Examination of Witnesses (Questions 1-19)
MR RICHARD BROADBENT AND MR MIKE WELLS
MONDAY 25 FEBRUARY 2002
1. Order, order. Welcome to the Committee of Public Accounts. This afternoon we are going to consider the Comptroller and Auditor General's report on the smuggling and misuse of hydrocarbon oil. We are delighted to welcome you back, Mr Broadbent, Chairman of Customs and Excise. Perhaps you would introduce your colleague.
(Mr Broadbent) This is Mike Wells who is the Director of Law Enforcement Policy in Customs and Excise.
2. May I start by referring you to page 8, Figure 5, the overall progress made by Customs in quantifying their risks? You will see there the figures for the level of fraud against Customs' duties running around £6-£7 billion a yeara very large sum of money. We have fraud on hydrocarbon oil duty between £0.45 and £0.98 billion. What are you doing to tackle it?
(Mr Broadbent) In relation to hydrocarbon oil specifically, I would point to three things. We have increased the resources we allocate to the job. We have changed our pattern of activity, in particular the activity is now more guided by intelligence and investigation. While we are delivering that operational response, the Government is consulting on various longer term measures to change the regime, to put in place a longer term, more stable set of assurance processes.
3. You are obviously a relatively new accounting officer so you have the advantage of coming in new to this field, a fresh approach. What sort of ideas do you have? What changes will you be making to try to improve the effectiveness of your department? What is your view of the recent effectiveness of your department and what changes do you think you can make?
(Mr Broadbent) I have just passed my second birthday, so you are generous in saying I am relatively new; I have been in post just over two years. This is quite a short period of time because these are large organisations and the tasks are very complex. I would point to three things. We have spent the last 18 months to two years first of all trying to move the emphasis of the organisation from reliance on processes to reliance on an individual judgement, to more learning qualities of response, flexibility, speed, to understand that the value you add to a job is the point when the process stops, not delivering the process itself. Secondly we have tried to moveand I do not want to oversimplify thingsperhaps from being somewhat tactical in our approach, if things are coming across the border we try to interdict them, to being more strategic in our approach. We want to understand more about our impact on the real world, very crudely to move from measuring how much we do in terms of outputs to measuring the impact of what we do on the real world. Thirdly, I would point to a set of organisational management changes which are designed to support those two changes of emphasis.
4. Could you now turn to page 11 and paragraphs 1.19 and 1.20? You have set targets to reduce the level of tobacco smuggling and missing trader fraud but not yet for hydrocarbon oils duty. Why have you not yet set a target?
(Mr Broadbent) We are aiming to set targets and I do not want to suggest the problems are not urgent. Two years ago we had no strategies, we had no analysis of the size of the problem, we had no estimates of fraud and we had no outcome based targets at all. In those two years we have put in place a complete tobacco strategy, funded, with outcome based targets and now being implemented. We have put in place a strategy with outcome based targets to tackle missing trader fraud. We have published estimates for most of our major regimes; we are still working on figures in relation to VAT; we are consulting on strategies for oils and for alcohol. I do appreciate that these issues are urgent and as the Government said in the PBR last November, further announcements will be made in the context of the Budget and the spending review. What I am saying in short is that I do believe we have done quite a lot in the last 18 to 24 months. It is not that we are trying to avoid doing things, we are trying to do them in an orderly and high quality fashion. Secondly, some of the issues which go towards what the outcome based targets should be related to resources. We cannot simply set outcome based targets without considering what the resource implications are and that is quite properly a matter for discussion with Ministers in the course of the spending review.
5. Do you appreciate that it is important to have a target so that we have a benchmark against which we can judge your performance? Are you now giving me a date when these targets will be set?
(Mr Broadbent) I cannot give you an exact date. I can say what the Government said last November, which is that the announcements will be made in the context of the Budget or the spending review.
6. The sums lost on the UK mainland have doubled in a year, which is rather worrying. The main threat appears to come from the misuse of rebated fuel. Are you satisfied with the response of your department to this threat?
(Mr Broadbent) I am satisfied that we are getting to grips with the problem. I am not satisfied that we have by any means completed the job.
7. How can you be getting to grips with something when it has doubled in a year?
(Mr Broadbent) We have done several things: increased the level of resources, I mentioned; changed the way of working, I mentioned; without wanting to go into the detail, we need to recognise the limitations of some of the estimates we are working on. There is no doubt that the level of fraud is increasing; the underlying trend is up. Whether it is doubling every year is another matter. There may have been some externalities in that particular year in question which may have inflated the misuse of red diesel in that particular year.
8. You told us back in October when we were discussing alcohol fraud that you needed to be more flexible and fleet footed to tackle emerging frauds. How confident are you that you are indeed becoming in this more fleet footed and more flexible?
(Mr Broadbent) I point to three things in relation to misuse. I do not want this to sound complacent, but the first thing is that we have spotted the problem. This is a problem nobody knew about two years ago.
9. Why not?
(Mr Broadbent) Because the data was not being collected and analysed. The actual level of fraud was quite low. The regimes were probably 98+ per cent compliant before the year 2000. It is not that simple to spot these things. When fraud began to take off we were relatively quick to spot it in GB. We were relatively quick to respond. We have very materially increased the resource being allocated to tackling misuse and the Government has already announced consultation on longer term measures to tackle it. I do not for a moment believe that is complacent, but to move from a standing start to that position within 12 to 18 months is what I would call more fleet of foot.
10. May I refer you now to page 19, paragraph 3.14? You were looking at your operations using a risk-based approach and you found evidence of duty evasion at 44 per cent of the traders visited, which sounds to me incredibly high. How worried are you about this? What are you doing about it?
(Mr Broadbent) In one sense I am worried because we think fraud is increasing on an upward trend. I am quite pleased with the hit rate at 44 per cent because those particular visits were part of one of the changes in the pattern of activity we have made to drive much of our visiting by intelligence-led work. The consequence of that is to change the hit rate from what we expect in random tests, which is around about four per cent, to a hit rate of about 40 per cent and that is actually a measure of how intelligence can leverage the use of resource.
11. If you look at what other countries are doing, particular page 22 and paragraph 3.22, Denmark seems to be developing an interesting idea whereby traders must register with the tax authorities, purchase the fuel at the normal duty paid rate and reclaim the duty by netting it off against VAT. It just seems to me that what Denmark has done seems to be an effective way of making it much more difficult to defraud the system. Do you agree with that and are you looking at what Denmark is doing?
(Mr Broadbent) I am not in a position yet to disagree or agree. We are looking at it. The preliminary analysis we are making is that it does have certain advantages and effectiveness clearly. There are certain disadvantages. One of them is cost; there is no doubt that it is a more costly system to administer both for us and for traders. The other one, and this is where we are going to need to find out more from Denmark, is that a repayment system does not necessarily stop fraud; it stops a particular sort of fraud and opens up an avenue for a new fraud which is repayment fraud which in the case of VAT is a major concern of ours. It is a balance issue: we are looking at it and we need to learn more from Denmark about the real balance of advantages before we can come to a final judgement.
12. Let me put a point to you as someone representing a rural agricultural area where there are farmers using red diesel in their tractors and I would be the last to suggest that they are always putting it in their cars as well. I must confess that in Lincolnshire I have never ever seen any spot checks on the road. Nobody has ever asked me to check whether I have any red diesel. When I was discussing it with officials from the National Audit Office earlier this afternoon, they said you only have 70 people in the entire country doing spot checks.
(Mr Broadbent) Yes.
13. It seems incredibly low to me. Really the chances of ever being caught are very, very small, are they not?
(Mr Broadbent) We carry out something in the order of 20,000+ spot checks a year, but it is not our primary control at all. I do agree that it is actually a bit more like the police car parked on the motorway to discourage people from speeding: it is more of a deterrence value than an attempt to believe we can control misuse by testing at point of use. The real work is done by these units which are driven by intelligence, where you get the 44 per cent hit rates by investigation work and we are consulting on bringing in a registration scheme and that is where the real control mechanism should go in. Random testing at point of use has a role to play, just as the red channel at Heathrow has a role to play, but it is not the major role.
14. Can we very briefly turn to Northern Ireland where there is a very serious problem indeed? If we look at page 8 and paragraph 1.11 we see that the revenue losses have increased from £140 million in 1998 to £380 million in 2000. This is really an astonishing increase, especially when you only collect £750 million in total there. This is a very serious problem indeed, is it not? I feel rather bruised about this because I agreed to do the Northern Ireland Today programme when this report was published. I was giving all the normal responses about how we should do more intelligence work and all the good work you were doing. They just said they simply could not cope with this. It was like putting the little boy's finger in the dam. The money is pouring out.
(Mr Broadbent) I am always available to offer briefing for any appearances if you wish to consult me; I am always very happy to do that. You are right. It is a very serious situation and we should not be frivolous about it. It is one which troubles me very deeply. I am sure we shall talk more about it. I would just say two things. The most important thing I can say about Northern Ireland is that we believe the position is stabilising and slightly improving. The latest figures we have show that deliveries of legal product to Northern Ireland are rising this year for the first year in five years. That is an acid test of effectiveness. The second thing I would say is that I do not believe everything we have done or are doing is perfect or necessarily as effective as it could be, but we have to look at what we are doing, what we could do, in the context of the situation in Northern Ireland as a whole, which, as you recognise, is not straightforward.
15. You say that but we see from this report, page 15, that one third of filling stations in Northern Ireland are openly selling illicit fuel, only selling it, that half of all filling stations in Northern Ireland are selling illicit fuel. It seems to me that this position is out of control in Northern Ireland.
(Mr Broadbent) The level of compliance is dangerously low in Northern Ireland.
16. That must be the understatement of all time.
(Mr Broadbent) It is a very serious thing for the Chairman of a revenue collecting organisation to say that compliance is dangerously low. There are some quite complex factors which go to filling stations, which we can talk about in more detail. I wish it were easier to solve the problem, but it is quite difficult to prosecute people who run filling stations because you need to prove that they know the fuel they are selling is illicit and it is not often easy to show that. It is quite difficult to close them, because we are not the licensing authority, we have to rely on local apparatus of power in Northern Ireland and they are not always able or necessarily willing to do it. It is not always easy to disable them because our staff are attacked and you cannot get the contractors to disable them and if you did all these things all you might do is displace the problem somewhere else into illegal huckster sites. Displacing a problem round and round a circle of illegality is not going to be an effective solution. I am not by any means trying to understate the seriousness of the problem, but as always the solutions are more complex than they might appear at first sight.
17. I am not criticising you here because I think you have an impossible job. Maybe this is an unfair question but I shall put it anyway. Is it entirely fair to put you in a position where you are trying to enforce an unenforceable law, given the difference between the rates of duty in the Republic and Northern Ireland?
(Mr Broadbent) It is quite fair to ask me to do my job. I would say that we will not succeed wholly, we may be able to contain the situation, without other agencies in Northern Ireland working with us. When I say "other agencies" take the case of filling stations, it is local authorities who license them, it is the Health & Safety Executive who has the power to close them, it is the Trading Standards Authority who has the ability to fine them for breaking trading standards. I believe that if all the agencies in Ireland worked together in this as in so many other areas in Northern Ireland, then there would be an improvement in compliance here as in other areas. I have a lot of respect for the work being done by Ministers and many other politicians in the very slow process of trying to move us in that direction, in which we should like to play our part. We cannot win alone but we can play our part.
18. I do not feel very sanguine about this fleetness of foot which you have described. The report seems to illustrate lack of coherence in terms of enforcement and detection. I want to illustrate that in a number of ways but first of all do you have any comment about that statement?
(Mr Broadbent) Without wishing to evade the question, I need to know whether we are talking about Great Britain or Northern Ireland. I would make one general point at the beginning of this hearing and that is that we have to deal with the two things quite separately.
19. I am talking about Great Britain. I will give you an example rather than an open-ended question, on the issue of sight tests rather than more objective tests which are described in this document. Why is it that your staff have relied so much on an unreliable system of trying to detect the presence of one type of fuel rather than another?
(Mr Broadbent) Broadly it has been the right thing to do. I am sure that it is not absolutely right. Historically the pattern of fraud has been low level and generally speaking large numbers of isolated small cases of misusers. Red diesel has a dye in it, so you can distinguish it clearly by eye and the key to effective enforcement has been to carry out large numbers of checks with a sight test and then move on quickly to the next one. You can do 50 sight tests in an hour; you can only do five chemical tests in an hour.