Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  180. On the day of the Pre-Budget Report, without a great deal of fanfare, you seem to have published this document on tackling indirect tax fraud. I am not aware—and this was mentioned by the Chancellor in his statement—it has a very brief mention on page 97 of the Pre-Budget Report. You published this new paper and it shows how the effectiveness of the Government's approach has been demonstrated, which sounds very encouraging. Then when you read the report you published on tackling indirect tax fraud, you go to page 15 about something you call VAT missing trader fraud which seems to be quite a significant fraud in the VAT system which started quite recently, there is this astonishing figure that you are estimating this type of fraud cost the Exchequer between 1.7 and 2.6 billion in 2000-01, which is a truly stupendous figure and a very large proportion of the total VAT collected. Can you say a little bit more about this and about whether there was this fraud prior to 2000-02 or whether this has suddenly emerged and how successful you will be in dealing with it?
  (Mr Gibbs) Sure. Perhaps I could explain a little bit about the document and why we are putting it out and I will try to do so briefly and then come on to try to answer the question about missing trader fraud. The reason we published this is essentially that having previously had a problem with tobacco smuggling in particular Customs established a strategy for dealing with that. The purpose of this paper is to show how they now feel ready to broaden that strategy out and apply it to other forms of fraud. The essential approach is, having identified a problem, to come up with the best estimate that you can of the size of the problem—those estimates are explained in a separate paper on measuring fraud—specify some targets, which would be done as part of the PSA process going forward, and then measure delivery against those targets. On the missing trader fraud actually the strategy is slightly more advanced than I think your question implies. It has been in place since September 2000. We do not yet have a full annual figure for its success but the indications are from the monthly returns that Customs are getting that the strategy is beginning to bite.

  181. Can I ask when you first became aware of the order of magnitude involved in this fraud? The top end of your estimate is the equivalent of a penny on the basic rate of tax. This is a pretty serious area of tax fraud.
  (Mr Gibbs) It is serious. Customs put a strategy in place to deal with it in September 2000. They were clearly aware that the fraud was very serious by then.

  182. Can you say what estimate you have got in the accounts for the current financial year and the next financial year for the costs of this fraud in terms of lost revenue: the 2001-02 and the 2002-03?
  (Mr Gibbs) I do not think I can, no. I am not sure that the accounts or the fiscal numbers forecast is prepared on that basis.

  183. Do you think you could send us a note on that?
  (Mr Gibbs) I do not think we have an estimate beyond the one that is in the paper.

  Mr Laws: You have no estimate for the current financial year?


  184. I think this is important, Mr Gibbs, in the light of the evidence the Sub-Committee has been taking in this regard. We had Mr Rocques and others along. I would urge you to send us as comprehensive a note as possible because I think we will be coming back to this in the Sub-Committee.
  (Mr Gibbs) Certainly we can send you a note on the estimate but I should say for the benefit of the Committee that of the types of fraud that the strategy paper identifies, this one is by far the hardest to estimate properly. The reason we are giving it a range is that basically you are trying to measure it indirectly. The bottom end of the range is based on comparison with other EU countries, this is an EU wide problem because the fraud involves goods crossing national boundaries and the trader disappearing and cancelling the VAT registration before the final VAT is paid. One way of measuring it is to look at the experience of other countries and try and see how levels of fraud there can be estimated in a UK context. That gives the bottom end of the range. The top end of the range is based on comparing data for imports and exports, so whether the goods declared to Customs in the UK as having been imported match up with what other governments have been told about the goods exported to the UK. It is all a very imprecise science relative to some of the other estimates. That is why we have given a range and that is why the range is so wide.

Mr Laws

  185. I want to be very quick, the Chairman is pressing me. Two quick things. One is would it not have been sensible to mention the magnitude of this fraud in the Pre-Budget Statement, Mr O'Donnell? It is quite a serious figure. The fact you have to search through some document which usually even Members of the Treasury Committee do not pick up, is slightly concerning.
  (Mr O'Donnell) Like I say, there is a reference to the paper, this is quite old, we are talking about September 2000.

  186. Not that old.
  (Mr O'Donnell) If anything on VAT, one of the things that is of real import is the NAO audited assumption which requires us to assume the VAT consumption ratio falls by 0.05 percentage points every year. That assumption, I do not think is going to be borne out in the future.

  187. Can I just ask one last question about this report which I found just as astonishing which is on page 30 when you give estimates of the revenue evaded through cross-Channel smuggling, that grew according to your estimates for 1996-2000 and then between 2000-01 you cut the cross-Channel smuggling revenue lost by 76 per cent in the year, including 93 per cent for beer, 84 per cent for tobacco. That is a most astonishing figure, is it credible?
  (Mr Gibbs) Yes.

  188. If it was so easy why was it not done before?
  (Mr Gibbs) Well, it has been done now and Customs have put the resources in. The resources have gone in.


  189. Was it the hand of God?
  (Mr Gibbs) No, it was more resources put by Customs into identifying and detecting smuggling.

  Chairman: We have not been impressed by the evidence we have had in the Sub-Committee so far on what has been happening. This seems an astonishing burst of energy initiative. I would ask Mr Gibbs to give us a report, and as full a report as possible, taking into account the evidence that has been provided to the Sub-Committee. We will be coming back to this in the Sub-Committee to deal with this.

Dr Palmer

  190. Turning to the reduction in stamp duty in undeveloped areas. Has the Treasury made any estimate of how much of this tax cut will simply be reflected in an increase in property values rather than reducing the net cost to purchasers?
  (Mr Gibbs) We have not made an estimate of that, no. I do not think it would be very straight forward to do so. I think we do expect that over time, to the extent that the tax incentive operates as it is designed to do, there will be some increase in the prices of properties in the areas affected but I think it is quite difficult to make estimates of the effect. It will depend on everything else that is going on in the economy at the time.

  191. Let me put it perhaps in a little more pointed way. If you own a property in the East End, one of the affected areas, which you had been offering at £150,000, and it attracts, perhaps, somebody for the City, when this announcement came through would you have said "Oh, good, we will cut the price" or would you have pocketed the £1,500?
  (Mr Gibbs) I think the transactions that people make are a matter for people involved. What we have done is we have looked at the policy, we have sought to design the policy to have the intended effect and one of the things it should do is affect people's decisions about where they want to live.

  192. The intended effect, would it be fair to say, is not really to reduce the house price but to encourage people to invest in deprived areas?
  (Mr Gibbs) Yes.


  193. On the last point, the issue of the Saving Gateway initiative, certainly a number of groups I have been working with in campaigns such as Church Action and Poverty indicate what they would consider the miserable level of benefits to live on. It is not enough for day to day living. The idea of people at that low benefit level saving money seems incredible to people. Have you had representations on that? Have you considered that issue?
  (Mr Holgate) Perhaps I could take that up. I am not sure we are intending that people living on benefit should be trying to save as well. One of the things that we may be trying out with the pilot starting next year is whether we make people eligible for a Saving Gateway account through becoming eligible for a Tax Credit or a Working Age Benefit "Passport". It may be a good idea when people are moving into work that would be a good chance to encourage them to develop a habit of savings so that they are more self-reliant when other vicissitudes might hit.

  194. If I understand the Saving Gateway correctly, it will offer qualifying benefits and tax credit claimants a pound for pound matching for any saving they make up to £1,000. It is for people on benefits who are saving. It is not correct to say that you are not asking people on benefit to save because this is part of the exercise.
  (Mr Holgate) It may or may not apply to people over a swathe of the income distribution. I should say that I do not think we have yet decided that it is pound for pound. We anticipate that there will be a matching element, it may not be pound for pound. You are right to say that we are thinking in terms of a maximum available match of £1,000.

  195. Political statements have been made on that pound for pound.
  (Mr Holgate) I do not think we have quite got that far. It remains a possibility.

  196. You are trying to say the Secretary of State has maybe gone too far.
  (Mr Holgate) No, no.

  197. You have drawn him back in.
  (Mr Holgate) There are a number of parameters to be set up just for the pilots, let alone the real thing later on. The degree and extent of matching is one of those.

  198. It is the end of the session but we may come back to that at some stage. One other issue on that aspect. When people are poor they are subject to unscrupulous lenders.
  (Mr Holgate) Yes.

  199. Have you considered this issue, that if people are saving pound for pound you would have those unscrupulous lenders targeting these people and giving them a loan in order to access the 300 per cent tax free return which the matching scheme offers?
  (Mr Holgate) Yes, I have to say that precisely that thought has occurred to me. It is a matter for the design of the pilot in the first instance and how we monitor and see what happens to people engaging in those pilots as to the extent of that sort of risk in practice. I entirely agree with you, that is certainly a problem.

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