The reasons for increase in debt
19. Customs categorise debt in several different
ways, but all categories have increased significantly with debt
growing by some 55% during 2001-02.[19]
Customs faced some 50% more debtors in that year than three years
previously. Traders who in the past had sent in their payments
at the same time as their declarations had recently been delaying
the payment and gaining 30 days at Customs' expense. The largest
increase in debt in 2001-02 was in routine recoverable debt.
20. Over the five years since March 1998 the
total amount of debt owed to Customs increased more than threefold.
Customs identified several reasons for this increase. They had
been seeing record levels of tax liability, and as a consequence,
debt to collect. They also had been successful in identifying
large fraud-related liabilities following the introduction of
their fraud strategies. And finally they had experienced changes
in trader behaviour, as more of them challenged their assessments
or appealed. These factors, combined, accounted for about one
half of the increase in debt over the five year period. Customs
mainly attribute the remaining increase to the economic slowdown,
which had a direct impact on business and on the level of debt
Customs had to manage.[20]
Figure 1: The
increase in Customs' debt since 1998
Source: Customs
21. Customs reorganised their debt management
function during 2001-02, reducing the number of debt management
units from 29 to 10 and creating a centralised civil recovery
unit. The reorganisation sought to improve performance standards
and deliver efficiencies. It involved large scale changes in
information systems, manpower and accommodation. But IT changes
designed to facilitate debt collection were delivered three months
late, building refurbishment caused upheaval in the work of one
of the largest debt management units, and delays in the recruitment
and training of staff at all units affected the programme. The
closure of some of the debt management units allowed Customs to
achieve a reduction of 101 staff years, but at the cost of a further
128,000 unresolved debt cases at the year end. Customs believed,
however, that the reorganisation had improved the effectiveness
of debt collection and that they were collecting a higher proportion
of debt than before the reorganisation.[21]
22. Customs' public service target for 2001-02
was to restrict debt owing to them to 1.41% of the total amount
collected. They did not meet this target, and debt outstanding
at the end of that year represented 1.95%. But they expected
be very close to the target for the 2002-03 financial year. Customs
said that a decrease in the overall debt figure could be a matter
for concern, if it meant that they were not doing as much as they
could in tackling fraud and collecting tax.[22]
The effect of missing trader fraud
on Customs' debt
23. Customs attributed about 30 to 40% of the
growth in debt in the year to missing trader fraud. In
its simplest form this fraud is perpetuated by traders who sell
goods at a VAT inclusive price, but who then disappear before
paying over to Customs the VAT they had collected. But it can
also be a highly organised type of fraud involving large numbers
of buffer and artificial companies. The Department retained the
debt on their records until the perpetrator had been caught and
prosecuted, or until civil recovery action had been completed.
In tackling this type of fraud Customs recently introduced a policy
of denying VAT repayments to companies thought to be linked to
the fraud. They had reduced repayments to certain industrial
sectors to less than half of what it had been six months earlier,
a decrease of £50 million to £100 million a month. But
Customs recognised that they have to avoid penalising legitimate
traders. They had also established specialist teams to recover
assets from the directors of the companies involved. They had
obtained assets to the value of £2 million by January 2003
and were working on the recovery of a further £47 million
in cases before the courts.[23]
18 Qq 23, 98 Back
19
C&AG's Report, para 6.3 Back
20
Ev 23-24 Back
21
C&AG's Report, paras 6.7, 6.9, 6.15, 6.18; Qq 13, 129 Back
22
C&AG's Report, para 6.1; Qq 199-200 Back
23
C&AG's Report, paras 6.12-6.13; Qq 13, 51, 53, 190 Back
