Select Committee on Treasury Minutes of Evidence

Supplementary Memorandum from HM Customs and Excise


1.1  Spend to Save initiative

  By mid-1997, new excise frauds had been identified in the outward diversion of excise goods and excise drawback fraud. Under the Spend to Save initiative announced later that year, the Government allocated Customs funding to deploy an additional 130 staff to combat internal frauds at registered traders and tackle paper-based frauds—see paragraph 2.1 for further details. In addition, the Spend to Save initiative enabled the Government to strengthen Customs resources aimed at tackling Single Market excise smuggling by an extra 70 officers.

1.2  Alcohol and Tobacco Fraud Review (ATFR)

  Following an announcement by the Chancellor in the July 1997 Budget, Customs carried out a review of alcohol and tobacco fraud, in partnership with the trade. The Alcohol and Tobacco Fraud Review (ATFR), which predominantly considered alcohol diversion frauds and the cross-channel smuggling of alcohol and tobacco, was published in July 1998 as part of the Comprehensive Spending Review. The Government allocated an additional £35m to Customs to fund 145 new front-line and assurance staff to help tackle smuggling and fraud and set up assurance systems to reduce alcohol diversion frauds.

1.3  Independent evaluation by Martin Taylor

  As Customs tackled alcohol diversion frauds, large scale tobacco smuggling stated to grow rapidly. By March 1999, the Chancellor announced the independent evaluation of tobacco smuggling. Martin Taylor was appointed to conduct the evaluation. He worked with officials from Customs and Treasury and took advice from other Government Departments, tobacco manufacturers and their representatives. He reported privately to the Chancellor in November 1999. In his Pre-Budget Report of November 1999, the Chancellor announced he had immediately accepted two of Taylor's recommendations and the Government would be funding a national network of x-ray scanners and introducing fiscal marks.

1.4  Tackling Tobacco Smuggling Strategy

  In March 2000, the Paymaster General announced full details of the Government's Tackling Tobacco Smuggling strategy. The strategy, which includes the Government investment of £209 million over three years, aims to put tobacco smuggling into decline within three years. The strategy consists of:

    —  nearly 1,000 more officers to tackle tobacco smuggling at key ports and inland locations (roughly doubling existing allocation);

    —  a national network of x-ray scanners;

    —  prominent fiscal marks to make identification of smuggled products easier;

    —  a range of tough new penalties for those involved in tobacco smuggling;

    —  a major publicity campaign to increase public awareness.


  Outward diversion fraud occurs when goods held in a UK warehouse in duty suspension are purportedly sent for export. Instead of being exported the consignment is diverted to the UK market without payment of UK duty. In many cases the owner of the goods rather than the warehousekeeper is the instigator of the fraud. This type of fraud was particularly prevalent from 1994 to 1998. Customs introduced a number of measures to counter it as outlined below. As a result no significant new cases of outward diversion fraud have been identified since April 1999.

Operational and organisational changes

2.1  IMPEX

  The Import/Export (IMPEX) teams, comprising 130 staff, were formed in late 1997. Their original remit was to identify and collect UK revenue, which had become due as a result of diversion or drawback fraud. They are a flexible resource, not constrained by the normal audit programme, and able to respond quickly to potential fraud. They liaise closely with warehouses to identify suspect movements at an early stage. In addition they undertake promiscuous visits to warehouses outside the normal audit programme.

  Although the teams were unable to recover significant amounts of revenue, due to their inability to trace the persons responsible for fraud (usually the owner), they were very effective in reducing outward diversion. Recognising this benefit, Customs has since 1998 used IMPEX staff to disrupt fraudsters' activities instead of adopting an investigative approach to diversion fraud (other than in limited instances). This operational change is largely responsible for the reduction in outward diversion fraud.

2.2  Commissioner's Direction

  A Commissioner's Direction was signed on 30 October 1997 whereby "the proper officer may impose additional conditions and restrictions on the removal of any goods from an excise warehouse in the case of any warehouse in which goods that are not owned by the occupier are warehoused". Local officers are now able to prevent suspect consignments from leaving third party warehouses until specific conditions have been met (eg the owner of the goods must identify himself to Customs). This Direction has been widely used by IMPEX and Assurance officers to good effect.

  It is recorded as having been used on 39 occasions between November 1997 and March 1999. It has only been used eight times since then. This supports Customs' view that the requirement to submit themselves to official scrutiny under the provisions of the Warehousekeepers and Owners of Warehoused Goods Regulations (WOWG) (see 5 below), and the activities of the IMPEX teams, have encouraged many fraudsters to withdraw from the UK warehousing system.

2.3  Excise duty drawback

  Spirits which had been the subject of drawback claims (ie the excise duty on them had been repaid) and which should have been exported, were found to have been diverted onto the UK market. To address this problem, Customs issued a circular to operational staff in 1997 reminding them of the checks which must be performed before excise duty is repaid and highlighting the relevant risk indicators. In addition, the IMPEX teams were given responsibility for verifying drawback claims. To place further obstacles in the path of fraudsters, in 1998 Customs centralised the processing and payment of drawback claims. This has standardised the application of the excise drawback criteria and facilitated identification of fraudulent claims, before repayment has been made. The combined effect of these measures has been a reduction in the level of drawback paid on alcohol from £68m in 1996-97 to £26m in 1999-2000.

2.4  Departmental Trader Register (DTR)

  The registrations required under WOWG (ie warehousekeepers, owners and duty representatives) are held on DTR. This allows Customs staff nationally to access information which was previously held locally. Customs officers who have concerns regarding goods intended to be removed from an excise warehouse can quickly check whether the alleged owner is genuine (ie correctly registered). DTR also ensures that local Customs staff are aware of, and can visit for assurance purposes, registered owners whose goods are stored in distant warehouses.

UK Legislation

2.5  Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWG)

  The initial impetus for these regulations was the need to provide for the approval and registration of warehousekeepers. Previous policy had been to approve warehouse premises and regard the occupier as the authorised warehousekeeper. However, this policy was contrary to Directive 92/12/EEC and could, if successfully challenged, have compromised our ability to use other legislation which referred to "the authorised warehousekeeper".

  Operational colleagues had cited their inability to identify the actual owners of goods held in excise warehouses as a barrier to implementing effective anti-fraud measures.

  Many of those perpetrating outward diversion fraud were shadowy figures who were buying and selling warehoused goods without the warehousekeepers' knowledge. When irregularities occurred after the goods were removed from warehouse and enquiries were made to establish the ownership of the goods (and thereby the person liable to pay excise duty), the audit trail invariably led to missing traders.

  The Warehousekeepers and Owners of Warehouse Goods Regs 1999 (WOWG) provide for the authorisation of warehousekeepers. They also require UK revenue traders (the owners of the warehoused goods) to be registered with Customs if they wish to deposit duty suspended goods in an excise warehouse or deal in warehoused goods. To prevent fraudsters from avoiding the need to be registered by moving their operations overseas (nominally at least), the Regulations require UK duty representative to be appointed to act on behalf of non-UK owners. The benefits of WOWG are:

    —  Customs can identify those persons dealing in warehoused goods. Credibility checks are carried out on owners and warehousekeepers by Customs prior to authorising them. We have an opportunity to reject applications for registration;

    —  a UK based person is always liable to pay the duty whenever the WOWG requirements are not met.

December 2000

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 26 March 2001