WEDNESDAY 26 JUNE 2002

__________

Members present:

Mr Michael Fallon, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr John McFall
Mr James Plaskitt
Mr David Ruffley

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MR RICHARD BROADBENT, Chairman, HM Customs and Excise, and MR DAVID SPENCER, Non-Executive Director, HM Customs and Excise, examined

Chairman

  1. Mr Broadbent, could you identify yourself and your colleague for the shorthand writer.
  2. (Mr Broadbent) Richard Broadbent, Chairman, HM Customs and Excise. This is Mr David Spencer, Non-Executive Director of the Board of HM Customs and Excise.

  3. Thank you very much. When you appeared here some six months ago, I asked you whether the Board was actually operating as you would understand a Board to operate from the commercial sector. I think you were honest enough to hedge a little. You said, "It is operating as a strategic overseer." You said, "I am still trying to build the Board." You said, "I think we are getting there, but we are not there yet." Are you there yet?
  4. (Mr Broadbent) I think that we have made useful further progress, and I think now I would try to remove some of the hedges and say that we are probably as close to the best practice in the private sector as it is possible to get to in the public sector. There are some differences, I think, between the public and private sectors in this respect. But since we last met, we have managed to satisfactorily increase the number of non-executive directors, which is important. We have improved the quality and completeness of information going to the Board, and also, something which I believe I touched upon last time we met, and I attach particular importance to, we have been pushing forward and have fully implemented the restructuring of the organisation underneath the Board, which I have always found is a critical part of actually allowing the Board to do its job. So in those respects, yes, I believe we have now made better progress and I think we are now in a position where the Board can do its job as well as it is able to in the public sector, where there are one or two differences between the public/private sector Board.

  5. I just want to be clear about that. I think you also said to me that it was only over a period of time that the concept of a Board developed in the true governing sense. Is it now a Board?
  6. (Mr Broadbent) It is a Board now. It meets regularly. It has a balance of executive and non-executive directors. The executive directors are largely the operational business heads, and it receives full and complete reports from the Management Committee, which is actually the executive body which runs the organisation. I do not want to digress, I would just say that I think there were two really quite serious issues previously, one was that the Board itself was not perhaps of the right composition and structure, and Mr Roques pointed to some of those issues: the balance between executives and non-executives, and the need for the executives to be the people who ran the business. The other area which Mr Roques pointed to was that even if the Board had been of the right composition, it would have struggled to have done its job because for the Board to do its job of overseeing the organisation, there has to be good executive decision making in the organisation to oversee. I would attach as much importance to, for example, the creation of a Management Committee which runs the organisation which the Board can oversee, as I would to the actual steps we have taken to strengthen the Board itself.

  7. Fine. Let me ask Mr Spencer. Do you think the non-executive directors now have access to all the information they need to discharge their duties?
  8. (Mr Spencer) I think they do. I think since the year 2000 there have been some significant differences in the way that the Board has been structured, the way that it interacts with the Committees beneath it, and the way that it discharges its duties. I think much of that is down to having a new Chairman, Richard Broadbent. The executive team is now very clear, whereas those accountabilities were not clear before, and I think the more streamlined committee structure allows the Board to more sensibly question and interrogate those committees as they report to the Board. In addition to that, the strength of the Audit Committee within the organisation, one of the sub-committees of the Board, which now has non-executive involvement and it has teeth, I think that has also been a significant step forward as well.

  9. You have actually been on the Board for 6 years, I think?
  10. (Mr Spencer) That is correct.

  11. How did you operate previously?
  12. (Mr Spencer) My role with regard to the Board has somewhat changed over that period. Initially, and before I arrived, Customs had no non-executive directors, so myself and another colleague, Graham Pecan(?) were the first, and I think there was a period of time when neither party quite knew what the expectation of non-executives was. But Customs have taken a significant step forward. They had embraced external contribution to their meetings, but, significantly in those days, myself and my colleague were excluded from Customs and Tax Policy issues and discussions - quite specifically and explicitly excluded from those issues, so we were never really contributing to the overall government of the organisation as a private sector non-executive would. That has changed: my own personal role in that has changed in that I now sit on the Audit Committee, whereas I had not done so previously, and secondly, there are no longer any no-go areas or exclusion zones from my own contribution.

  13. I understand how it has changed, I am just puzzled as to how you were exercising your functions properly during your first four years if you were excluded from these areas. How could you say to yourself you were properly performing the function of a non-executive director?
  14. (Mr Spencer) I think it was a somewhat unique situation. It was not the private sector. The statutory duties rested with the Commissioners of Customs and Excise and not with the Board, and the Board at that time was a very loose term. It is not one that either myself or my colleague, at that time, would have regarded as a correct and fully functioning private sector Board. It was far from that. It has changed substantially in recent times, and I am much more comfortable with where we are now today than we were 4, 5, 6 years ago.

  15. And were you trying to put right these failings in your first four years?
  16. (Mr Spencer) Failings is perhaps a strong word. I think at that time, of course, the failings were not obvious. They were items for discussion. The structure of a Board of Customs and Excise with non-executive involvement was a new concept. It was very difficult at that point to say where the successes and failures lay. I think, with the benefit of hindsight, those have become clearer. At the time, as I say, it was very much a first step for Customs and Excise to take on board outside directors, with never having a history of that kind of intervention before.

  17. Mr Roques, in his report, said it was impossible to obtain a full set of Board Committee documents such as Board minutes before 1997. You were there then: did you get Board minutes properly?
  18. (Mr Spencer) I had a number of comments to make to Customs over that period about the Board minutes and about the committee structure. I would receive vast amounts of paperwork -- and I was fairly well known in the organisation for having been critical of this -- and, therefore, the administration which surrounds Board meetings has sharpened up and changed significantly. We now get meaningful Board papers, manageable Board papers, and they are quite focussed. So, at that time, change was required; that change has happened. Some of that change happened back then as well. It is not all just in the last two years.

  19. I just want to be clear: do you have a set of minutes for all the meetings you have attended?
  20. (Mr Spencer) Yes, that is correct.

  21. Mr Broadbent, in the Spring Report, you say you will measure success by your ability to meet outcome based targets by satisfaction surveys, and by the extent to which the Government see you as a first choice organisation for new tasks. Based on that, do you think you have had a successful year?
  22. (Mr Broadbent) That statement was as a result of about 12-15 months' work with a management team which I think needed a great deal of work to develop into a management team, and it is a very recent statement, which is why it appears in our Spring Report and has not appeared earlier. Have we had a successful year? I think we have had a mixture. On the one hand, I think that there has been a great deal of change in the organisation. We have not just been making changes at the Corporate Government's level, we have introduced a restructuring of the organisation, which, I think I will use the word "radical". It has moved, essentially, from a wholly regional to a wholly functional structure, one from where there were 11 directors with many overlapping responsibilities, into half a dozen very clearly defined - I do not want to go on about the level of operational change which perhaps has had some impact on the activities of the organisation, and, at the same time, we have undertaken a very major programme of asking most of the people in the organisation, certainly most people at management level, to behave differently and to do different things. We are trying to encourage different attitudes and values and behaviours, and, in particular, to attach an importance to the impact of what people do rather than just doing it and completing a process. Those things have had some impact . Change has a cost. On the other side of the coin, I believe that we are doing some things we have not done before, and we are adopting a different approach in most of our areas, including collecting tax and in law enforcement. I do believe that there are some signs that - our stakeholders recognise this - so, for example, when we developed a new approach in law enforcement which identified pursuing money rather than pursuing the commodity of drugs, the Treasury has given us the responsibility of regulating money transmission services, which is a wholly new activity, and they gave us that responsibility and the money and the legislation to put it into place.

    Mr Beard

  23. Mr Broadbent, last time you were here, at the end of the session, you said you would go away and think about the way in which your organisation avoided having members of the criminal fraternity in your bonded warehouses, and after that, we received a communication which set out various checks that were done. Were those checks done on people who were involved in the fraud previously?
  24. (Mr Broadbent) Sorry, which people?

  25. The people who were involved in the case which led to a loss of 640 million whilst the malfeasors were being supervised.
  26. (Mr Broadbent) The way we approached that was to essentially do a risk assessment of all the warehouses and start with the ones we assessed at being highest risk, then working down through them. I would need to check whether our risk assessment matched the past, but my expectation would be that insofar as those people are still in the business, they would have been incorporated in our checks, yes.

  27. But the question I am raising is whether the people who were involved in that fraud had gone through this process with a check?
  28. (Mr Broadbent) I do not believe we conducted these checks prior to the time we are talking about, the time of my last hearing.

  29. So these are new?
  30. (Mr Broadbent) These are new checks, yes.

  31. Right. Mr Roques also said at the time that he was surprised that the Management Committee never had any estimates of what were the likely figures smuggled against which you could compare your achievements. Do you now do those estimates?
  32. (Mr Broadbent) Yes. I think this has been one of the major changes, and has been a big change for the organisation, that we do now, for the first time, develop estimates of the total available tax take, if you like, for our major regimes, and we are trying to move towards a situation, which I personally welcome, where our targets are phrased in terms of the percentage of the tax we collect rather than the cash amount we collect, and that is certainly the way, as managers, we think about the organisation. Those figures were published for all the major Excise regimes, in some parts, for VAT in the pre-budget report last November, and the Government said they wanted a completed analysis on VAT, which is a significantly complex area, it will be bringing those numbers forward as well.

  33. You mentioned before that Customs and Excise were in cooperation with the security services: how well is this cooperation with M15 and M16 working?
  34. (Mr Broadbent) The cooperation, in my view, is excellent, and I would say three things about it. I just need to tread slightly carefully. One is that there is a significant interchange of personnel between the organisations now, which is new in the last two years. I personally welcome that a great deal. I made it very clear when I arrived and went to see the agency heads that I thought there were areas where we would benefit from a skills transfer, and they have been very good indeed. For example, I will not talk about individuals, but there are people in our intelligence and investigation branches who were seconded from that organisation, and, equally, we have met certain requirements, particularly recently, which those organisations have had for skilled personnel. The second thing I would point to is that as we have moved progressively from trying to see our business as trying to do practical things at a particular point in a transaction, so trying to collect drugs at the border, for example, we are trying to move much more to seeing it as a chain of activities. We do not have the skill sets or people to act at all levels in the chain. For example, if you go upstream in the heroin chain, or upstream in the cocaine chain, we are working very closely with the relevant UK agencies, and, indeed, overseas Governments to take action in those areas. Yes, indeed, we are downstream with the police, for example.

  35. Do you have contact with them at Board level, just to supervise how well this arrangement is working?
  36. (Mr Broadbent) I meet regularly with the heads of both agencies, and I was delighted recently to be able to announce that the retiring head of M15 is actually one of the non-executive directors joining our Board. I think he will bring a particularly valuable eye to our problems.

  37. Also, last time we were talking, there was a review of whether Customs and Excise should retain its prosecution powers because of the case that went wrong, and now it has been agreed that you should keep them. What have you done to improve your performance over that which caused them to be reviewed?
  38. (Mr Broadbent) It is not quite the case. We kept our prosecution powers. The conclusion the Government came to was that we would, if you like, retain the "housekeeping" of actually housing and looking after the solicitors and paying them. But the care of those cases have actually moved to the Attorney General, so if Customs wishes to bring a prosecution, it is now the Attorney General who takes the decision that it should be taken, and he has the care of the case. That is the key, safeguard, I think. I think the problem before was that we were both, if you like, judge and jury in deciding whether to bring a case. This separation of that power is important.

  39. That was what was recommended, was it, by the -
  40. (Mr Broadbent) That was the key recommendation in the Gower Hammond Report, and, in fact, it came into effect on 1st April this year. I now meet regularly with the Attorney General to see how it is going. As you would expect, an interface between a law enforcement agency and a prosecuting authority needs to be managed very carefully.

  41. The other question that arose last time was the phenomenal smoking habits of Andorra, where there were enough cigarettes imported for the population, man, woman and child, smoking for 24 hours a day for the whole of their lifetime and have some left over. Has this been gone into by yourselves or the Foreign Office, or, indeed, inquiring into the firms from Britain who are actually exporting them there?
  42. (Mr Broadbent) Yes, I think we have done quite a lot of work on tobacco since we last met. Indeed, it is a very major priority of ours. I was glad to have the opportunity recently with your colleagues in the Public Accounts Committee to have quite a long discussion about tobacco, and, as a result of that, they decided to call before them the Imperial Tobacco company to be asked a series of questions about their supply to countries like Latvia and Afghanistan. In fact, that hearing took place last Wednesday, and I think the report of the PAC is still awaited.

  43. Your note, Mr Broadbent, says, "The role of the Board has not substantially changed in recent years", which is a surprising observation, considering that it was seriously deficient in the past?
  44. (Mr Broadbent) I should probably apologise for the slightly - I think the wording was possibly not what I would have perhaps chosen if I thought it through. The point I was trying to get to was that my understanding, and indeed my view, and I think Mr Roques's view, is that the issue with the Board before was not that it should have operationally have been running the department. The Board cannot do that, it should be an exercise in proper oversight of the department, including its operational matters. And it could not do that for two reasons: one is that it lacks certain qualities, notably strong ones: active representation, composition of the Board, but secondly, and I think probably most importantly, it lacked anything to oversee. There was not an executive management committee, there was not an individual - the Board could not line manage the department. I believe the real essence of the changes that were introduced are clearly that we have strengthened the composition of the Board, but we have introduced into the organisation clear, focussed decision making structures where the management committee are six people who are solely and completely and explicitly charged with running the organisation, no hiding of difficult issues. So the Board now has something to oversee. When I say its role has not substantively changed, I do not mean to say it is not different, it is different, but I see it more as putting it in a position where it can discharge its role of strategic and operational oversight. It is not, I think, that Mr Roque suggested the Board should take over the running of the organisation, but it should be allowed to do its real job. And I hope the changes made now allow it to do its real job, hence taking on its proper role.

  45. Your note also says, "The Board reviews the strategic issues facing the department in its response to them." Do these strategic issues include operational and performance issues?
  46. (Mr Broadbent) Yes, we in fact have a Board meeting coming up in a fortnight's time. Beyond the normal reports of the Management Committee and Audit Committee, probably the major agenda item will be a review of tax strategies, and we are going to go through each of our taxes, of oils, tobacco and VAT, and we are going to be clear where we stand in relation to some of the issues we have been discussing in some detail, and we will seek to identify the issues that we need to tackle if we are going to continue to make progress. I hope the Board, particularly the non-executives, will tell us if they think we have got the wrong issues, or we are missing something or going too slowly. That will be a fairly typical Board discussion.

  47. Because that was one of the areas Mr Roques was surprised the Board never covered. What is the benefit from you now covering those areas?
  48. (Mr Broadbent) From the point of view of an organisation, and I do have a very strong belief in the benefit to a group of executives who get very close to problems from people who are a bit further away from them who need to say one or two things, or many things, but frequently, "You are missing something here", or "You are trying to pretend this thing is not going wrong, but it is, wake up", or saying, "Look, I faced this sort of problem before, what happens next is X". These are the sorts of inputs that I have most frequently seen on Boards which are of the greatest value. I think the relationship between executives and non-executives, like any other team, is a very organic thing that has to be built over some period of time. There has to be, if you like, sufficient trust for there to be robustness.

  49. Why are there no non-executives on the Management Committee? What stops them having the wool pulled over their eyes?
  50. (Mr Broadbent) The Management Committee is an executive body, meets at least weekly, often more than weekly, twice a week, so the non-executive would almost de facto become an executive by attending. I think that if they did attend, I would want them to be executives, because the Management Committee is the group of executive directors who I want to be accountable for the organisation. They have to be the ones who actually run the business. In a sense, if you have a non-executive there, it kind of allows an opening. But the truth of the matter is it simply meets frequently, therefore, a non-executive would become an executive.

  51. Mr Spencer, what changes have you noticed in the operation of the Board in the years since the Roques Report?
  52. (Mr Spencer) A number of changes. Firstly, as Mr Broadbent has already pointed out, we have more non-executive directors coming on, so I think the balance on the Board between executive and non-executive is going to be helpful and much more constructive, as Mr Broadbent was saying, for allowing people to see the wood for the trees. I think that will make a significant difference. I think also, because the Management Committee, the executive directors, if you like, are now clearly accountable and very clear about what their accountabilities are, their ability to report back on those issues and for the non-executives to be able to interrogate and question them on those issues is much clearer and much more simple. There are no no-go areas, therefore, the entire organisation is visible at that meeting, rather than just elements of it. I think those are the biggest issues. I also think, as a subset of that, if you like, that the Board now has the ability to set its own agenda, and therefore, I, as a non-executive, have much more influence in what those agenda items will be.

  53. What are the most significant agenda items that now appear that did not appear before?
  54. (Mr Spencer) There are operational reporting issues that now appear. Previously we had worked under the softer issues at these Board meetings, HR issues, IT issues, that were not tax or Customs Policy based, whereas now those operational issues are much more a topic for debate.

  55. Regularly?
  56. (Mr Spencer) Regularly, yes, very much so. They cannot be avoided now. They are pretty much standing items of the agenda that the executive directors have to report on.

    Mr Cousins

  57. Mr Broadbent, I wonder if I could bring you back to the Roques Report again. There were 65 recommendations, of which 62 were accepted, sometimes in modified form. It would be useful for the Committee, I think, to have, since time does not permit working through all 65 recommendations, an update on the comments that Customs and Excise provided for the Roques Report. If I could draw your attention to one or two of those: there was a proposal in the Roques Report to introduce tax stamps in order to reduce fraud for spirits, and the response then was that it was under consideration. What is the progress on that?
  58. (Mr Broadbent) There was a consultation period with the Trade, as a result of which, the decision was taken by Ministers not to introduce physical marks at this time. The reason for that was that the compliance cost, effectively, for the Trade, was very material. Instead, we have been asked, and we are now currently engaged with the Trade, in having a series of discussions about a voluntary scheme which the Trade suggest will achieve the same effect. If we are satisfied that it will achieve the same effect, and these discussions are continuing, we will act on that basis. If not, we will go back and give advice to our Ministers.

  59. When do you expect to take a decision about that?
  60. (Mr Broadbent) I would think the discussions with the Trade will take the order of six months. The decision on physical marks was announced in the Budget, so we have about six months' work to do with the Trade to be clear whether or not we can get a voluntary scheme which gives us the data we need.

  61. Another point made in the Roques Report was the need to devise what was put as a "close to zero tolerance policy" at ports and rail terminals. There was quite a sensitive response to that, which concludes with the number of vehicles seized by Customs and Excise in those situations rising 100 per cent to 10,219. I wonder what the figure for 2001/2002 was, just to see whether that improvement has been maintained?
  62. (Mr Broadbent) It was of the same order, I believe slightly higher. There was a change of policy. We implemented the policy, and we are not going to see another trebling of vehicles seized, I do not think. There are two things behind that: one is that actually the policy has been tremendously successful, and the figures we published last November suggested that the cross-channel bootleg trade, if you like, fell by 76 per cent in that year, so there are actually fewer vehicles to seize, which is a good outcome. The second thing is that, seeing that, what we have actually done is now extend the policy to HGVs, which I think is the next critical area, because increasingly, this trade is being squeezed out of the classic "white van" trade, but there is still a problem with commercial traffic and we are now starting to seize HGVs in certain circumstances, if we can find them with the goods on board and the driver knows it.

  63. Do you report to the Board on these sorts of indicators?
  64. (Mr Broadbent) There are generally very close contacts between port directors and my directors in ports. I do not think we have a national standard for reporting to ports our vehicle seizures.

  65. But if the Committee wanted to know how many seizures, whether it be of cars, vans or HGVs, that would be possible for us to know?
  66. (Mr Broadbent) I can provide that information. The HGV seizures at the moment are in the hundreds, because it is, as I said, a new policy, and the vehicle seizures would be broadly the same order of the previous year, but I am happy to provide those numbers.

  67. You recruited 146 extra officers as a result of the Roques recommendations -
  68. (Mr Broadbent) 146 officers were redeployed into Excise work, we did not actually recruit additional staff.

  69. Are you recruiting additional staff?
  70. (Mr Broadbent) Only in very limited circumstances at present. We recruited a number of staff last year to implement the tobacco strategy, quite a large number of staff over the last couple of years. We are not presently recruiting staff.

  71. Do you have enough bodies on the ground to do the job?
  72. (Mr Broadbent) I have quite a large number of bodies, and I think that, for me, the issue of resources goes as much to my ability to use the bodies I have got as to having more of them. That is a function of - the issues we deal with are highly geographically flexible, so often I have people in the wrong place; I need people with the right skills, and I sometimes need the systems to support them. And as much as the actual number of resources, I am concerned with these issues, the flexibility and the skills of the resources I have to deploy.

  73. Turning to the way that you report progress - this is not in the context of the Roques Report, but more generally - and looking at the Spring Report published in June, it is a bit dismaying that you only have Quarter 3 figures, rather than the full year figures?
  74. (Mr Broadbent) I recognise that. It is actually a function of the lateness of the publication of the Report, if I can put it that way, because - and I think it is true of other departments as well - but we had a particular problem: we assembled and hoped to publish our Spring Report rather earlier, because it was the latest date available at the time the Report was assembled. Then, I think, through a slightly unfortunate series of events, the Budget obviously came rather later this year and we had a new Minister, so we were faced with the challenge of, "Should we wait, rewrite the entire Report and then publish it later, or should we publish what we have now, and we will obviously provide the full outcome data in the Autumn when we publish our Autumn Report?", and we chose the latter course of action.

  75. But the full year figures are now available?
  76. (Mr Broadbent) The full year figures are available in some areas. It depends a little bit on which area we are talking about. For the simpler output measures we will probably have full year data, but if, for example, you asked me the question - outcome targets are significantly more difficult to assess, because you often have to do a lot of analysis of market share, commercial sales, a lot of external data is required to assess whether you have met the market share target, for example. So some figures we have, and some we would not have.

  77. I wonder if I could draw your attention particularly to rates of sickness absence. It does seem slightly extraordinary that you cannot report on full year figures for such a basic indicator?
  78. (Mr Broadbent) I would be very happy to let you have the full year figure, which I believe is not very different from the one which is published. It was just a decision we had to make about, "Do we publish the entire document as it is, or do we try and wait", and I felt it was already late, this report, and I took the decision to say we should publish it now and provide the full data in the next report.

  79. I did ask a number of Parliamentary questions in an attempt to compare Inland Revenue with Customs and Excise on some of these indicators like sickness absence. I think it is interesting that in fact Customs and Excise, on the whole, performs better on these indicators than Inland Revenue: ill health, retirements and sickness absence. There is one indicator that I asked for in questions which is not in your Spring Report, and that is staff turnover. Staff turnover in the last full year given for 2001 was almost 10 per cent, which seems quite high?
  80. (Mr Broadbent) Oddly enough, my own sense is that staff turnover is a little low for Customs and Excise now. I will explain what I mean: the greatest proportion of staff turnover we have is essentially in Central London and some of the other conurbations, and it will be a narrow measure of large numbers of people, including casuals, probably, who are coming in sometimes as a first job, sometimes because they need the work, and leaving after a relatively short period of time, and this is the sort of turnover which we have always experienced in Central London, perhaps in Central Birmingham. Outside the major urban conurbations, and excluding, for example, retirements, our levels of staff turnover are very, very low. In some areas, they are effectively zero. This makes it extremely difficult to manage an organisation when you are constantly challenged to move your resource from - you have a problem in the South East at the moment, but actually next year it could be the North West, so a moderate degree of turnover would be quite valuable. As I say, in practice, outside the major conurbations and outside the very junior grades, the lowest clerical grades, there was a staff turnover of close to zero.

    Mr Plaskitt

  81. Can we look at some of the statistics in the Appendix relating to performance of essentially, public service agreement targets. On page 19, for example, you had the target of a 6 per cent improvement in customer service from the 1999 base line. How exactly did you get on in respect of that target?
  82. (Mr Broadbent) It was broadly unchanged. The satisfaction index was 70.5 per cent, I think. Your target was 74.9?

    (Mr Broadbent) Our target was actually to achieve a 6 per cent increase in customer satisfaction, and the outcome was broadly unchanged satisfaction, although within that, I am glad to see that the number dissatisfied actually went down, but we failed to get that target.

  83. Do you know why?
  84. (Mr Broadbent) Not completely, no, but I think there are a couple of things I would say, beyond the fact that I think the target was itself quite ambitious. If you simply ask our taxpayers, "Are you satisfied with Customs and Excise?", 89 per cent of them say yes. The actual index of satisfaction takes a mix of questions, some of them quite qualitative and creates a base line, which is absolutely fair. Direction of this target is correct, but I just wanted to make the point that underlying this are some pretty high levels of satisfaction. In the course of the last year/18 months, we did a series of things which we thought would increase satisfaction. We introduced, for example, out of hours business advice services; we improved our website; we introduced cheap rate telephone call facilities, and the amount of dissatisfaction has gone down. I think one of the things we are learning is the provision of service is not necessarily quite the same as satisfaction, and I sometimes ask myself whether, in a sense, taxpayers can be satisfied, if you like, by our providing more services. We have dealt with this target and I am sensitive to that. The target is directionally correct. I think though, that we may need to think a bit more about how we actually increase taxpayer satisfaction. I am probably personally coming to the conclusion that we will not do that by going on providing service innovations. We are going to have to get to grips with something much more fundamental, probably linked to e-technology and IT, where we change the nature of the interaction of the taxpayer with us, which is essentially what our e-business strategy is directed at, but that is a 2, 3 year timescale.

  85. So are you likely to think again about this 6 per cent target and perhaps try to express it in a different way?
  86. (Mr Broadbent) I do no think it is quite catching - I do not have a problem with the target pushing us in this direction, but I do not think we are going to meet this target. I think the real problem -- we can go back, if you like, to output measurements which is easy. We can measure new services we provide, we can measure court(?) if answered. It was actually our idea, saying, "Let us go for an outcome, let us go for satisfaction", and we are learning now that it is quite difficult to measure, so I think we will try to replace it, but I would like to keep pushing to see if we can keep an outcome base rather than just going back to outputs, which are sort of Mickey Mouse, really.

  87. Next, you have productivity. Target outturn of +2.5 per cent, actual outturn -8.95. That is a considerable shortfall. What has happened there?
  88. (Mr Broadbent) We got the target wrong. This again was an attempt to try and create an outcome based target, and I do not want to labour the point, but I think it is sometimes underestimated how different an outcome target is from an output target, how difficult to construct and how difficult to get an organisation to meet. We used to have a series of essentially activity measures, and, in fact, the figures for those are still given in our reports. They are the unit cost of collecting tax and the unit cost of processing trade. Although the figures are not published in the Report, and perhaps we should have published them, all those measures have improved. As a matter of productivity, the unit cost of collecting tax is lower, the unit cost of processing export trade declarations is lower than it was a year ago. And indeed, I know that most of the outputs of the organisation in terms of the tax we collect and the law enforcement activities are the same or higher than last year, and you have manpower that is actually lower than last year. So they have led me to look very carefully into why this target has this rather interesting result. The answer is this: that attempt to create an outcome target is calculated by taking only a small number of our PSA measures - because not all of them are very easily translated into outputs you can divide by a cost - in fact, out of 60 measures, only 7 are included. Of those 7, 5 were actually paper based: "Did you get the returns in?" They are not, in my view, what I would call strategic outcome targets. Even then, in most of those cases, we actually met the 2.5 per cent target. There was one which was 40 per cent deficit which was debt collection, and the reason that debt collection was so far out was because of the success of our strategic drive to deal with that missing trader fraud. We have enormously increased the amount of debt we have on our books which is actually another way of saying we have uncovered more fraud and are dealing with it. It is an illustration of how complex these outcome targets are and how careful one has to be in interpreting them. We did have a debate about how far we should try to explain some of these things in this report. We concluded in the end to publish the raw data, and I think we are going to have to come to grips with this and give much fuller explanations in the future.

  89. That is interesting, because on some of them you do give an explanation, but on that one, which is a stark example of where you did not meet the target, surprisingly, there is no explanation, and yet what you have given in terms of an explanation is very interesting.
  90. (Mr Broadbent) Yes, and we do take a view to try and keep this report short. It is like mid year reports on our flowing of accounts. One always worries about sounding defensive, but I think in that case, we should have said, "A lot of evidence suggests our productivity is going up; the problem here is we have not been able to create a sensible productivity target base with outcomes", and we are going to have to think about this, because I do want to try and keep some sort of outcome based productivity measure.

  91. You referred yourself earlier to the annually reported measures which appear on page 15, the unit cost measures, really, which are all printed there. There is an interesting footnote at the bottom. It says, "Not appropriate to set targets for these indicators. They are designed to provide trend information." But how can we deduce trend from this table?
  92. (Mr Broadbent) Unfortunately you cannot, and, as I said, when I looked at the report, as one perhaps does sometimes, in hindsight, it might have been sensible to have published a series of figures. Again, we set out, as a Board, some sort of guidelines for this report. We wanted it to be clear, concise, brief, and so we say, "We are not going to get into explaining everything, we do not want trends", and I am afraid these figures dropped out.

  93. But if it is going to be a trend, you have to have the figures?
  94. (Mr Broadbent) I would accept that, and indeed, I am happy to say if we had put the trend figures in, the trend was a good one. It was the result of an overall decision to try and get a document of a certain sort. I would accept that perhaps we had not quite got it right in terms of what we published there.

  95. But the comparison has to be there for the whole thing to be interpreted. Will you make sure it is there in future?
  96. (Mr Broadbent) I would like to have a bit of a think about this document. I certainly think there are some areas where we did not provide quite enough information, and I would like, perhaps, to include some more discussion of the sort we are now having about the nature of these outcome targets. I would not like to commit myself now to saying exactly what data comes out of that, but I would accept that we have not provided enough information in that particular area.

  97. Are you suggesting that you might take the unit cost information out of the report?
  98. (Mr Broadbent) It is not a decision we have taken. I think the unit cost information may be useful. One of the difficulties with it is that it is very susceptible to changes in policy, changes in economic conditions, for example, the unit cost of tax collected is a function of the economic environment as much as our efficiency, so I am just wary that again, we might put some numbers in which then require quite a lot of explanation to interpret them, and now I am seeking to try and find a relatively small number of helpful targets. I am not saying these should not be here, I just do not feel I have reached a conclusion on that yet.

    Chairman

  99. Just looking back, for example, on this whole question of targets that we find in Appendix 2 on the 1998 targets, you say at one point, "15 million of assets seized." That was the target, I think. "Result: 8.3 million. Many of the cases we expected to come to court did not do so during 2000/2001." Why was that?
  100. (Mr Broadbent) We have no control over the judicial system. We can bring the cases to court, but we cannot control the timetable they go through in.

  101. But you said here you expected them to come to court?
  102. (Mr Broadbent) They came to court. We misjudged the speed they would go through at. Some of these cases have taken two years because we had to bring the case to court; you have to get your conviction; you then need to have the assessment of the financial situation; then you have another hearing to assess the benefits, and that whole process has taken somewhat longer than we anticipated. I am glad to say that the pipeline has now come through, and we are going to very materially exceed that target this year, because of this flow-through effect. But we did misjudge simply the sheer amount of time the judicial process takes.

    Chairman: Thank you both very much indeed.

    JOHN HEALEY, a Member of the House, Economic Secretary, HM Treasury, examined.

    Chairman

  103. Minister, welcome. Congratulations on your appointment. Welcome to the Committee, I think, for the first time.
  104. (John Healey) That is very kind of you. I am pleased to be here. In fact, this is only my third week, but although any assessments I have made so far are obviously early, sometimes first impressions are useful, so I am delighted to be here.

  105. We would like to begin, if we may, with Customs progress against the PSA targets, which are something which you or your predecessor had responsibility for. Are you satisfied with their progress so far?
  106. (John Healey) Generally, yes. On the details, particularly with the in-year targets where they are falling short, I think there are questions equally to be raised about performance, and, in fact, the nature of the targets, and, in some cases, the quality of robustness of the evidence and the analysis which underpinned their being set in the first place. Generally, yes, I am pleased with the progress, particularly in the context of what has really been a period of substantial change within Customs over the last couple of years, not just internally, but in terms of the environment they have been working in, and, indeed, the expectations of them.

  107. We have been examining the Chairman against the Spring Report which only takes his performance up to December. Do you, as Minister, have information on their performance more recently than that?
  108. (John Healey) The Spring Report is based on the third quarter outturn to December 2001. As you say, they were the latest set of figures that were available where we are tracking them in-year when we came to compile the Spring Report. What we aim to do is to update those probably in keeping with the PBR cycle when, as Mr Fallon, you may be aware, we are aiming to consolidate as much data as we can, both analytical data and progress data and projection data, increasingly in what will become a very substantial Annual Report, published to coincide with the pre-Budget Report cycle.

  109. That will be helpful, but my actual question was, given it is now June, have you yourself received any progress check on the last quarter, taking the story up to the end of March?
  110. (John Healey) No, I have not myself receive that data. I have been working off the data that we published in the Spring Report, and am now very much turning my attention to how we can improve the quality of the information that we report regularly, in keeping with the PBR cycle, in a way that really helps to establish a sensible basis for the strategies we need to put in place, and also helps put in place a much fuller range of information that allows the public, and indeed Parliamentarians, including your Committee, to examine what is being done and what is being achieved.

  111. The PSA targets we have just been talking about are the targets for 2000/2001, which was the first year after CSR 2000. We are now into the second year, 2002/2003. Why are those targets not in this Spring Report? Have they been set?
  112. (John Healey) No. You are right, the PSA targets and the Spring Report does concentrate on PSA targets, and are set for the spending review 2000 period, so they run from 2004/2005. In some cases, they will have been broken down so that they are, if you like, our annual or milestone targets during that spending review, in other words, the PSA period. Where they are identified, they are in the report. For instance, on tobacco fraud, we have a target to have reduced the share of the total consumption in the UK from illicit cigarettes to 18 per cent by the year 2004/2005, so that is in there. On some of the other PSA targets where there is not that breakdown, you do not find those figures. I appreciate that is somewhat piecemeal; that is the nature of the way that the PSA targets were set. I hope we can, in a sense, marshall our target setting, our milestones against which we judge the progress against those much more effectively in the future, and based, principally, on what I hope will become a much more substantial, much more informative, much more open Annual Report.

  113. So you are not going to add any mini targets for this current year after the year has started?
  114. (John Healey) We will not be adding mini PSA targets. They were set with the spending review period. What we may do, as we did last year, was to develop - where we had an increasingly sound basis for understanding the dimensions of areas of fraud, we were able to analyse more effectively than in the past what was going wrong, and then able to work out sensible strategies plus targets for dealing with it, then we may well be setting targets in the forthcoming year, as we did last year. An example of that is with the oils fraud, where, in the PBR last year, we published our analysis, not just of the problem as it stands, but importantly, of the projected worsening of the situation that we anticipated if we did nothing about it. We published proposals on which we consulted at the time of the PBR through to the Budget itself for the strategy that we thought we needed to be in place, and we confirmed that in the Budget with targets built into that. So in that respect, but separate from the PSA targets, which, of course, is the proper focus of the Spring Report, we may well do that. But they will not be PSA targets.

  115. The PSA targets, you have one for tobacco smuggling, but you do not have one for alcohol; why is that?
  116. (John Healey) On alcohol, you may recall, at the time of the PBR proposed tax mark system, rather akin to cigarettes, we consulted on that with the Industry, and in the end decided not to go ahead with that. It was a decision confirmed in the Budget. At the moment, we are now in more detailed discussions with the Industry to see what other much more voluntary based strategies we need to put in place, particularly on alcohol, to deal with spirits, and that is, although not sizeable in total tax revenue lost in the big scheme of things, nevertheless, significant in the spirits field at 15 per cent because it is a significant market distortion and undermining those businesses that conduct their affairs legitimately.

    Chairman: Minister, we will have to suspend the Committee now for ten minutes for the division. Reassemble at exactly 6.00 pm.

    The Committee suspended from 5.50 pm - 6.00 pm for a division in the House

    Chairman: We will resume. Mr Ruffley.

    Mr Ruffley

  117. Economic Secretary, could you just recap: you have not set a PSA target for alcohol for what reason?
  118. (John Healey) We have not set a PSA target for alcohol because PSA targets, of course, were set to coincide with the current spending review that we are more than halfway through. We have not set, subsequent to that, firm targets on alcohol and we are in detailed discussion, as I explained just before the short break in the Committee, following the consultation period where we proposed, as part of an anti fraud strategy, a tax mark, particularly for spirits where the main problem lies, and after consultation with the industry, came to the conclusion, which we confirmed in the Budget, that the practical and compliance costs of doing so would, at this point, be disproportionate to the benefits. That moves us into a different territory. We are determine still that we need a strategy to deal with alcohol fraud, particularly spirits fraud, and we will produce that when we have come to a sensible conclusion on what we can do in conjunction with the Industry.

  119. But it does not sound to me you are going to have a PSA target in the near future, because you do not know what the alternatives are to the marks system that you have looked at and rejected?
  120. (John Healey) With respect, you asked me about the existing PSA targets, and alcohol fraud, at that stage, was not set as a PSA target.

  121. I am trying to get you to explain why, and what the prospects are for some robust targets going forward?
  122. (John Healey) I think if you are looking for robust targets, then the prospects for those are good. How we precisely do that, we still need to settle in discussion with the Industry. The question of PSA targets, rather than robust targets in themselves, are a matter at the moment that we are considering, obviously in the context of the new spending review period, and the spending review settlement for 2002 we expect next month.

  123. What about the question about specific targets for VAT? What are your thoughts on that?
  124. (John Healey) Crucial area. One we have recently turned significant attention to. Crucial not least because the degree of fraud that we are able to establish accurately within the system will give a measure, not just of the loss to the Revenue and public finances, but the degree of distortion there is in the market for those businesses that do legitimately abide by the law and pay the VAT. As we explained in the Spring Report, and indeed in the PBR back in November, at present, what we are doing is assessing the extent of the revenue loss through VAT fraud and avoidance. We are still doing that work. It is important that we do that work in a way that gives us in Government, Customs, as the operational enforcement Agency, and Parliament and the public as well, a secure base line on which we can assess the scale of the problem, and then subsequently judge the impact or the outcome of any strategies that we put in place. Once we have completed that exercise satisfactorily, we will be in a position to produce what we are determined to put in place, which is a comprehensive strategy to try and deal with VAT fraud. That will be something that needs to tackle outright fraud; that will need to tackle avoidance; that will need also to encourage compliance; and will need also to encourage businesses that may at the moment be falling foul, essentially, through ignorance and error. So you can anticipate the need for a strategy that will deal with that range of problems right across this field. In a sense, Mr Ruffley, we will do what we have recently done with missing trader fraud. The process is the same: identifying the extent and scale of the problem, and understand the nature, i.e. sound analysis, and in that case, an estimated loss of revenue of between 1.7-2.6 billion per year, so certainly the most blatant form of VAT fraud which we are tackling. That is now then, as a result of that analysis, a top VAT fraud priority for Customs. Extra staff have been deployed to tackle this. We have targets for the outcome of this, in other words, the savings, the cut and the loss to the Revenue that we are looking for, which is 750 million by 2003/2004, and we plan to report on progress towards the outcome that we are seeking with any updates of our analysis that may be required on that annual cycle that I explained earlier, when trying to establish this link to the PBR cycle and since. What I suggested to you is that we have serious work in progress and a serious intent to produce a comprehensive VAT strategy, and a sign of our serious intent is demonstrated with the missing trader measures that we have put in place, which was the most blatant, and, arguably, the biggest element of VAT fraud that we were facing.

  125. That work in progress, when do you expect it to be completed?
  126. (John Healey) I would hope that the assessment would be completed later this year to enable us to move towards the publication of a comprehensive picture, plus a declaration of the sorts of strategies that we want to put in place.

  127. Would you say you are pressing it urgently as a Minister, because obviously, the longer it takes for the assessment to be reached -- and clearly, you have to do that work properly and thoroughly, we all agree with that -- but the longer it takes to get action on this, the more the Revenue base is suffering?
  128. (John Healey) This is certainly the missing big piece of the jigsaw in terms of the proper analysis and the strategy. You asked about my determination and sense of priority in this, and it is certainly is there, it clearly has to be a centrepiece of what we try to do over the next few years.

  129. But you think the end of the calendar year? Is that what you were thinking?
  130. (John Healey) We are aiming, and I am pushing, to have the analysis and assessment, the fundamental work that we need to do in order to understand the scale, nature, trends of the problems that we face in order to sensibly then set out the plans. I would hope to see us in a position where we could confirm that assessment by the end of the year.

    Chairman

  131. If we can turn to governance, Minister. The Roques report, of course, uncovered a horror story of a Board. I think he said, "All the things I would have expected a Board to do, it did not do", and one of the things we questioned your predecessor about and are still concerned about is the relationship between the Board and you as the Minister responsible. If you do not receive minutes of Board meetings, if you do not send a Treasury representative to them, how are you properly accountable to the Department for the Commissioner's activities?
  132. (John Healey) Halfway through my third week, trying to understand the nature of the relationship, I have to concede to the Committee it is a complex area. We have Customs, which is, in some respects, a department of State, and in other respects, independently established and longstanding, with Commissioners formally appointed for Customs and Excise dating back to 1909. With certain rights and independence that flow from that, I have a dual role, as both Treasury Minister, and Minister responsible for the Customs and Excise, which, in other departments of State outside the Treasury, it would be quite simply described as sponsoring Minister for that department. I think, on balance, that is probably an advantage for customers rather than a disadvantage. But in simple terms, as far as there is a constitutional clarity about this, the Treasury is responsible for resources for Customs, the tax policy within which they operate, and the broad policy direction within which the Agency needs to work. Customs and Excise are responsible for the operational decisions, particularly over tax investigations and the day to day running, overseen, of course, by the Board. I think, particularly under the new Chairman, Richard Broadbent, he has made great strides in greater clarity in organisational management and accountability, and I think that was reflected in his Memorandum to the Committee. I have to say, Mr Fallon, I am now keen to try and achieve similar clarity in terms of the relations between the Treasury and Customs and Excise -- Ministers and Customs and Excise, which, of course, you may have noticed, was not dealt with in these memorandums to the Committee, so, in a sense, I have taken the opportunity as a new Minister to have a fresh look and review this area. And I am very happy to let the Committee know of the conclusions and clarity that I hope I am going to be able to bring to this in due course if that is helpful.

  133. It is extremely helpful. We fully understand it is only week three, but I was genuinely puzzled, because after the last hearing, we had a letter from your predecessor who pointed out the constitutional position and she said, "The Chancellor of the Exchequer delegates responsibility, but is accountable to Parliament for the Commissioner's actions." That is not law enforcement, obviously, but generally, Commissioner's actions, and I was just a bit puzzled as to how you can be accountable for their actions if you do not receive the minutes of the Board and do not send somebody from the Treasury to occasionally see what is going on?
  134. (John Healey) I am not sure that the simple formula of receiving minutes and processing minutes of the Board is a sufficient guarantor that I would have the right information when I needed it in order to be able to either make decisions or undertake my responsibility in accounting to Parliament in the same way as a Minister in a different department, accountable for both the operation of a department and in the agencies that it sponsors. In a sense, we are faced with some of the similar questions: "What is the proper level of relationship?" "What is the proper exchange of information?" "What are the proper matters for discussion, decision, determination, or information?", and I think now is not a bad time for me to try and bring some sort of rigour to the role that I am expected to play in the future.

    Chairman: That is helpful, and interesting to know that you yourself are reflecting on that. We maybe look forward to hearing further from you. Can we now turn to the PSA targets in more detail. Nigel Beard.

    Mr Beard

  135. Is your aim, coming to the report, to reduce the availability of Class A drugs by 25 per cent by the year 2005, though, on the same period, your target for reducing smuggled cigarettes is to reduce it by only 4 per cent? That is, from 22 per cent to 18 per cent. It does not sound a tremendously demanding target?
  136. (John Healey) The Class A drugs target or the tobacco target?

  137. The tobacco target, compared with the Class A drugs target.
  138. (John Healey) Class A drugs target is a staged target over 7 years, going through from 1998-2005. I would suggest, Mr Beard, that is actually quite the opposite, that the tobacco target is a pretty formidable target, rather than being one that is either flawed or rather too soft. I say that because I think it is important to examine the point of where we started in examining the problem and setting the target. In other words, where we were with the scale and the problem of tobacco fraud in March 2000, and where we would be without any sort of intervention or strategy such as we have in place. Here, we would have seen, by the year 2000/2001, the share of the consumption in this country risen to 25 per cent from cigarettes on which no duty was paid. If we had no strategy in place, by 2003/2004, that would have risen to 36 per cent. In other words, we had very powerful trends at the point at which we were examining the problem and deciding what action to take. In those circumstances, the objective of first stabilising the increase of consumption from illicit sources, and then driving it down to where we aim to be, at 20 per cent in that year 2003/2004, is actually, as I said earlier, a formidable challenge, one in which I think arguably, not a 4 per cent cut, but over and above what we would have had if we had not had the strategy in place, actually a 15 per cent cut. A gap, incidentally, that would be worth 2 billion to the Exchequer each year. So I would suggest to you this is actually quite a tough target, not an easy target.

  139. Are you suggesting, then, that the Class A drugs smuggling has not got the same growth momentum as cigarette smuggling?
  140. (John Healey) No. In the nature of any fraud, the comparability of the problems that are faced is very limited, and I think it is both in terms of targets and enforcement and the other intervention action, it is horses for courses. On the Class A drugs, that is also an extremely tough target. I think your colleagues on the Home Affairs Select Committee recently published a report which described it as "aspirational". In some sense, it was a PSA target that was set in the days when perhaps we did not have the fullest understanding of what the factors that can bear down or influence the availability of Class A drugs in the UK actually are. I do not draw any direct comparisons between the two because I think that is actually very difficult to do.

  141. The targets for tobacco smuggling for 2001/2002 is 22 per cent, and next year, 2002/2003, is 21 per cent, so it is a 1 per cent drop, but the report says that the knowledge of cigarette smuggling is not accurate to plus or minus 2 per cent, so how will you know whether you have hit it or not?
  142. (John Healey) I think you might accept that it is always very difficult, if not impossible, to get a precise fix on what is an illegal, an illicit operation. In the nature of this particular type of target, which is, in a sense, the impact or the outcome of what we trying to achieve, we can only first of all analyse that, then assess it, by actually quite a complex set of data that we might bring to bear. So I think it is inevitable, and quite right, that we would recognise a degree or a margin of error. That said, and I think you might accept that there is bound to be a degree of margin of error in such fields, the certainty that I can draw on, and perhaps the Committee might draw on is really twofold. First of all, the figures that Customs have painstakingly produced are accepted by the Industry, and secondly, they have been audited and they have not been disputed by the NAO. In a sense, both checks, are important to give a greater surety of the estimates and the targets that we are setting. In the final analysis, whether we examine the likely margin of error of plus or minus 2 per cent, what nobody at the moment who is a serious commentator in the field is disputing is that what was a rapidly accelerating and serious upward trend has been arrested. There is a degree of stabilisation in the proportion of illicit cigarette sales, and that the strategy that we have put in place is responsible for that improvement in the tobacco smuggling situation.

  143. One aspect of the tobacco smuggling position that we had illustrated to us on a previous occasion was of cigarettes that were legitimately manufactured in the United Kingdom with the Government Health Warning on, being exported. Andorra was one of the examples where the small state of Andorra was importing so many cigarettes, people would have had to smoke from cradle to grave for their lifetime to have consumed them, 24 hours per day, and there would have been some left over. Why is it not possible to deal with that, and how complicit are the cigarette manufacturers in this business?
  144. (John Healey) What would be described, technically, as you have outlined, as "Diversionary fraud" is an element of the picture. Our best figures suggest it is significantly reduced as a problem. It is a matter, incidentally, that your colleagues on the PAC have recently examined, and in fact called the Imperial Tobacco company, I think last week, to give evidence. Imperial Tobacco was the one major cigarette company with whom Customs did not feel that they could come to a proper understanding and agreement with, unlike the other major players in the field. A manufacturer responsible for the two brands which most commonly seem to find their way into the illicit sales in the UK. I hope that we will be able to reach the same sort of agreement to narrow down the possibility of diversionary fraud with Imperial Tobacco, just as we have with the others. The main problem with cigarette fraud now, in fact, lies between 70-80 per cent of the illicit cigarette sales consumed in this country . They are in fact cigarettes that have their source outside the European Union on which no duty at all is being paid, which is shipped in in bulk by freight, and it is those sources which at the moment are the main problem of supply into our market without any duty paid on them.

  145. Are those not more easily detected than the ones that have been legitimately manufactured, the same way as the ones that are on the market here?
  146. (John Healey) They are possible to detect. Some of the techniques are slightly different. I would not say they are necessarily easier, but they are part of the picture that we are having to try and deal with.

    Mr Plaskitt

  147. Could I come to another aspect of the problem with cigarette smuggling. I had a look this morning at a website -- I do not know whether you have had the chance to see it -- it is called, "tobaccosmuggler.com", and I can quote from it. It says, "As a European freight hauler, I have 8 lorries a week going over to France and Belgium. My drivers all bring back lots of tobacco which means I can supply you, the UK consumer, with tobacco at half the UK prices. I do all the hard work. I bring the tobacco to the UK. I put pouches in strong envelopes and the British Post Office delivers it to your door. HM Customs only confiscate at the port or my warehouse, if they can find it. Once in the UK post to you, they cannot touch it, and so you know your goods are going to get there." I also found several other sites offering the same service, including "cigarettesforyou.com" and "cigarettesfromspain.com". Does Customs and Excise have any idea how extensive this sort of trade is?
  148. (John Healey) I think I have given you an indication of the Customs assessment of that. Between 70-80 per cent is sourced outside the EU, as I was explaining to Mr Beard, brought in often by freight in bulk in a systematic and organised way. This is not a problem that is a product of people crossing the channel, bringing just a bit more than they are perhaps entitled to for their own personal consumption any more, this is organised crime on a large scale with very significant profits that accrue to the companies that get away with it. That is why the tobacco fraud strategy is something that the Customs are giving priority to at present, and this is why, as Government, we are backing it, with an extra 209 million, because it is an important one to crack.

  149. But can Customs and Excise get in and disrupt this web-based trading that is going on?
  150. Can these sites be shut down?

    (John Healey) They can and they do, and they disrupt the movement of goods, because however the sale or the contacts are made, in the end, the goods have to be moved. They cannot be moved virtually over the web, and Customs do get in and do that. There was a seizure from the Dover Customs just yesterday: 1.5 million cigarettes coming in under a consignment of carrots from Spain. That is the nature and scale of the sort of shipments, perhaps to order, rather as your website experience suggests. But however the promotion of sales might be done, in fact, the transfer of goods has to be done physically, and Customs do disrupt those movements.

  151. In the Annual Report 2000/2001, there was quite a little feature on the introduction of the x-ray scanners at the ports, which was envisaged, I think, as quite an effective way of disrupting this part
  152. of the organised smuggling that is going on. How much progress has there been with those? How many more have been introduced?

    (John Healey) There are a number that have been introduced. There are extra staff that have been put on the frontiers. The approach that Customs are taking to interception, and indeed the penalties that they are levying when they intercept cross-channel goods in this way, have all been stepped up. The impact of that is that whereas we had been looking for a 10 per cent reduction in cross-channel smuggling in 2000/2001, in fact, we have seen a reduction of 76 per cent, and clearly the scanners have played a part in that.

  153. Can you say how many scanners we have in use now?
  154. (John Healey) I would be dredging my memory from what I have read over recent days, but I can certainly supply that information to you.

  155. And is the number going to go on steadily increasing? Is the assessment that this is a cost effective way of undermining the trade, and, therefore, we are going to do more of it? Is that the position, more of these scanners?
  156. (John Healey) Scanners on their own are not sufficient, but if I supply you with the details about the scanners deployed so far, I will endeavour to answer that. This is an example of an operational issue which is clearly the responsibility of Customs, but in my role as accounting to Parliament for what they do, I will endeavour to give you that answer. It is not something that I would have been involved in the decision about. It is an operational deployment issue.

     

    Mr Cousins

  157. When we are considering indirect tax fraud, we have considered the issue of revenue loss, but you yourself have drawn attention to other dimensions which are perhaps equally significant, and that is the role of organised crime, and, of course, that many of our fellow citizens are, in effect, drawn into illegal activities which become legitimated in their experience. And it is a bit disappointing that nowhere in this - you have been very frank with the Committee, and I do appreciate that, about the work that is going on to estimate VAT fraud, which clearly is the most widespread and the least known, the least bottomed-out - but it is a bit disturbing that nowhere can we seem to get hold of information on the work that is going on now to tackle VAT fraud, not the work that will go on in the future, but the work that is going on now?
  158. (John Healey) In the one dimension of VAT fraud, the missing trader fraud which I have mentioned, I think we have been clear in the PBR, and subsequently, with the PBR related documents, what we are doing on that front. I have to say to the Committee, Mr Cousins, really, in a sense, I am reluctant to push the Customs to the point that we produce what is our starting point, our baseline data, our assessment of what we are dealing with, which is not robust, because if we get that starting point wrong, and, frankly, any strategy, any subsequent tracking against target that you as a Committee may want to do will simply be flawed from that point. So until we have the assessment and the analysis in the sort of shape that I am confident about, that I feel we have discussed fully with other relevant agencies, then I am not ready to sanction its publication. I have given an answer to Mr Ruffley, I think, in indication of (a) how important I see this is - and you are quite right to bring us back to it - and (b) the sort of timescales that I hope we can confirm the progress that we are making.

  159. You have been very frank with the Committee, and I entirely accept all the difficulties about targets, but it does seem to me to be reasonable to ask why there is no account of present levels of activity in these areas. For example, in the document which you have drawn the Committee's attention to that was published at the same time as the PBR, we do have an account of the efforts that are being made on so-called "missing trader fraud" which is just one element of VAT fraud.
  160. (John Healey) A very significant element, but it is one element.

  161. Yes, and that is 340 staff, and some account of the number of registrations that have been refused and the number of injunctions and their value, but we do not have any account at all of the efforts that are being made to tackle VAT fraud which is undermining legitimate business, supporting a lot of organised crime, and bringing millions of our fellow citizens into illegal activities?
  162. (John Healey) Customs will, in the regular way that they go about their business, be picking up elements of that. What I am interested in is getting a proper fix on (a) the scale, (b) the trends (c) the nature of the breadth of VAT fraud, and we have made that start with missing trader fraud. Then what I am interested in is looking at how we need Customs to change what they do, where perhaps other agencies can help what they do so that we can capture that in the way that we have done some of the other Excise fraud areas now, and that I have described as examples to the Committee so that we can put in place something that I think will measure up to an ambition of a comprehensive strategy, which we do not have at the moment. At that point, then it is clearly a matter both for Customs operationally to carry out, and a matter also for Treasury and Government to consider the resources that may be required to back it. I am sorry I am describing the process in general terms, but in many ways, I do not think I can be any clearer at this stage than that.

  163. Therefore, you do acknowledge that on the basis of what we know about missing trader fraud and the 340 people who have been put to work on it, maybe more down now, it is going to need a considerable increase in people on the ground tackling this, is it not?
  164. (John Healey) It is going to need significant increase of effort. More people on the ground may be part of that, but it is not necessarily the only, and certainly will not be sufficient to tackle the problem of VAT fraud comprehensively. But those are judgments that we will have to take when we are clearer and more confident about the scale and nature of the problem and work out the most effective ways of dealing with it.

  165. So it would be sensible to assume that by, say, Budget 2003, the analysis will have been done, and any extra resources that may be required to support the work programme that is produced by the analysis, it would be reasonable to expect that in the Budget?
  166. (John Healey) I have mentioned resources already, and we will consider the question of resources in the context of how we put in place a sufficiently comprehensive strategy to deal with the problem that we outline.

  167. Turning to another slightly different area, oils fraud. The Government has identified this as a substantial element of abuse here, and rather heroically committed itself to this being a major element in the reduction of tax evasion and tax avoidance. How much further forward are we on practical proposals to achieve that?
  168. (John Healey) I would say we are very significantly further forward, particularly following the process I did outline briefly to the Committee earlier on, where we published our analysis and proposals with the pre-Budget report. We consulted on them as part of the pre-Budget report process and confirmed in the Budget the sort of strategy that we would be putting in place, and, in particular, one that is targeting the rebated oils problem, which, you will appreciate, is a longstanding system, and responsible for the major part of UK mainland oils fraud. There will be a new Euro-based market introduced to the fuel, but the main focus of intervention for the strategy is the retail network, in other words, the points at which people who will misuse laundered rebated fuel and therefore abuse the system actually get hold of it. So there is a registration scheme for retailers that retail rebated fuel. They will need to register with Customs; they will need to inform Customs about the supplies that they make; and they will be required to take reasonable steps to satisfy themselves that those that are purchasing from them are doing so because they are legitimately entitled to use rebated fuel and will be using it in legitimate ways. Finally, there is a range of penalties which are not there at present if there are problems with that system. If we are able to close off the retail network for rebated fuels, that is the most significant part of the network in order to clamp down on it. It is significant in terms of UK mainland oils fraud, which is why we have, in a sense, nailed our colours to the mast with this and set targets for the reduction in the market share, if you like, of illicitly or fraudulently purchased diesel from 4 per cent to 2 per cent. But it is, perhaps, even more significant, potentially, in Northern Ireland, where I think many would argue that the oils fraud problem is that much greater than on the UK mainland.

    Chairman: Final question. We are near the end now. Mr James Plaskitt.

    Mr Plaskitt

  169. I am just particularly interested to know what progress you think we are making in tackling illegal meat imports?
  170. (John Healey) With meat imports and the concerns there, Customs is not the lead agency. DEFRA, particularly since the concerns over Foot and Mouth, are responsible for the illegal import programme that tries to control the problems and the risks from imported meat. The main enforcement agencies are local authorities, port authorities, devolved administrations, and Customs play an active but supportive role to the measures to try and deal with imported meat. In a sense, I would suggest that we have still got some work and some way to go on this. There is, at the moment, a process being undertaken where we are trying to establish a very proper, full analysis of the risks here. This is being led by the Veterinary Laboratories Agency. That proper assessment of risk has got to be fundamental to establishing a future policy and a future strategy in this area. Border controls, which is essentially where Customs are most visible and play their part, have got a part to play in this, but they are not the complete solution, and, in many ways, with the fears and the risk of importing infected meat, unlike, for instance, drugs, where partial success is success, if you miss the one import of infected meat, then, however effective you are in intercepting anything else at border points, that leads to a failure of your strategy. Border controls: Customs operations have got a role to play and it is one that is of an enforcement agency that, at the moment, is not in the lead, and it plays a supportive and very strong role to back up the efforts of the other agencies.

  171. Right, but you have highlighted yourself in the answer just how important it is to ensure that we are doing the best we can to deal with the illegally imported meat, not only because of health issues, because we have to be very, very serious indeed, and I just want to be sure that we have not got one department, Customs and Excise, over here developing all sorts of techniques for finding out what is being brought into the country that should not be, and the skills and the processes being applied there are not being switched over to look at meat, because, in terms of the actual process that brings it in, it is not any different from the alcohol coming in or the tobacco coming in. It is still stuck in the back of a lorry, ostensibly bringing in something else. Given how important it is to deal with this, I am looking for the reassurance that the departments are working absolutely in harmony on this, and there is not a risk of, "This is our responsibility and that is theirs", and that we lose something by a lack of communication and joint working?

(John Healey) Let me reassure you, Mr Plaskitt. Customs are not acting unilaterally on this and the other enforcement agencies who have more of a lead role are not acting without Customs. Furthermore, in terms of the prospects for future policy and operations, we have the Cabinet Office at the moment undertaking the coordination of a thoroughgoing review of our animal health controls, and Customs is making a very important contribution to that work, just as it is with the risk assessment exercise that the Veterinary Laboratories Agencies are leading on as well.

Chairman: I think we must call a halt there, but can I, on behalf of the Committee, thank you very much indeed for appearing before us today. If you had not drawn our attention to the fact that you were only in your third week, we would not have know it.