats said a unanimous decision by finance ministers could order the Commission back to the drawing board.

But ministers privately admit they have all but lost the fight. The focus is turning to what will follow. Dawn Primarolo, the Paymaster General, said: "We need to make it clear the successor regime proposed by the Commission is fraught with problems."

Brenda O'Brien of the European Federation of Transport Unions said: "This is disappointing but it is not the end of the road. Clearly the Commission has snubbed the wishes of prime ministers by providing an incomplete picture of the impact on jobs and by refusing to consider seriously the possibility of an extension. It raises the question of who runs Europe."

In a long-awaited report the Commission conceded that short-term job losses would flow from scrapping the tax concession, possibly as many as 53,000, about 5,000 of them in Britain. But Mario Monti, the EU commissioner for the single market, said this was not enough to justify a change of plan. He said duty free was a subsidy to one industry and was a burden on all taxpayers.

He dismissed claims that abolition of tax-free sales in the absence of harmonised VAT and excise would lead to farcical scenes on cross-Channel ferries, with the price of alcohol changing four times as the ferry moved from one country's waters into another's.

He said that VAT will be levied at the rate applying in the country of departure. A ferry leaving Dover for Calais would charge VAT at the British rate but the French rate would apply for the return.

The rules are different for excise duty on drink and cigarettes. Here the rate applies to that charged in the country where the goods are loaded. But it changes as soon as the vessel or aircraft moves into new waters or airspace.

Vic Moorcraft of P&O ferries said the rules were "unworkable". P&O accepted the 1991 decision abolishing duty free as a logical extension of a single market, but harmonised rates of VAT and excise had never materialised, he said.

The Ban and its Effects

The ban was agreed unanimously by EU governments in 1991.

France and Germany support a five-year stay of execution, but Denmark, Holland and Belgium insist the system must go.

Some say 140,000 jobs could be lost in Europe. Britain could lose 23,000, up to 10,800 in ferry firms and 9,000 at airports. Kent would be worst hit.

The Scotch Whisky Association alone fears it would lose 1,000 jobs.

Under the new system excise duty changes half-way between countries. On a ferry from Ostend, Belgian excise duty is paid until UK waters. Then the selling stops or the goods switch to UK excise duty.

VAT goes on duty-free goods at the country rate where the journey began.

BAA, which operates UK airports such as Heathrow, Gatwick and Stansted, could lose pounds 123m a year in duty-free revenue, so holiday prices could rise.

EU commissioners may give up their annual allowance of wine and cigarettes at preferential rates to show solidarity.