Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 180 - 199)

WEDNESDAY 28 NOVEMBER 2001

MS DAWN PRIMAROLO, MP, MR MICHAEL HANSON AND MR DEREK HODGSON

  180. It is not yours, it is the Treasury's.
  (Ms Primarolo) With respect, Mr Roques went wider than his original remit because he saw that as relevant. He covered a number of things, which are very helpful.

  181. He said he considered that outside his terms of reference.
  (Ms Primarolo) What he has recommended, and he is a well-respected authority in these areas, is what Customs has to do to bring itself to where he believes it should be with proper checks and balances and the combination now of the broad targets, the monitoring through their PSA targets and the clear responsibility—

  182. Do you not think it is a Treasury monitoring responsibility?
  (Ms Primarolo) With respect, what is the point of commissioning an independent investigation, getting them to make recommendations, and then —

  183. Because that was not in his terms of reference.
  (Ms Primarolo) Because it was not relevant. What is relevant is what is happening in Customs, and that is what he has identified. Surely it would be much more serious if I had come here and said, "It was very interesting, but I am not going to act on the recommendations". We commissioned an independent investigation; it was very thorough and he made his recommendations. That has all been acted on. There are new checks and balances in place. The Department is being monitored and is monitoring itself in a way that Mr Roques believes will therefore ensure that it does not happen again. To instigate independent advice and then not take it, is just—

  Mr Laws: That is not what I was suggesting.

  Chairman: We want to move on to the estimates of revenues.

Mr Mudie

  184. The first one you might not be able to talk about because you were not there. We are asking why, under the Roques Report at page 192, he points out that the Department preferred not to publicise the specific estimates which were available on lost revenues on the grounds of the lack of robustness. Why did the Treasury accept that decision not to publish, or were Ministers even aware that estimates existed? You might not be able to answer that because it was not on your watch.
  (Ms Primarolo) I understand that Ministers were not aware. I think that is what Roques says, that this remained internal with Customs.

Chairman

  185. Were officials aware?
  (Ms Primarolo) In Customs, yes, but not beyond, hence the methodology now.

Mr Mudie

  186. In terms of revenue and estimates (and I have read the documents albeit briefly, discovering their existence at lunch time) are you happy with the robustness, for example, of the tobacco revenue estimate and the basis of arriving at that estimate?
  (Ms Primarolo) Yes. The tobacco estimate was provided when I was Minister and the strategy was again implemented by the present Government and it is working very well. Part of the reason, and I appreciate that you would not have had time to look in detail at this, now for giving the methodology—and if people have comments, they are going to comment—is to expose that to a wider assessment but certainly, in terms of the Treasury and Customs, the tobacco strategy was subjected to considerable scrutiny in terms of its correctness and its achievable targets. I would say that when we introduced this strategy, we were told that the targets would not be achieved, and they have been. For instance, the 21 per cent—

  187. I am not so much worried about the target as the information that the target is based on, the revenue estimates. Can you assure me that the basis of it, which is 1992-93, and having chosen that as a base, is that Customs and Excise tell us that smuggling was minimal in that year.
  (Ms Primarolo) In the sense that those figures have now been scrutinised on a wider basis - and we get into quite technical discussion about how these estimates are delivered - I am assured that the rigour with which those estimates are now made is very tight.

  188. There is a question that can be asked about the estimates because there are two ways of getting that: there is a household survey and the report points out that they have not published one since 1998. Having said that, the calculations all relate back to 1992/93 when Customs and Excise, with this appalling record over the last ten years, tell us that there was minimal smuggling that year. Is that a good basis for thinking these are robust?
  (Mr Hodgson) Certainly with regard to the estimates being up to date, you say that the data is based on 1998; yes, we accept that. We have had to do a certain amount of extrapolation. We will be looking at new data when it comes in. As regards the assumption that there was not so much smuggling before the Single Market—

  189. It says it was minimal.
  (Mr Hodgson) There is certainly operational evidence from that time suggesting it was very limited. That is what we have had to go on.

  190. Three years later it was £1 billion.
  (Mr Hodgson) It grew very rapidly.

  191. Two years after that it was £2.5 billion but it says it was minimal then. On what basis are you telling the Committee it was minimal in 1993?
  (Ms Primarolo) But Roques identifies the issues that occurred then, the emergence of the Single Market, the removal of all the internal arrangements that were possible before the Single Market. He then identifies a number of other issues that Customs were required to do that drew them further from direct operational contact towards relying on risk assessments. As Roques points out, there are better ways to do an assessment of your likely exposure to fraud, hence the change now. So this is also to do with how operationally Customs could operate before the Single Market.

  192. My next question is about indirect tax. In the document you acknowledge that smuggling and fraud have a debilitating effect on respect for the law and provide a source of funding for those organised through networks. When considering raising indirect taxes, how does the Government assess the risk that this will encourage the public to seek illicit sources of supply?
  (Ms Primarolo) I think, firstly, we have to be clear - and the Government would assess that - that in these areas it is systematic and organised criminal activity, that the arrangements and the activity around, for instance, alcohol diversion fraud was not as a result of anything other than extensive criminal activity that then shifts to find opportunity elsewhere. The NAO and Roques point out that as you close one area down, people try and seek out another area. If we look, for instance, specifically at the cross-Channel smuggling, you will see that in the report it clearly identifies huge success in breaking down that smuggling to the point of reducing it massively. So the issue for Customs and for t he Government has to be to understand the opportunities for that organised activity, which leads to the massive loss. The missing trader VAT fraud is a huge operation engaged in by criminal networks, and not somebody just taking the opportunity not to pay some tax. Many of these goods do not have any tax on them at all.

  193. Missing trader VAT fraud cost you £2.6 million in 2001. Is that the only type of VAT fraud that is significant and, if not, what other types of VAT fraud are costing you significant sums?
  (Ms Primarolo) Naturally, as a result of the Roques Report, we are asking Customs to look across the areas and to report to us. At the present time, their report is on missing trader fraud and they will have to report to the Minister on other areas of potential fraud or actual fraud across the whole area. That is being worked on now, as I understand it.

Mr Beard

  194. The Roques Report on page 69 at paragraph 3.20.5 states that in 1980 there were some 2,600 staff employed on Excise control work. Successive cost-cutting exercises and business re-engineering have reduced this number dramatically. The current level of less than 400 staff is surprisingly low, having been further depleted this year by the diversion of a further 100 staff to service the tobacco destruction strategy. Do you think this is a situation that has contributed substantially to the increased smuggling of alcohol and tobacco?
  (Ms Primarolo) Again, forgive me, the Roques Report accounts for what happened before this Government. I can tell the Committee what we have done since 1997. For instance, on election, we retained 300 anti-smuggling staff programmed to not be required any more. By the end of 1997, we had put in 130 extra staff on the IMPEX system. In July 1998, following the alcohol, tobacco and fraud review, we put in a further 145 staff. In July 1999 we commissioned the Taylor Report. In March 2000, in publishing that strategy, we put in place 955 staff. If we look over that period, mainly new staff and some redeployed staff account for some 2000 redeployed and recruited into these areas, which is some 10 per cent of the total of the Department's staffing levels. Whilst Roques comments on what happened before 1997, since 1997, where it has identified a weakness, the Government has a systematic, consistent and thorough record of addressing this issue and keeping pressure on the Department to do that. I think you can see that in the way that the Government was moving through this area in looking at the number of anti-smuggling staff that we needed and commissioning reports, trying to get to the bottom of the problems that exist,

  195. Yesterday's publication, along with the Pre-Budget Review, dealt with tackling indirect fraud and refers to Customs as having deployed 340 staff to tackle VAT fraud and having commenced the redeployment of an additional 146 officers to tackle spirits fraud. It says that specifically. Are these resources extra or are they redeployed from somewhere else?
  (Ms Primarolo) These are redeployed from within the Department as a result of the fraud estimates, particularly in those areas, and a reassessment of best use of the Department's resources in terms of where the pressure points are. Clearly, as the Department moves into discussions on expenditure, the question of resource will need to be addressed.

  196. The Roques Report brings out the threat of increased oil smuggling, tobacco smuggling and also the prevailing increase in drugs smuggling. Why does this report specifically mention spirits fraud? Is there a problem through all these areas?
  (Ms Primarolo) Which report are you talking about?

  197. I am talking about the one that came out yesterday, entitled Tackling Indirect Tax Fraud.
  (Ms Primarolo) In section 4, which starts on page 15, it states "tackling other forms of fraud" and goes through: missing trader VAT fraud, oils fraud in Northern Ireland and oils fraud in the rest of the United Kingdom. It then goes on to alcohol and spirits. It is covering those areas.

  198. So those numbers are not just related to spirits fraud?
  (Ms Primarolo) No. The 146 is just for spirits and the warehousing issue.

  199. Are you saying there are increases for tackling the other frauds?
  (Ms Primarolo) What I am saying is that in section 4 of this report it identifies the issues and explains what the strategy is to deal with that fraud. That is in the document that you are reading from, Tackling Indirect Tax Fraud. The second publication is entitled Measuring Indirect Tax Fraud, and that covers the methodology of how the figures were compiled for scrutiny by others outside the Department.


 
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