Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 29 APRIL 1998
MRS V STRACHAN,
CB, MR R ALLEN
and MR J MORTIMER.
Chairman
1. This afternoon we are considering the
C&AG's report on Volume 16 of the 1996-97 Appropriation Accounts
for the Customs and Excise. The main witness is Mrs Valerie Strachan,
CB, the Chairman. Welcome again to our Committee. Perhaps you
could start by introducing your colleague and then we can start
the questions.
(Mrs Strachan) My colleague is Richard Allen,
who is the Director Personnel and Finance.
2. Welcome to Mr Allen as well. I will start
with my normal opening warning about brevity: please keep answers
as brief as possible. We will go straight into questioning. My
first question related to paragraph 13 in the report. I see from
that that the department detected goods with an excise value of
£29.4 million in 1996-97. However, your surveys lead you
to estimate that the Exchequer lost £950 million in that
year as a direct result of smuggling. Your own figures suggest
that you stop only three per cent of smuggling yourselves. Why
is this and what are you doing to stop the other 97 per cent?
(Mrs Strachan) I can give you some updated figures
which will be a bit encouraging but I will not do that straightaway[1],
I will do it if you would like them. Why it is, arises very straightforwardly
from the fact that we are in a single market, which means we should
not have fiscal controls at the frontiers. We do of course have
very much higher rates of duty than our neighbours in France and
Belgium which means there is a considerable temptation to smuggle.
People are entitled to bring back as much as they like of alcohol,
tobacco, anything else, for their own personal use but not for
commercial sale. Those very big differentials present a temptation
and with limited means of enforcement at our disposal that inevitably
means that there is bound to be a problem and it is one which
has been there and growing ever since the single market started.
In absolute terms it is a large amount. In terms of the proportion
of the revenue it is quite a small amount with the exception of
hand-rolling tobacco. I will go on to tell you the sort of things
we have been doing to prevent it. We certainly aim to improve
our record all the time and in fact in the course of the most
recent year the goods detected nearly doubled. Instead of that
£29.4 million you referred to, the latest figures, which
are of course unaudited and not yet fully quality controlled,
are of the order of £55 million; we made 8,767 detections
in the most recent year and we seized nearly 3,000 vehicles. There
is therefore a very substantial improvement in the most recent
year compared with the year before.
3. Is that on the basis of just a quarter
increase in resources in this area?
(Mrs Strachan) That is on the basis of 330 staff.
We have been gradually putting more staff in but focusing them
more sharply.
4. The year on year increase was about 24
per cent, was it not?
(Mrs Strachan) Something like that. We have tightened
up the restoration terms for hired vehicles as the report makes
clear. We had what is now our traditional pre-Christmas exercise
where we plough in some more staff from neighbouring regions and
that was very successful. We have had joint exercises with the
Kent police and the Department of Social Security and indeed the
Kent police reported an 18 per cent reduction in crime while they
were doing that exercise. The DSS reported significant savings
in fraudulent benefit claims because of course whilst the smugglers
are fiddling us they will fiddle everybody else in sight as well.
Further measures were announced by the Financial Secretary just
a week or so ago in the course of the Second Reading of the Finance
Bill and those are tougher terms for non-hired vehicles and also
the fact that we would be pressing in our prosecution policy for
all available sanctions including driving disqualifications, compensation
and confiscation orders, and we will approach the relevant authorities
to have liquor licences withdrawn in cases where a publican or
a liquor retailer is involved. We will also approach the Traffic
Commissioners to have hauliers licences removed on convictions.
We have a number of other measures which have been put to Ministers
as part of the alcohol and tobacco fraud review. Ministers are
now considering those recommendations in the context of the comprehensive
spending review and I hope they will make announcements in July.
5. In a sense that partially answers my
next question. I was going to ask you about the 80 per cent increase
in reclaims of duty paid on exports of beer. It is noted in the
report in paragraph 34. You have just told us that tightening
controls is under way and also being considered. How much revenue
was lost as a result of that?
(Mrs Strachan) The fraud at a significant level
had a lifespan of about 18 months. During that period the total
beer drawback which was claimed was £70 million; not all
of that was fraudulent of course. Of that we think now that probably
not less than £25 million but not more than £50 million
was fraudulent.
6. That much.
(Mrs Strachan) That much, yes; it was a serious
fraud.
7. Why did it take the department quite
so long to tighten the controls?
(Mrs Strachan) The problem started to become evident
shortly after we had introduced new regulations which we had to
introduce in order to implement the European legislation fully.
Those regulations had the effect of widening the categories of
people who could claim beer drawback. Our investigators' suspicions
really were first raised in the middle of 1995. We set up a central
unit to monitor drawback claims towards the end of 1995 and, as
a result of that monitoring, specific investigations into two,
what turned out to be very big, cases were started in January
1996 and August 1996 and they were knocked in November 1996. Immediately
following that we changed the procedures. You may well ask why
we did not change the procedures earlier. This is where I have
to point to one of the points which the NAO make about the purpose
of investigations. It is to get at major fraudsters as well as
stopping the frauds a quickly as possible. These frauds were being
committed at the same time as a number of other types of fraud
against the excise system. If we had tightened up the controls
on drawback earlier we would have effectively warned the organisers
that we were on to them. The nature of the fraud was such that
the organisers were very well back in the chain. A whole series
of bogus businesses, false identities and so forth were involved.
The investigators had to make a judgement about how quickly to
knock the case and get these fraudsters, who were involved in
other frauds.
8. You were snaring the big players.
(Mrs Strachan) Yes, that was the aim.
9. I am going to change subjects slightly
now back to paragraph 8 on the shortfall of £1.2 billion
in VAT receipts as compared with the November forecast. The forecast
was £47.9 billion and your target allows you to get the forecast
wrong by plus or minus £1.44 billion, a range of nearly £3
billion from top to bottom. How can the department justify having
such a broad target range, given the size of the revenues involved
and their importance? Is this not too broad a target to ensure
future forecasting accuracy, since I understand it is actually
improving?
(Mrs Strachan) Yes. To pick up your last point
first, it did improve very considerably and indeed in the most
recent year we were within £78 million of the November 1996
forecast which was an error of 0.2 per cent. You might reasonably
feel that plus or minus three per cent is a bit of a soft target.
All I can say is that at the time it was set it certainly was
not a soft target because it was set against a background of a
very substantial error in the forecasts on which the NAO reported
first last year and there is some more about it in this year's
report. We have still set the forecast at plus or minus three
per cent for this year but we will look at it again in the light
of the fact that we do seem to be getting better at VAT forecasting.
At the time we set it, it was a tough target. We would not have
hit it 50 per cent of the time in the previous ten years but we
will aim to tighten it.
10. The revised Figure 13 shows £1.3
billion of debt at 31 March 1997 and that £481 million of
debt was more than six months old. During 1996-97, £516 million
was written off-that is Figure 14. To put that another way: one
third of the debt is older than six months and roughly one third
of debt is written off. Do you actively pursue recovery action
for debts older than six months, or should the Committee infer
from these figures that once a debt is older than six months you
feel it is irrecoverable and so write it off?
(Mrs Strachan) You certainly should not infer
that. We do pursue debt which is older than six months and indeed
our local offices have targets which do focus on trying to keep
to a minimum the debt which is more than six months. The reasons
why debt becomes more than six months old are many and various.
For example, they will include cases which are going through civil
recovery so we are certainly pursuing debts at that point. Three
are debts which for one reason or another have slowed up in the
system, perhaps because the trader has put in an appeal against
an assessment and that has taken time to resolve through the tribunals,
perhaps because the trader is under investigation. You can get
some quite large amounts held up whilst cases are under investigation
for possible evasion of tax. I can assure you we do pursue very
hard the debts over six months as well as under six months.
11. I want to turn to paragraph 44. That
shows the target for collecting taxes from large payers by the
due date is only 95 per cent. Surely the target should be for
all large taxpayers to pay the due amount on time, should it not?
(Mrs Strachan) Our activity is geared to trying
to ensure that all large payers do pay spot on time. It would
probably be unrealistic as an operational target to set 100 per
cent, if only because there are all sorts of things which may
not be within the traders' control or our control which might
cause them to miss the due date. For example, postal delays, banking
delays, banking errors, traders' internal procedures being changed
which causes them to be slightly late. At any time even a large
payer may be getting into difficulties and possibly on their way
to insolvency; so that is simply for business reasons. 100 per
cent would be an unrealistic target to set. I can report an improvement
in the most recent year. The figure, unaudited, was 96.23 per
cent. I would draw your attention to the fact that 30 days later
there is only 0.23 per cent of debt which is outstanding from
these payers. The National Audit Office themselves refer to a
picture of tight control.
12. Others may want to debate with you targets
versus forecasts but I will move on from that. Paragraph 60. The
Legis programme looking at fines and penalties began in 1993 but
you have not yet completed it. Why? What is your timetable for
completion, what improvements do you expect to make and what will
be the impact?
(Mrs Strachan) Legis is a fairly long-term project
and at the moment it has become part of our comprehensive spending
review. It has already had some fruits in the sense that there
were streamlined debt recovery provisions which were included
in the 1997 Finance Act which should ensure equity of treatment
of debt recovery across the customs taxes and duties. So far as
the rest are concerned, the teams are finalising their findings
at the moment and we will be putting them to Ministers in the
course of this year. As to when you can expect a total outcome,
the nature of the project is such that you are likely to see it
coming forward in pieces as Ministers are satisfied that that
is the right thing to do on any particular subject. It will also
depend a bit on space in Finance Bills, which of course are subject
to considerable pressure.
Mr Leslie
13. May I take up a point you mentioned
earlier about VAT debt which has been written off? You said roughly
one third of the £1.3 billion which was outstanding for long
periods in the year 1996-97 was written off. We have heard some
reply from you about why that might have been the case. What I
am curious about is that my understanding is that insolvencies
are by and large the main cause for this, companies which go bust
and basically make it more difficult for you to follow them up.
However, what I want from you is some sort of assurance or explanation
as to how rigorously you are pursuing the creditors of these insolvent
companies and what your strategy is to recover a lot of this debt.
When I was a local councillor, when we had council tax debt outstanding,
if it was more than a couple of percentage points, the Audit Commission
would leap on top of local councils. To have one third of any
debt written off is a very large amount indeed. What action are
you taking to pursue the creditors?
(Mrs Strachan) We are different from many other
creditors in the sense that we are involuntary creditors. We cannot
take the action which, say, a normal business would be able to
take with a suspect payer, which is to simply cut off supplies
to them. If people go insolvent we are stuck with that. We certainly
do not stop action at the writeoff point. The writeoff is simply
to get the ledgers clear at the point where somebody goes insolvent.
We do assiduously pursue the insolvency practitioners to make
sure that we do get proper returns, they continue to submit returns
and we do seek to recover debt after writeoff. For example, in
1996 £37 million was recovered after writeoff and it runs
at about 950 cases per month.
14. Are you happy with that level?
(Mrs Strachan) We are never happy with any given
level, we always try to improve. If you ask the insolvency practitioners
they would probably tell you that we were quite assiduous in pursuing
them.
15. To move to a different area, you undertake
a number of anti- smuggling initiatives and I am glad to see that
these are quite innovative on lots of occasions, including penalising
those who let out vehicles for hire. You make sure those companies
are penalised for giving vehicles to persistent smugglers. What
I am interested in more generally is whether you believe there
is a spend to save ratio in anti-smuggling initiatives in your
department. Obviously there has been a lot of controversy in recent
years about the numbers of staff you have but do you believe that
there is a case that if you spend more on enforcement and anti-smuggling
you can save a lot more?
(Mrs Strachan) This is a path down which I am
regularly drawn by the Committee of Public Accounts. Perhaps I
can best answer it by referring again to the fact that we have
just had a review of alcohol and tobacco fraud. We have put a
number of recommendations to Ministers. You will have seen that
the Chancellor said that some of our recommendations do have resource
implications and that is why they are being considered in the
context of the comprehensive spending review. It is probably implicit
in what I have said what the answer is.
16. Out of interest, I do not know whether
you have the figures to hand, how many operational staff did you
have when you came in as Chairman back in 1993 and how many operational
staff are there today?
(Mrs Strachan) I cannot answer that instantly.
The short answer is that I had more operational staff but I cannot
give you an exact number. I have fewer now but they are delivering
better outputs because their efforts are better focused. It may
not be terribly easy to derive operational staff as opposed to
total staff right away.
17. Could we have a note on that because
it would be very useful[2]?
(Mrs Strachan) You can certainly have a note.
18. I appreciate that focusing the work
of staff is obviously very welcome but if you can focus the work
of more staff that would be even more welcome. May I ask about
the fines and penalties system you have to try to enforce a lot
of your policies? How effective do you think the current regime
of fines and penalties is, both civil and criminal?
(Mrs Strachan) That is a very broad question.
There is no doubt that the system of civil penalties which was
brought in for VAT following the Keith Committee's review of our
powers has been very effective in improving compliance. For example,
at the time just before we introduced default surcharge, something
like 68 per cent of returns and payments came in on time. There
was an immediate increase. Now 85 per cent of returns and payments
come in on time. That is a measure of how effective that particular
measure has been. Other measures have been geared to securing
greater accuracy in returns. It was noticeable that after those
measures came in, there was less additional liability discovered
by our officers but more voluntary disclosure by traders of errors
which they themselves had discovered. The answer so far as civil
penalties on VAT are concerned is that they have been very effective.
The regime has been modified over the years to reflect particular
concerns but we still think that by and large that regime is effective.
19. Do you think justice is being done a
lot of the time? Do you have a figure for the proportion of cases
you have on your log which you are investigating which actually
go to court? How many are actually taken all the way down and
prosecuted? What is the outturn?
(Mrs Strachan) When we investigate a case for
criminal activity then we would have a decision to make about
whether if the evidence is sufficient we offer what is called
compounding, which enables the offender to settle for a financial
penalty or whether we take it to court and prosecute. We publish
our figures for prosecutions and for compounding each year in
the board's report. We can give you the exact numbers that we
take.
1 Note by Witness: The estimate of revenue evaded
of £950 million was for the 1997 calendar year, not the 1996-97
fiscal year. Back
2
Note: See Evidence, Appendix 1, page 17 (PAC 297). Back
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