Select Committee on Northern Ireland Affairs Minutes of Evidence


Examination of Witnesses (Questions 442-459)

JOHN HEALEY, MR PAUL GERRARD JANE KENNEDY AND MISS MARGARET O'MARA

WEDNESDAY 12 JUNE 2002

Chairman

  442. Good afternoon, ladies and gentlemen. Welcome to you all. It is very unusual in a select committee to start off with a word of sympathy for a minister but, with less than two weeks in office, you do have our sympathy. You are ably supported by Paul Gerrard who is an old friend who has given evidence to us very well and robustly before and we have seen the minister many times before. As you know, we are looking into the cross-border road fuel price differentials three years on, after the previous committee in the previous Parliament conducted an inquiry into it. Perhaps I could start off with a Treasury inclined question. We were told both by Treasury and Customs officials about the difficulty of obtaining meaningful estimates of the revenue lost to the Exchequer as a result of fuel duty differentials specifically in Northern Ireland and, although it is difficult, the estimate which we have is that the loss to the exchequer in 2000 was about 380 million, 150 million in lost petrol duty and 230 million in lost diesel duty. Are these difficulties involved in gathering data being addressed?

  (John Healey) I wonder whether you would permit me to offer some opening comments, or would you prefer to go straight into the questioning?

  443. If you have anything specific to tell us, certainly, if it is brief.
  (John Healey) I am grateful for the words of sympathy at the outset. I know it will not last but it is a pleasure to be here. It is a committee with formidable experience and, from my point of view, in what is my third day in the job, in effect, it is quite a forbidding prospect appearing before you, but I am very ably supported by Paul Gerrard, who you have met before, and jointly with my colleague, Jane. In a sense, it was very prescient for the Committee to ensure you had two ministers here rather than just one. In many ways, the inquiry that you are conducting now seems to me very timely. It is timely to revisit the report that you produced in 1999, first because, from our point of view, it offers an opportunity for the Committee to contribute to the developing multi-agency approach and the next stage strategies that we are beginning to put in place for enforcement in this area. Indeed, perhaps also to reinforce the commitment of those agencies within the province to that multi-agency strategy which is going to be so important. In some ways, the Committee might claim some paternity credit for some of the progress that has been made in the three years since you first produced your report because in a way that report helped focus concern and attention on the problems of oils fraud in the province. Since then, I know that the Committee will be aware that Customs has significantly increased the resources it has put in so that the number of officers deployed in the province has gone up from 25 following your report to 163 in January 2001. As a result of those increased resources, we have seen a very significant impact in the seizures that Customs have been able to carry out. Fuel seizures have doubled, vehicle seizures have trebled and laundering plants that have been broken up have increased more than five times. In the last full year for which we have results, 2000-01, those 17 laundering plants had a capacity to produce 85 million litres of fuel. The concern however is that at present we still have no accurate estimate of the fraud problem disaggregated from the cross-border shopping. Therefore, assessing the actual impact, which is what I suspect all of us are most concerned to see, of Customs on the problem is extremely difficult. The most useful independent indicator, the one that is used by the trade, is the volumes of legitimate UK duty paid deliveries into Northern Ireland, principally from the UK mainland. After four or five years of decline, following your report and an increase in Customs activity, we have seen a stabilisation of those and in the most recent period, the year ending November 2001, we have seen those increase by seven per cent. That is an encouraging sign but sustaining and stepping up the impact that we are having on enforcement is going to depend crucially on being able to align the work of Customs with the Inland Revenue, Trading Standards, the police service in Northern Ireland and local authorities. It is that multi-agency approach to oils fraud which is going to lie at the heart of any sustained solution to the problems we face. We are fortunate in that respect that the work is being given a significant boost by the Organised Crime Task Force because it is within that context that Customs are pulling this effort together, of course chaired by my colleague, Jane Kennedy.

  444. We have heard about that and we will be reporting shortly about certain aspects of the progress that you have been making there. Can I turn to the licensing of the filling stations because there is a different regime in Northern Ireland from the rest of the United Kingdom. Are you considering updating the Act? To remind people, it is the Petroleum Consolidation Act (Northern Ireland), of 1929 which governs the regulation of filling stations in Northern Ireland. It would seem that there would be a very broad welcome for any rationalisation and updating of that to prevent some of the current operations which are going on.
  (John Healey) The short answer is yes. The slightly longer answer is that the Act dates from 1929 which suggests that it is probably overdue for review and updating. It is a licensing regime which principally applies to petrol rather than diesel, which is overseen by local authorities and, because of our concern that if we can clamp down on the retail network through which the fraudulent fuel—whether that is laundered or smuggled—is distributed en masse, we have a real chance of cracking down on the problem. Consideration of the questions of beefing up the licensing is one of the matters that is part and parcel of the work that is being done under the aegis of the Organised Crime Task Force. Discussions are going on between the agencies and they are concerned to see whether there is a potential for tightening up the licensing and, by so doing, playing a part for those agencies that I mentioned in being able to clamp down on the retail fraud.

  445. If the short answer is yes, the government is going to change the law, the short question is when?
  (John Healey) The likely responsibility for that licensing legislation lies not with the UK government but is a devolved function of the Northern Ireland Assembly.
  (Jane Kennedy) One of the initiatives that has taken place directly relating to this is that Customs, I understand, have appointed a liaison officer who is actively contacting local authorities with a view to encouraging them to use the powers that they already have under the licensing regime that exists and with a view to doing spot checks on petrol stations to make sure that they are complying with their current licensing regime. That, we hope, will certainly highlight those who are not. Particularly, they will be looking for laundered fuel because it is so easy to detect. In the light of that process, we are quite confident that, where we do find people in breach of their licensing regulations, we may well find that there are other activities that they are engaged in as well. That is an initiative that is underway at this present time.

  446. It was Mr Gerrard himself who told the Committee, "If we did have an effective licensing system which had real teeth, that would be a very useful weapon to stop fraud." It is quite clear that everybody wants this but when you say that it is up or down to the devolved Assembly to do this, surely it has to go wider than that because at the moment, as we understand it, it is a question of health and safety and trading standards. What we want is a regime that is properly policed from the Customs and Excise, police and every other point of view, to make sure that the criminal activity which is extensive is curbed. Can you leave that to the Northern Ireland Assembly to do alone or will it require some UK legislation? That has been our understanding, that it would.
  (John Healey) On the narrow issue of the current licensing of retail petrol stations, that is where the Northern Ireland Assembly power resides. You are right to say that, at the moment, the licensing regime essentially concentrates on health and safety issues. Beefing that up and having multi-agency visits so that you have trading standards going on with Inland Revenue, Customs, health and safety officers at the same time gives the opportunity—and we have one or two examples where this has been done in practice—of being able to clamp down from a number of different directions and potentially catch those who are engaged in this trade.

  447. But you cannot close the offending station down, which is the sanction that would probably be the most effective.
  (Jane Kennedy) You can if you take their current licence away.
  (John Healey) You can close them down at present, essentially on health and safety grounds.

  448. How many have been closed down?
  (Mr Gerrard) I hope my information is accurate but there have been three occasions where enforcement action has been taken and, on one occasion, before the licence was revoked, the trader withdrew from trade. I am not aware of any occasion on which a licence has been revoked.

  449. They cannot take the sanctions they want to take because the legislation is not appropriate. That is right, is it not?
  (Mr Gerrard) It is. It is one of the things that, within the Organised Crime Task Force, we are looking at, how we can more effectively drive that process forward.
  (John Healey) The Committee may be aware that there is a UK-wide initiative that was confirmed in the Budget by the Chancellor to try and clamp down on the problem on the mainland and in the province of rebated oils fraud. One element of that involves a new approval scheme which will require all distributors to be authorised by Customs—in other words, in effect, to bring Customs into play as one of the agencies that will have a role in any form of licensing. It will oblige the distributors to provide regular returns to Customs and their customers and it will oblige them to take reasonable steps to ensure that rebated fuels are not being bought by people who are not entitled to purchase them. Also, it will beef up the penalties that may be available, so that there is a range of penalties where those obligations are not fulfilled.
  (Jane Kennedy) On this particular issue, you are absolutely right that the licensing regime has to be the right one. Just having a licensing regime in place is not going to be sufficient to enforce the law and to make sure people do not abuse the system. As a result, because we are conscious of the need to continue to reinforce for the different agencies involved in law enforcement the need to coordinate their activity, we will be launching on 26 June an expert group, bringing together the different agencies who are particularly concerned with fuel taxation fraud; and that includes the issue of smuggling, cross-border activity but also laundering and other elements of it. As part of that expert group, we will be inviting representatives of health and safety organisations based within local authorities who have precisely these kinds of responsibilities to join that group to make sure that all of the agencies who are responsible for enforcing the law are working together to maximum effect. From then on, it will be very much a working group of officials representing different agencies.

  Chairman: That is very encouraging news indeed and we will watch the progress closely.

Mr Beggs

  450. You agree that any benefit from the extended licensing regime will depend largely on a joint approach to law enforcement from all the agencies involved. We all welcome the Minister's announcement that a multi-expert group to tackle evasion will be set up. Could someone tell us a little more about how this group will work and what its priorities will be?
  (Jane Kennedy) Initially, I will chair the first meeting to impress upon the different agencies that we will be inviting to participate the importance of their coordinated role in this. There needs to be an understanding within the agencies that they need to coordinate and cooperate, share intelligence, share operations. The first meeting will be very much a launch of this group. Thereafter, it will be a series of meetings very much in the mould that we have established with other expert groups. They will be led by the lead agency in that field. In this case, I expect it will be Customs who will be the lead agency, but there will be representatives of the Northern Ireland Office offering secretarial support to the group and representatives of PSNI and trading standards, everybody who is perceived to have not just a public interest but a practical, law enforcement interest in this field. The objective will be to encourage those agencies to work together as effectively as they can. That is not to say that cooperation does not exist at the moment, but it is to make sure that, where cooperation can be improved upon, then it is.
  (John Healey) The Inland Revenue will also be involved in that. In a sense, it is part of the process that has already begun because over the last nine months Customs have done a good deal of bilateral work with the agencies that we need to pull together. The launch of the group and the meeting that Jane will be chairing on 26 June is a culmination of that preparatory work.

Mr Pound

  451. I find myself in a rather difficult position because, on the one hand, I am absolutely delighted to hear that you are rolling out this exciting initiative involving multi-agency, interdepartmental, cross-sectional initiatives and I am greatly impressed. However, I am slightly saddened because I was going to ask you precisely why you were not doing that. One of the great skills and pieces of genius that you bring to the job, Minister, is anticipating the Members of this Committee. Could I ask what the involvement of the Northern Ireland Executive is? How are you working with them in this particularly exciting initiative?
  (Jane Kennedy) Which particular department will it be?
  (Miss O'Mara) The Environment Agency. There are a number of others involved in it, but Customs, in inviting people, although the Minister is chairing it, it is very much a Customs led operation. It is a joint operation but, as I understand it, when Customs have been sending out invitations, they are inviting people from the devolved administration too, but we also have a group within the Task Force that liaises specifically with the devolved administration so that people know this is happening. The last thing we want to do is to cut across any responsibilities there.
  (Jane Kennedy) One of the other important roles of the Task Force is to raise public awareness of the problems and at the launch of the second year report, which took place in May at Hillsborough Castle, the Secretary of State and I drew attention to the problems with health and safety. We had a big wagon parked in the forecourt of Hillsborough Castle to demonstrate what risks these people are taking when they are moving illicit fuel around the country. We were supported in that launch by the first and deputy first minister. There is very close liaison between us as Her Majesty's Government Ministers and the ministers in the devolved Assembly.

  452. You are involving environmental and heritage services, Customs and Excise, local authorities and all the other key stakeholders and participants. How about the role of local authorities, bearing in mind that they will tend inevitably to take a parochial view? How do you think they will take a joined up, province point of view?
  (Jane Kennedy) I have every confidence that they will rise to the challenge. If I were to take the experience we have had over the time of the Organised Crime Task Force, there is already an increasingly close working relationship between trading standards officers on the ground and police and Customs, particularly in combatting counterfeiting goods at markets. We have had particular success at some of the regular, Sunday morning, car boot markets that we see around the country.

  453. Jones Brothers?
  (Jane Kennedy) Jones Brothers being just one of the venues that I had in mind.

Mr Barnes

  454. A straightforward solution to the problem we have would seem to be that on the island of Ireland we should have sufficient duty harmonisation to make it no longer worthwhile for there to be an illegitimate trade or even a legitimate trade that takes place. In pursuing this, could I clarify what our understandings are about the legal position in relation to the European Union? I understand that from European Directive 9/82 it sets minimum levels for tax on mineral oils but it does not enforce the rate which is to be set; nor does it prevent a Member State from imposing different levels throughout its territory. Is that an understanding between us as to what the position is?
  (John Healey) That is correct. It is being examined at present and has been for the last couple of years, rather fitfully, in terms of updating that. It does indeed set minimum levels of duty but on either side of the border the duty rates currently set are significantly above those minimum levels, so that would suggest that any new European-wide framework that may be agreed is unlikely to have any impact on the issue that you are raising.

  455. There seems to be no legal impediment upon what I was suggesting initially. I know that within the Directive it allows for provisions in which there might be breaches of some of the provisions of Community law that would distort competition but that would not come into play in connection with what I was suggesting about duty harmonisation, would it?
  (John Healey) No. If the decision was taken to try and reduce the duty rates in Northern Ireland specifically, a derogation would be required from the European framework, at the moment the structures directive. It would not be unprecedented but it may be difficult to do. The existing derogations, as is quite common in European law, were already in place when the Directive was first introduced. Technically, it would be possible to make a case for a fresh derogation. It may constitute state aid which would run into additional parts of the European Commission's process of decision making. Technically, it would not be impossible but it may be difficult to do.

  456. But it is quite likely that it would be possible to produce harmonised rates on the island of Ireland or sufficiently harmonised rates without the European Union's provisions being insurmountable in these matters. If that is the case, why has it not been done? Why are you not moving towards a pattern in which the rates for Northern Ireland are reduced in order to rid us of the problem?
  (John Healey) Because I would want to argue that it is not simply a technical issue and that it is not as simple a solution as it might first appear. There are several dimensions to that. First, it would be a very significant move in principle from the fact that we set national, UK tax and duty legislation.

Chairman

  457. Mostly. There are exceptions.
  (John Healey) Secondly, it is not simply a question of duty levels and revenue raising. As you well know in other policy areas, we use the tax regime as an instrument to pursue certain social, economic and, in this case particularly, environmental objectives. There would be policy consequences for a reduced duty in Northern Ireland, particularly in the environmental field, where you will be aware that we have used differential duties very effectively to alter the consumption patterns of fuels on the roads. We have covered the question of technically whether it may be possible or not. The third concern is that it would deal with only part of the oils fraud problem that we face in Northern Ireland. It would unarguably deal with the incentive to smuggle. It would not touch the very significant problem we have with laundering of rebated fuels. The sort of judgments that I have heard in the last three days from professionals that operate in the province and the fact that we have in Northern Ireland significantly and uniquely as far as the UK goes a well organised, criminal-based distribution network would mean that we would be likely to see a very smooth substitution of smuggled fuel for increases in rebated fuel. Finally, from the point of view of the Treasury, a not insignificant concern would be that, were such a move to be made in Northern Ireland, every one of us in the room can anticipate very quickly pressure from other parts of the UK for a similar cut in fuel duty which would indeed need to be significant in order to have the impact on the problem that you wish to tackle.

Mr Barnes

  458. As far as the environmental impact is concerned, a reduction in duty would obviously be liable to link to greater usage and therefore greater problems of pollution from vehicles. On the other hand, there is an extra use of vehicles at the moment in order to collect illegitimate fuel from Ireland and also to deliver illegitimate fuel across the border. It is a matter of swings and roundabouts. Might it not even itself out somewhat and are there any investigations taking place to discover what these likely consequences might be?
  (John Healey) The best estimates that we are able to do on that question suggest that the sort of cross-border shopping traffic that we see at the moment produces, from the vehicles that undertake it, about 33,000 tonnes of carbon per year. The total UK pollutant output is 31.2 million tonnes so in those terms the argument that it would have an environmental benefit suggests that, at that type of level, its impact and contribution in environmental terms would be negligible.

  459. On the Treasury arguments that you produced, it was really to do with the impact within other areas of the United Kingdom and the pressures that might flow from that because within Northern Ireland itself there would be considerable savings as far as the Treasury was concerned. All the illegitimate fuel which is being brought in, ignoring the laundered material, would go in those circumstances and all the purchasing legitimately of petrol from the Republic, where there is no duty paid upon it, would go. Also, all the extra money that is having to be spent on enforcement through Customs and Excise would begin to be tackled. Is there not, looking at the Northern Ireland position, some considerable economic advantage in doing what I was suggesting?
  (John Healey) I appreciate, as a Member of this Committee, why you have such a strong focus on Northern Ireland. From the Treasury point of view, the concern must be for the potential impact on the UK. I have explained that it would undoubtedly lead to demands from elsewhere for similar sort of treatment. That would be the first thing. The second thing is that decisions about taxation inevitably have a balance of a number of different objectives. There is a simple cost benefit in revenue terms about whether a particular duty delivers more than it costs to enforce, but principally and increasingly, as you will have seen with this government, an interest in using fiscal and economic instruments for other ends—in particular I turn to the impact we have had on certain environmental objectives—means that we have quite a complex context of decisions and policies to take into account. It would be a very significant departure from the essential principle that we have a unitary, UK tax regime with nationally set duty and tax rates.


 
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