Examination of Witnesses (Questions 442-459)|
WEDNESDAY 12 JUNE 2002
442. Good afternoon, ladies and gentlemen. Welcome
to you all. It is very unusual in a select committee to start
off with a word of sympathy for a minister but, with less than
two weeks in office, you do have our sympathy. You are ably supported
by Paul Gerrard who is an old friend who has given evidence to
us very well and robustly before and we have seen the minister
many times before. As you know, we are looking into the cross-border
road fuel price differentials three years on, after the previous
committee in the previous Parliament conducted an inquiry into
it. Perhaps I could start off with a Treasury inclined question.
We were told both by Treasury and Customs officials about the
difficulty of obtaining meaningful estimates of the revenue lost
to the Exchequer as a result of fuel duty differentials specifically
in Northern Ireland and, although it is difficult, the estimate
which we have is that the loss to the exchequer in 2000 was about
380 million, 150 million in lost petrol duty and 230 million in
lost diesel duty. Are these difficulties involved in gathering
data being addressed?
(John Healey) I wonder whether you would
permit me to offer some opening comments, or would you prefer
to go straight into the questioning?
443. If you have anything specific to tell us,
certainly, if it is brief.
(John Healey) I am grateful for the words of sympathy
at the outset. I know it will not last but it is a pleasure to
be here. It is a committee with formidable experience and, from
my point of view, in what is my third day in the job, in effect,
it is quite a forbidding prospect appearing before you, but I
am very ably supported by Paul Gerrard, who you have met before,
and jointly with my colleague, Jane. In a sense, it was very prescient
for the Committee to ensure you had two ministers here rather
than just one. In many ways, the inquiry that you are conducting
now seems to me very timely. It is timely to revisit the report
that you produced in 1999, first because, from our point of view,
it offers an opportunity for the Committee to contribute to the
developing multi-agency approach and the next stage strategies
that we are beginning to put in place for enforcement in this
area. Indeed, perhaps also to reinforce the commitment of those
agencies within the province to that multi-agency strategy which
is going to be so important. In some ways, the Committee might
claim some paternity credit for some of the progress that has
been made in the three years since you first produced your report
because in a way that report helped focus concern and attention
on the problems of oils fraud in the province. Since then, I know
that the Committee will be aware that Customs has significantly
increased the resources it has put in so that the number of officers
deployed in the province has gone up from 25 following your report
to 163 in January 2001. As a result of those increased resources,
we have seen a very significant impact in the seizures that Customs
have been able to carry out. Fuel seizures have doubled, vehicle
seizures have trebled and laundering plants that have been broken
up have increased more than five times. In the last full year
for which we have results, 2000-01, those 17 laundering plants
had a capacity to produce 85 million litres of fuel. The concern
however is that at present we still have no accurate estimate
of the fraud problem disaggregated from the cross-border shopping.
Therefore, assessing the actual impact, which is what I suspect
all of us are most concerned to see, of Customs on the problem
is extremely difficult. The most useful independent indicator,
the one that is used by the trade, is the volumes of legitimate
UK duty paid deliveries into Northern Ireland, principally from
the UK mainland. After four or five years of decline, following
your report and an increase in Customs activity, we have seen
a stabilisation of those and in the most recent period, the year
ending November 2001, we have seen those increase by seven per
cent. That is an encouraging sign but sustaining and stepping
up the impact that we are having on enforcement is going to depend
crucially on being able to align the work of Customs with the
Inland Revenue, Trading Standards, the police service in Northern
Ireland and local authorities. It is that multi-agency approach
to oils fraud which is going to lie at the heart of any sustained
solution to the problems we face. We are fortunate in that respect
that the work is being given a significant boost by the Organised
Crime Task Force because it is within that context that Customs
are pulling this effort together, of course chaired by my colleague,
444. We have heard about that and we will be
reporting shortly about certain aspects of the progress that you
have been making there. Can I turn to the licensing of the filling
stations because there is a different regime in Northern Ireland
from the rest of the United Kingdom. Are you considering updating
the Act? To remind people, it is the Petroleum Consolidation Act
(Northern Ireland), of 1929 which governs the regulation of filling
stations in Northern Ireland. It would seem that there would be
a very broad welcome for any rationalisation and updating of that
to prevent some of the current operations which are going on.
(John Healey) The short answer is yes. The slightly
longer answer is that the Act dates from 1929 which suggests that
it is probably overdue for review and updating. It is a licensing
regime which principally applies to petrol rather than diesel,
which is overseen by local authorities and, because of our concern
that if we can clamp down on the retail network through which
the fraudulent fuelwhether that is laundered or smuggledis
distributed en masse, we have a real chance of cracking down on
the problem. Consideration of the questions of beefing up the
licensing is one of the matters that is part and parcel of the
work that is being done under the aegis of the Organised Crime
Task Force. Discussions are going on between the agencies and
they are concerned to see whether there is a potential for tightening
up the licensing and, by so doing, playing a part for those agencies
that I mentioned in being able to clamp down on the retail fraud.
445. If the short answer is yes, the government
is going to change the law, the short question is when?
(John Healey) The likely responsibility for that licensing
legislation lies not with the UK government but is a devolved
function of the Northern Ireland Assembly.
(Jane Kennedy) One of the initiatives that has taken
place directly relating to this is that Customs, I understand,
have appointed a liaison officer who is actively contacting local
authorities with a view to encouraging them to use the powers
that they already have under the licensing regime that exists
and with a view to doing spot checks on petrol stations to make
sure that they are complying with their current licensing regime.
That, we hope, will certainly highlight those who are not. Particularly,
they will be looking for laundered fuel because it is so easy
to detect. In the light of that process, we are quite confident
that, where we do find people in breach of their licensing regulations,
we may well find that there are other activities that they are
engaged in as well. That is an initiative that is underway at
this present time.
446. It was Mr Gerrard himself who told the
Committee, "If we did have an effective licensing system
which had real teeth, that would be a very useful weapon to stop
fraud." It is quite clear that everybody wants this but when
you say that it is up or down to the devolved Assembly to do this,
surely it has to go wider than that because at the moment, as
we understand it, it is a question of health and safety and trading
standards. What we want is a regime that is properly policed from
the Customs and Excise, police and every other point of view,
to make sure that the criminal activity which is extensive is
curbed. Can you leave that to the Northern Ireland Assembly to
do alone or will it require some UK legislation? That has been
our understanding, that it would.
(John Healey) On the narrow issue of the current licensing
of retail petrol stations, that is where the Northern Ireland
Assembly power resides. You are right to say that, at the moment,
the licensing regime essentially concentrates on health and safety
issues. Beefing that up and having multi-agency visits so that
you have trading standards going on with Inland Revenue, Customs,
health and safety officers at the same time gives the opportunityand
we have one or two examples where this has been done in practiceof
being able to clamp down from a number of different directions
and potentially catch those who are engaged in this trade.
447. But you cannot close the offending station
down, which is the sanction that would probably be the most effective.
(Jane Kennedy) You can if you take their current licence
(John Healey) You can close them down at present,
essentially on health and safety grounds.
448. How many have been closed down?
(Mr Gerrard) I hope my information is accurate but
there have been three occasions where enforcement action has been
taken and, on one occasion, before the licence was revoked, the
trader withdrew from trade. I am not aware of any occasion on
which a licence has been revoked.
449. They cannot take the sanctions they want
to take because the legislation is not appropriate. That is right,
is it not?
(Mr Gerrard) It is. It is one of the things that,
within the Organised Crime Task Force, we are looking at, how
we can more effectively drive that process forward.
(John Healey) The Committee may be aware that there
is a UK-wide initiative that was confirmed in the Budget by the
Chancellor to try and clamp down on the problem on the mainland
and in the province of rebated oils fraud. One element of that
involves a new approval scheme which will require all distributors
to be authorised by Customsin other words, in effect, to
bring Customs into play as one of the agencies that will have
a role in any form of licensing. It will oblige the distributors
to provide regular returns to Customs and their customers and
it will oblige them to take reasonable steps to ensure that rebated
fuels are not being bought by people who are not entitled to purchase
them. Also, it will beef up the penalties that may be available,
so that there is a range of penalties where those obligations
are not fulfilled.
(Jane Kennedy) On this particular issue, you are absolutely
right that the licensing regime has to be the right one. Just
having a licensing regime in place is not going to be sufficient
to enforce the law and to make sure people do not abuse the system.
As a result, because we are conscious of the need to continue
to reinforce for the different agencies involved in law enforcement
the need to coordinate their activity, we will be launching on
26 June an expert group, bringing together the different agencies
who are particularly concerned with fuel taxation fraud; and that
includes the issue of smuggling, cross-border activity but also
laundering and other elements of it. As part of that expert group,
we will be inviting representatives of health and safety organisations
based within local authorities who have precisely these kinds
of responsibilities to join that group to make sure that all of
the agencies who are responsible for enforcing the law are working
together to maximum effect. From then on, it will be very much
a working group of officials representing different agencies.
Chairman: That is very encouraging news indeed
and we will watch the progress closely.
450. You agree that any benefit from the extended
licensing regime will depend largely on a joint approach to law
enforcement from all the agencies involved. We all welcome the
Minister's announcement that a multi-expert group to tackle evasion
will be set up. Could someone tell us a little more about how
this group will work and what its priorities will be?
(Jane Kennedy) Initially, I will chair the first meeting
to impress upon the different agencies that we will be inviting
to participate the importance of their coordinated role in this.
There needs to be an understanding within the agencies that they
need to coordinate and cooperate, share intelligence, share operations.
The first meeting will be very much a launch of this group. Thereafter,
it will be a series of meetings very much in the mould that we
have established with other expert groups. They will be led by
the lead agency in that field. In this case, I expect it will
be Customs who will be the lead agency, but there will be representatives
of the Northern Ireland Office offering secretarial support to
the group and representatives of PSNI and trading standards, everybody
who is perceived to have not just a public interest but a practical,
law enforcement interest in this field. The objective will be
to encourage those agencies to work together as effectively as
they can. That is not to say that cooperation does not exist at
the moment, but it is to make sure that, where cooperation can
be improved upon, then it is.
(John Healey) The Inland Revenue will also be involved
in that. In a sense, it is part of the process that has already
begun because over the last nine months Customs have done a good
deal of bilateral work with the agencies that we need to pull
together. The launch of the group and the meeting that Jane will
be chairing on 26 June is a culmination of that preparatory work.
451. I find myself in a rather difficult position
because, on the one hand, I am absolutely delighted to hear that
you are rolling out this exciting initiative involving multi-agency,
interdepartmental, cross-sectional initiatives and I am greatly
impressed. However, I am slightly saddened because I was going
to ask you precisely why you were not doing that. One of the great
skills and pieces of genius that you bring to the job, Minister,
is anticipating the Members of this Committee. Could I ask what
the involvement of the Northern Ireland Executive is? How are
you working with them in this particularly exciting initiative?
(Jane Kennedy) Which particular department will it
(Miss O'Mara) The Environment Agency. There are a
number of others involved in it, but Customs, in inviting people,
although the Minister is chairing it, it is very much a Customs
led operation. It is a joint operation but, as I understand it,
when Customs have been sending out invitations, they are inviting
people from the devolved administration too, but we also have
a group within the Task Force that liaises specifically with the
devolved administration so that people know this is happening.
The last thing we want to do is to cut across any responsibilities
(Jane Kennedy) One of the other important roles of
the Task Force is to raise public awareness of the problems and
at the launch of the second year report, which took place in May
at Hillsborough Castle, the Secretary of State and I drew attention
to the problems with health and safety. We had a big wagon parked
in the forecourt of Hillsborough Castle to demonstrate what risks
these people are taking when they are moving illicit fuel around
the country. We were supported in that launch by the first and
deputy first minister. There is very close liaison between us
as Her Majesty's Government Ministers and the ministers in the
452. You are involving environmental and heritage
services, Customs and Excise, local authorities and all the other
key stakeholders and participants. How about the role of local
authorities, bearing in mind that they will tend inevitably to
take a parochial view? How do you think they will take a joined
up, province point of view?
(Jane Kennedy) I have every confidence that they will
rise to the challenge. If I were to take the experience we have
had over the time of the Organised Crime Task Force, there is
already an increasingly close working relationship between trading
standards officers on the ground and police and Customs, particularly
in combatting counterfeiting goods at markets. We have had particular
success at some of the regular, Sunday morning, car boot markets
that we see around the country.
453. Jones Brothers?
(Jane Kennedy) Jones Brothers being just one of the
venues that I had in mind.
454. A straightforward solution to the problem
we have would seem to be that on the island of Ireland we should
have sufficient duty harmonisation to make it no longer worthwhile
for there to be an illegitimate trade or even a legitimate trade
that takes place. In pursuing this, could I clarify what our understandings
are about the legal position in relation to the European Union?
I understand that from European Directive 9/82 it sets minimum
levels for tax on mineral oils but it does not enforce the rate
which is to be set; nor does it prevent a Member State from imposing
different levels throughout its territory. Is that an understanding
between us as to what the position is?
(John Healey) That is correct. It is being examined
at present and has been for the last couple of years, rather fitfully,
in terms of updating that. It does indeed set minimum levels of
duty but on either side of the border the duty rates currently
set are significantly above those minimum levels, so that would
suggest that any new European-wide framework that may be agreed
is unlikely to have any impact on the issue that you are raising.
455. There seems to be no legal impediment upon
what I was suggesting initially. I know that within the Directive
it allows for provisions in which there might be breaches of some
of the provisions of Community law that would distort competition
but that would not come into play in connection with what I was
suggesting about duty harmonisation, would it?
(John Healey) No. If the decision was taken to try
and reduce the duty rates in Northern Ireland specifically, a
derogation would be required from the European framework, at the
moment the structures directive. It would not be unprecedented
but it may be difficult to do. The existing derogations, as is
quite common in European law, were already in place when the Directive
was first introduced. Technically, it would be possible to make
a case for a fresh derogation. It may constitute state aid which
would run into additional parts of the European Commission's process
of decision making. Technically, it would not be impossible but
it may be difficult to do.
456. But it is quite likely that it would be
possible to produce harmonised rates on the island of Ireland
or sufficiently harmonised rates without the European Union's
provisions being insurmountable in these matters. If that is the
case, why has it not been done? Why are you not moving towards
a pattern in which the rates for Northern Ireland are reduced
in order to rid us of the problem?
(John Healey) Because I would want to argue that it
is not simply a technical issue and that it is not as simple a
solution as it might first appear. There are several dimensions
to that. First, it would be a very significant move in principle
from the fact that we set national, UK tax and duty legislation.
457. Mostly. There are exceptions.
(John Healey) Secondly, it is not simply a question
of duty levels and revenue raising. As you well know in other
policy areas, we use the tax regime as an instrument to pursue
certain social, economic and, in this case particularly, environmental
objectives. There would be policy consequences for a reduced duty
in Northern Ireland, particularly in the environmental field,
where you will be aware that we have used differential duties
very effectively to alter the consumption patterns of fuels on
the roads. We have covered the question of technically whether
it may be possible or not. The third concern is that it would
deal with only part of the oils fraud problem that we face in
Northern Ireland. It would unarguably deal with the incentive
to smuggle. It would not touch the very significant problem we
have with laundering of rebated fuels. The sort of judgments that
I have heard in the last three days from professionals that operate
in the province and the fact that we have in Northern Ireland
significantly and uniquely as far as the UK goes a well organised,
criminal-based distribution network would mean that we would be
likely to see a very smooth substitution of smuggled fuel for
increases in rebated fuel. Finally, from the point of view of
the Treasury, a not insignificant concern would be that, were
such a move to be made in Northern Ireland, every one of us in
the room can anticipate very quickly pressure from other parts
of the UK for a similar cut in fuel duty which would indeed need
to be significant in order to have the impact on the problem that
you wish to tackle.
458. As far as the environmental impact is concerned,
a reduction in duty would obviously be liable to link to greater
usage and therefore greater problems of pollution from vehicles.
On the other hand, there is an extra use of vehicles at the moment
in order to collect illegitimate fuel from Ireland and also to
deliver illegitimate fuel across the border. It is a matter of
swings and roundabouts. Might it not even itself out somewhat
and are there any investigations taking place to discover what
these likely consequences might be?
(John Healey) The best estimates that we are able
to do on that question suggest that the sort of cross-border shopping
traffic that we see at the moment produces, from the vehicles
that undertake it, about 33,000 tonnes of carbon per year. The
total UK pollutant output is 31.2 million tonnes so in those terms
the argument that it would have an environmental benefit suggests
that, at that type of level, its impact and contribution in environmental
terms would be negligible.
459. On the Treasury arguments that you produced,
it was really to do with the impact within other areas of the
United Kingdom and the pressures that might flow from that because
within Northern Ireland itself there would be considerable savings
as far as the Treasury was concerned. All the illegitimate fuel
which is being brought in, ignoring the laundered material, would
go in those circumstances and all the purchasing legitimately
of petrol from the Republic, where there is no duty paid upon
it, would go. Also, all the extra money that is having to be spent
on enforcement through Customs and Excise would begin to be tackled.
Is there not, looking at the Northern Ireland position, some considerable
economic advantage in doing what I was suggesting?
(John Healey) I appreciate, as a Member of this Committee,
why you have such a strong focus on Northern Ireland. From the
Treasury point of view, the concern must be for the potential
impact on the UK. I have explained that it would undoubtedly lead
to demands from elsewhere for similar sort of treatment. That
would be the first thing. The second thing is that decisions about
taxation inevitably have a balance of a number of different objectives.
There is a simple cost benefit in revenue terms about whether
a particular duty delivers more than it costs to enforce, but
principally and increasingly, as you will have seen with this
government, an interest in using fiscal and economic instruments
for other endsin particular I turn to the impact we have
had on certain environmental objectivesmeans that we have
quite a complex context of decisions and policies to take into
account. It would be a very significant departure from the essential
principle that we have a unitary, UK tax regime with nationally
set duty and tax rates.