Examination of Witnesses (Questions 1-19)
MR RICHARD BROADBENT AND MR MICHAEL HANSON MBE
WEDNESDAY 31 OCTOBER 2001
1. Welcome to the Public Accounts Committee. Today we have Mr Richard Broadbent, the Chairman of HM Customs and Excise, he is joined by Mr Michael Hanson, the Director of Finance and Strategy. They are going the tell us about losses to the Revenue from fraud on alcohol duty. The losses came to some £900 million between 1994 and 1998 and they were notified to Parliament in 2001. The losses came about because of changes introduced by the single European market in 1993. There have been various reports to the Public Accounts Committee. Matters did not improve fast enough, despite various recommendations by the Committee. Clearly it is a very important subject, we are pleased to welcome you this afternoon. Perhaps I can start the questioning by asking you this, Mr Broadbent, this Report covers the circumstances surrounding the losses of alcohol duty worth £668 million from illegal diversions on the UK market between 1993 and 2000 and another £216 million from illegal diversions overseas. Why do these losses happen?
(Mr Broadbent) I think you said in your introduction that there was a change in the external environment, the single market, and that created new opportunities for fraud. Changes in external environments are amongst the most difficult sources of problems for organisations to grapple with. This particular change did create an opportunity for fraud that was exploited by opportunists. The initial reaction of Customs and Excise was a law enforcement reaction, which is actually quite usual because that is how you discover fraud. Then as the NAO Report points out that was followed by controls being tightened by the end of 1998, when fraud had virtually come to an end.
2. Can I ask you, please, to speak up. Can you help me with this rather general question, how can you have duties which are so vulnerable?
(Mr Broadbent) All indirect taxes or taxes are vulnerable. My own view is that the vulnerability stems from the fact that these are taxes which are levied at the point of transaction, so you are dealing with a large number of transactions and you have quite a limited time scale to collect the taxes. We are rather different from the Inland Revenue. The Inland Revenue generally assess revenue in arrears and bases it on accounts and profits. We are assessing revenue every minute of every day, so if you do not get it at that point in time you tend to lose the revenue. Transaction taxes, which most indirect taxes are, are vulnerable to fraud in a different way than direct tax.
3. You are blaming all of the problems we have on the nature of the taxes, I must really ask you this question as a general question to set the scene, how can a government department run a system which loses all of this money?
(Mr Broadbent) It is a large sum of money, and I make the following point with a lot of care, it is a large sum of money but it is actually quite a small proportion of the total revenue we collect. Customs and Excise is a very, very large and complex organisation collecting £100 billion a year. We take our responsibilities very, very seriously indeed. This is not a point I want to labour at all. The actual sums of money are very large but these are frauds that took place over six years and as the NAO Report points out over that period of time they account for 1.4 per cent of our revenue, a lot in absolute terms but not a huge amount of money in percentage terms.
4. Can I ask you, how much has been lost through fraud in the other major areas of your business, VAT fuel, lack of duty?
(Mr Broadbent) We are doing a great deal of work on this at the moment. Perhaps the most important thing I should say at this stage is that the government will be setting out much more detail about levels of fraud in the excise regime in the forthcoming Pre-Budget Report, and it would wrong for me to preempt that. I am happy to talk in general terms about each regime. Clearly each regime takes a little time to discuss. What the government is going to do in the Pre- Budget Report is publish estimates of excise fraud.
5. You are not going to give me any figures on VAT?
(Mr Broadbent) I cannot give you a figure on VAT, we do not have a figure. VAT is particularly complex. In the case of VAT you are dealing not just with fraud, you are dealing with avoidance, you are dealing with the custom and practice of legislation and you are dealing with error. We have a great deal of work to do before we can make an estimate on that.
6. When do you think we might have that information?
(Mr Broadbent) I cannot commit to a date. We will be able to deal with some aspects of VAT in the Pre-Budget Report. For example there is one particular aspect of fraud of VAT, Missing Trader fraud, that we have already identified, we have measured and we have put in place a strategy to deal with that and we will cover that in the Pre-Budget Report.
7. You have already taken action to improve controls in the alcohol duty system and, "more are planned", as set out on page 17 paragraph 1.28 of the NAO Report, what assurance can you now give us that the controls currently in place are adequate?
(Mr Broadbent) It is impossible to give absolute assurances. In the case of outward diversion I think we are as confident as we can be that fraud is now at minimal levels. There are other sorts of alcohol fraud, as the NAO Report identifies, notably inward diversion, which are still at levels which are too high. We have already put in place operational steps to begin to improve our controls, that will include tighter controls at the border and tougher policy on HGV vehicles. We are not yet in a position to give a clear, strategic target for alcohol fraud but that is something I hope we will have more to say about in the Pre-Budget Report.
8. You will appreciate that my colleagues may want a rather more proper quantitative and qualitative commitment than you have given. The second bullet of paragraph 1.28 notes that you are, "looking to improve the exchange of information and the movement of goods from other European Member States. Some of this work will take at least five years". What are you doing to speed up this process?
(Mr Broadbent) We have taken quite a lead in Brussels, really going back to 1997 and the Alcohol and Tobacco Fraud Review. We have taken quite a lead in Brussels in increasing the profile of this whole issue. It is largely because of the efforts of United Kingdom Customs and Excise that progress is being made on things like the electronification of the movement system. Yes, I think you are right, it is not moving as fast as we would like, we have to work harder in the United Kingdom to
9. It is not moving as fast as you would like because the others are not committed, why should they, because their taxes are so much lower than ours?
(Mr Broadbent) The Commission is committed. The other states have now committed to a timetable. The Commission have recently allocated funds and I am confident that the work will get done. You are right, it is less of a priority for some member states and we therefore have to work harder in the United Kingdom and accept that some of that work is going to take longer in the EU.
10. At the time of the fraud your approach to protecting the revenue was letting loads run, that is dealt with on page 19 in paragraph 2.3. You did not quantify the revenue at risk or the likely level of the targets to help you decide whether there was a more effective way to protect revenue than disrupting fraud and only £23 million has been confiscated by the courts. How do you now strike a balance between disruption and letting loads run?
(Mr Broadbent) This is a very important judgment that we need to make. I should say at the outset I think the NAO Report is right, that judgment was not properly made in every case at the time these frauds were taking place. As the NAO Report also says, it is very hard to say, even with the benefit of hindsight, whether more revenue was lost. It is important to recognise that that judgment was not properly taken and we have spent much more time taking that judgment now. In order to do that we have effectively a new set of controls, a new case management system for investigation, which from the earlier stages of the case identifies what the issues are and triggers a series of control levels for more and more senior attention, depending how much money is at stake. I am much more confident now than I might have been a few years ago.
11. You can assure me that my feeling that you are letting these loads run without really considering just how much chance you have of getting these people to court, you have a grip on this issue now, have you?
(Mr Broadbent) I think the situation is different now from what it was in the mid-90s. I can tell you, which I could not have done a couple of years ago, how much revenue has been at risk so far this year and that information would not be available to you before.
12. On page 21, 2.7 states, board level approval is now needed where letting loads run could put revenue of over £1 million at risk. To what extent does your board consider significant operational decisions relating to fraud across all of your activities?
(Mr Broadbent) It does not get involved in operational decisions. The board level approval is a reference to an individual, a director to take a decision. The Board of Customs and Excise is largely a strategic body, it is not an operational body. The operational body is the Management Committee and below that there is an Operating Committee for Law Enforcement. The Head of the Law Enforcement chairs the Operating Committee and I chair the Management Committee, and he and I are closely involved at an appropriate level in operational decisions when the various controls and authorisations that have been put in place are triggered. For example, I would personally be aware of all of the cases where revenue of more than £1 million is at risk.
13. From what you say the board does not really have any direct operational control, you do not have a feel collectively for projects, what they should be raising, particular taxes. You are happy with the system set up by your predecessor, are you?
(Mr Broadbent) I rather changed the corporate structure of my predecessor. The key operational entity is the Management Committee, they do have a view and do have discussions about the balance of priorities between different sorts of taxes.
14. Page 23 now, paragraph 3.6 of the Report notes, "you consider the current threats to revenue are from inward diversion fraud and the smuggling of alcohol". What action are you taking to counter these threats?
(Mr Broadbent) We are very aware of these threats and we put in place over the last nine months a series of operational measures to tighten up controls. These range from reviewing all existing warehouse approvals to putting more resource into Dover in particular to look at the documentation to try and identify fake and forged documents. We have promulgated a much tougher policy on seizing HGV vehicles within the use of smuggling, and this is very well known in the trade. We have taken a series of steps to increase our operational controls. We are committed to publishing a complete strategy for alcohol later this year, and we shall be doing that. In that strategy we will identify whether more than the current operational controls we put in place are needed.
15. Can you say when you expect to reduce fraud to acceptable levels?
(Mr Broadbent) I wish I could, but I think fraud is a never ending threat. It is the nature of the fraud that effectively the world will provide human and financial capital to exploit the economic opportunities that fraud is. It is a dynamic situation. Our aim, of course, is to eliminate fraud. Our realistic likely outcome is to make sure we are always slightly ahead of the picture. We have dealt with outward diversion, effectively in about 20 months of it becoming a problem. When we have dealt with that I am quite sure we will see another opportunity. The nature of this problem is not to believe that a set of fixed controls do more than have a part to play. My own personal view is that you need to create an organisation which is a very flexible and very responsive organisation, so when the external environment changes again, we change at the same time and when the fraud happens we will then deal with it.
16. As it often seems to be the case on this Committee we are dealing with somebody who has recently come to the post and some of the problems occurred in the past. You are in the firing seat at the moment. In 1994 I believe this Committee urged Customs and Excise, "to remain vigilant in the face of the acknowledged risk in alcohol fraud". In the three subsequent financial years, according to table four on page 15 fraud rocketed from £46 million a year to £137 million, £334 million and £339 million, would you say that far from being vigilant in fact Customs and Excise were negligent?
(Mr Broadbent) I do not think they were negligent. I do think there was a change in the external environment. With hindsight one would have liked to react more quickly to these changes. I will digress for a second to observe, as somebody who has worked in other sectors of the economy, that changes in the external environment are always the most difficult thing for any organisation to deal with. Look at Marks & Spencer. The reason for that is that although things are often apparent in hindsight they are not apparent at the time. If you look at what was happening, in the case of these frauds they were at a very, very low level in the 1994, £9 million. Even in the next year they were still measured in tens of millions of pounds. There were two years when they peaked, 1997 and 1998. In that period of time you, first of all, got some signs that the fraud was increasing, you then had to work out how it was happening and you then had to as an organisation understand that the world had changed. I would say that there was probably a gap of 9 to 12 months when Customs & Excise might have moved more quickly internally to understand they had found a problem. They were acting quite effectively on the law enforcement side to deal with it but they had to move from just trying to enforce the law and that took probably somewhere from mid 1996, where you might have said the fraud was evident, to about mid 1997, then after that the fraud decreased.
17. It was quite an expensive delay, 9 to 12 months, because we then lost three quarters of a billion pounds over that period. Do you have any idea if they had acted more quickly how much money would have been saved?
(Mr Broadbent) It is difficult to say. If one acted straightaway the frauds would not have occurred. I think that is a very difficult thing for an organisation to do.
18. The dramatic figure drop from £339 million to £12 million in one year suggests there were some straightforward, clear things you could do and once they were done there was a massive drop in fraud. Presumably those things could have been done 9 to 12 months earlier, you might have saved one of these figures like £339 million.
(Mr Broadbent) If things had have been done 12 months earlier you might have reduced the fraud by whatever 12 month period you saved. The observation I make is simply to get to the point where you see the sharp downturn in the line, it took a succession of actions, it was not just one thing that was done, there were actually a series of initiatives taken.
19. You said in your replies to the Chairman that not a huge amount of money is lost in relative terms as a percentage, it was only 1.4 per cent of the total revenue from alcohol over the period we are talking about. On paragraph 3.6 it says if you include the VAT lost through fraud it is actually £800 million in one year alone, 1999-2000. That is 7 per cent of the total tax recently received from alcohol. I hope I have that right.
(Mr Broadbent) Can you refer me to the paragraph, please?