Examination of Witnesses (Questions 140-159)
MR RICHARD BROADBENT AND MR MIKE WELLS
MONDAY 25 FEBRUARY 2002
140. Do you accept that there is nothing wrong or illegal in legitimate cross-border shopping?
(Mr Broadbent) Yes.
141. It is what you do if you can get a better bargain.
(Mr Broadbent) It is not for me to make a judgement on it. It is just not my business.
142. It is not illegal or wrong.
(Mr Broadbent) It is not illegal.
143. May I refer you to Figure 2 on page 3 to try to assess what figure we are worried about.? We are not worried about the £900 million. What proportion of the other figures in that table are we not worried about. You mentioned a figure of £600 million was really a genuine level of fraud. Is that in GB and Northern Ireland in total or is that your figure for what the fraud figure is for mainland UK?
(Mr Broadbent) The analysis I tried to go through was my own personal judgement, I hasten to add. I would not give it the weight of a Government estimate. I was trying to be helpful and give my personal view. What I did was to say let us take the £450 million as diesel, which we are fairly confident is fraud; we can discuss how accurate the estimate is. The mainland UK fraudulent petrol market is quite small. We do not know exactly how small but this is petrol not diesel. It is quite difficult to get a hold of. You have to smuggle some petrol and then somehow deliver it to somebody which is quite difficult to do on a large scale. Therefore, we think that of that £150 million a very small amount is fraudulent.
144. Say about £20 million.
(Mr Broadbent) It would be specious accuracy, but it is very small. It could well be £20 million, it might be less.
145. Les us say £10 million then.
(Mr Broadbent) Yes; it could be.
146. What about Northern Ireland.
(Mr Broadbent) I guess the sort of sum I did in my head was this. We have done some analysis of economics. In Northern Ireland every commercial haulier has an economic incentive to drive across the border, fill up his tank and drive back. The economics say you should do that. Thirty per cent of private motorists have the same incentive. Wherever you are in Northern Ireland you should drive and get that. It would be foolish to say that all of the £230 million diesel was cross-border shopping because we know from our operations that there is crime and similarly 30 per cent of £150 million. So I said very crudely that the economics tell us, and indeed our own activity surveys suggest, that the level of cross-border shopping is material. Suppose it is half.
147. As much as that?
(Mr Broadbent) It could well be half.
148. As much as half of that is fraud.
(Mr Broadbent) I do not know, is the true answer; all I am trying to do is give you the basis of the personal judgement I gave. The economics tell you that these people have this incentive to do cross-border shopping; it could be half, it could be less than half. Of that diesel figure of £230 million every haulier in Northern Ireland has a legitimate incentive to cross the border and pick it up. We do not think everyone does but we think a lot of them do; some of the bigger firms certainly do.
149. Yes, it makes sense.
(Mr Broadbent) Half would be an upper estimate in my view.
150. So it is £115 million diesel and £75 million of petrol is fraud. Is that right or wrong?
(Mr Broadbent) Very broadly what I did was to add the £450 million together with about £200 million other fraud to get to my £600 million.
151. So we are talking about £650 million.
(Mr Broadbent) Yes.
152. So this report is not about £1.8 billion which this table seems to indicate, it is really about £650 million.
(Mr Broadbent) That is the fraudulent activity. Cross-border shopping is a factor you have to take into account when deciding what duty rate to set, but the fraudulent activity is £650 million.
153. In terms of fraud, which is what the recommendations are about and what we are focusing on.
(Mr Broadbent) Yes and £650 million out of a £22 billion regime, which is not to be satisfied with but is not my worst regime.
154. Absolutely. What is the rate of duty on diesel in the Republic of Ireland?
(Mr Broadbent) It has been falling recently. The current rate of duty is 15.8 pence per litre.
155. What is the rate of duty on diesel in Great Britain, on ULSD?
(Mr Wells) The latest January 2002 figure I have for diesel in the Republic of Ireland is 18.9 pence per litre and for unleaded petrol in the Republic of Ireland the duty rate is 25.1 pence per litre, on top of which the Irish VAT rate is 20 per cent against 17.5 per cent in the UK.
156. What is the rate of duty in Britain on unleaded petrol and diesel?
(Mr Wells) Currently on unleaded petrol the duty rate is 45.8 pence and similarly presently on diesel also 45.8 pence.
157. So it is significantly different. Significantly higher than the rates on diesel and petrol in Ireland from 18.9 pence a litre diesel compared with 45.8 pence in Britain. The incentives are huge to cross-border shop. How do you calculate the £450 million fraud figure in Figure 2?
(Mr Broadbent) In GB?
158. Yes, the UK mainland, going back to that for a second.
(Mr Broadbent) That is calculated on the basis of traffic surveys giving us an estimate of the number of vehicles. We then have to make assumptions about the mileage those vehicles run, for which there was also statistical data collected by the DETR, we then needed to make some assumptions about fuel economy which were in manufacturers' estimates. There was a series of steps but essentially it is based on working out what we believed the consumption in diesel should be through the movements of goods vehicles which use diesel and doing statistical bases and in some cases survey bases and then comparing that estimate with what we actually levy duty on and there is a gap. I had to make a number of assumptions in that process, so there is a sensitivity there.
159. What is the sensitivity rate?
(Mr Broadbent) There are two particular things I would draw attention to: one is that we had to make an assumption about whether or not the VAT due on the diesel is lost or not. We have made an assumption that it is all lost. In reality probably it is not all lost because some of that fraud is reflected in lower output prices not in other activities, so that would be a minus £40 million. The other sensitivities are primarily to do with the sort of data which might be plus or minus two per cent.