Select Committee on Northern Ireland Affairs Third Report


THIRD REPORT

The Northern Ireland Affairs Committee has agreed to the following Report:—


IMPACT IN NORTHERN IRELAND OF CROSS-BORDER
ROAD FUEL PRICE DIFFERENTIALS



INTRODUCTION

1. In July 1997, prompted by concerns expressed about the extent to which gas oil[1] was alleged to be used fraudulently as road fuel in Northern Ireland, we asked HM Customs and Excise[2] for a memorandum on this subject.[3] Such misuse is not a new problem, nor is it confined to Northern Ireland.[4] In the autumn of 1998, concerns were also being expressed about road fuel, particularly diesel fuel,[5] being offered for sale in Northern Ireland at prices substantially below the ex-depot prices of regular fuel distributors and the impact of this on retailers. The usual presumption was that such fuel was either fuel smuggled in from the Republic of Ireland, where rates of excise duty are much lower than in the United Kingdom,[6] or, in the case of diesel fuel, gas oil from which the markers had been unlawfully removed.

2. We therefore decided, in October 1998, to conduct an examination of the sale of hydrocarbon oils in Northern Ireland on which appropriate duty has not been paid and the effect of such sales on the legal trade in such fuels. In the course of our inquiry, it became clear that this was simply one facet of a broader problem, which had its roots in the price differential in respect of both petrol and diesel between Northern Ireland and the Republic of Ireland. We therefore extended the scope of our inquiry accordingly.

3. We took oral evidence on four occasions.[7] We also received a number of written submissions.[8] We are grateful to all those who contributed to our enquiry in these ways. We also visited Customs and Excise in Belfast in January 1999 for an informal presentation and discussion on fuel smuggling and related problems and saw some of the vehicles impounded by them following action to counter this. This gave us a very helpful introduction to the problem as seen through Customs and Excise eyes, and we would like to thank the Collector, Northern Ireland, and his staff for their assistance on this occasion.

4. The United Kingdom currently has the most expensive road fuel in the European Union.[9] Unleaded petrol is some nine per cent dearer than in the next most expensive Member State, and diesel is over 50% dearer. Compared to the Republic of Ireland, the current differentials, in sterling terms, are 45% and 61% respectively: according to the Department of Trade and Industry,[10] there is a price differential in sterling terms between the United Kingdom and the Republic of Ireland of 21.6 pence per litre for unleaded petrol and 27.6 pence per litre for diesel. These are the largest differentials in the European Union between adjacent Member States with a land border. The differential in respect of diesel prices is particularly marked: the next closest differential is 9.16 pence per litre.[11] For unleaded petrol, the next closest differential is 16.05 pence per litre.[12]

5. There are two principal factors which combine to create the bulk of the price differential in road fuel between the United Kingdom and the Republic of Ireland. These are:

  • differences in the tax element (excise duty and VAT)[13] in the final price to the consumer; and
  • currency differentials between the pound and the punt (euro).

The effect of the fuel price escalator[14] in the United Kingdom may be expected, in the absence of a major change in fiscal policy in the Republic of Ireland, to lead to an enhancement of these differentials. On the other hand, any weakening of the pound against the euro would act to reduce the current differentials.[15]

6. The very substantial price differential between the United Kingdom and the Republic of Ireland in relation to road fuels creates an incentive for consumers in Northern Ireland to take advantage of the lower prices in the Republic of Ireland. This is typically done in one of two principal ways:

  • lawful cross-border purchases of duty-paid fuel to fill up the running tank of a vehicle;[16]
  • unlawful importation (smuggling) of bulk loads across the border for re-sale in Northern Ireland.

7. Given that there is a total border length of about 300 miles, that there are something like 200 crossing points,[17] and that, within the Single Market, overt border controls are not permitted,[18] it is difficult to police cross-border movements.[19] We ourselves were shown clear evidence of how easy it can be to smuggle a load of fuel across the border from the Republic of Ireland. It is not possible to determine the country of origin of a consignment, either of petrol or of diesel, by analysis of the product, so Customs and Excise must in principle rely on documentation[20] to establish the provenance of a consignment.

8. In tandem with the smuggling of fuel across the border, the high level of duty on road fuel in the United Kingdom acts as an incentive unlawfully to use as road fuel products carrying a much lower rate of excise duty, or which do not carry excise duty, or to mix such products, with or without modification such as removal of dyes and chemcial markers[21] to seek to disguise their true origin, with lawful road fuel. A perennial example of this is the misuse of gas oil, which triggered our initial inquiry to Customs and Excise.[22] Another is the use of kerosene or other substances to 'extend' diesel fuel.[23] There is also particular scope in Northern Ireland for misuse of Republic of Ireland gas oil.[24]

9. A number of consequences flow from this situation. These include:

  • lawful cross-border purchases and purchases from suppliers of unlawfully sourced fuel, who typically offer supplies at significantly lower prices than legitimate fuel retailers,[25] reduce sales by legitimate retailers, and consequently threaten the viability of their businesses;[26]
  • road hauliers in Northern Ireland are exposed to competition from cabotage operations of other European international operators (typically Republic of Ireland-based operators) who have a lower cost base by virtue of lower fuel costs in their home country; and
  • vehicle engines may be damaged by impurities in 'laundered' fuel as the processes used to remove, or to attempt to remove, dyes and fiscal markers can leave harmful residues in the fuel which are not immediately obvious at the time of purchase.[27]

10. A number of further consequences also flow from the unlawful elements in these activities:

  • the substantial profits[28] to be made from fuel smuggling attract the involvement of organised criminals and paramilitaries and operations are typically on a much larger scale than the small- scale operations in various commodities that have gone on since the division of the island, over 70 years ago;
  • otherwise reputable fuel retailers may be pressured into handling smuggled or laundered fuel, either through intimidation or through fear of going out of business if they cannot match local prices,[29] and road hauliers can be subjected to similar pressures and temptations;
  • law enforcement difficulties in some parts of Northern Ireland continue to make it difficult for the Royal Ulster Constabulary and Customs and Excise to proceed against illegal operations.[30]



1  Gas oil is essentially the same as diesel road fuel, but attracts a much lower rate of duty (see Ev. p. 22). To enable its ready identification, a prescribed chemical marker and a colour marker are added. It is from the colour of the dye that this product gets its colloquial names of 'red diesel' (United Kingdom) and 'green diesel' (Republic of Ireland). The use of either in the United Kingdom as road fuel is a criminal offence. Back

2  Referred to in this Report as "Customs and Excise". Back

3  Ev. p. 22. Back

4  Q84. Back

5  In this Report, we use the expression "diesel" for fully duty paid road fuel. Back

6  Ev. p. 29, 32. Back

7  For a list of those who gave evidence, see p xxvi. Back

8  For a list of the written submissions included in the Minutes of Evidence, see p. xxvii. For a list of other written submissions, see pxxix. Back

9  See Appendix 12, p. 97, updating Appendix 4, p. 84. Back

10  Figures as at 14 June 1999 Back

11  Austria-Italy. Back

12  France-Luxembourg. Luxembourg has cheaper unleaded petrol and cheaper diesel than any other Member State except Greece. Back

13  The VAT element is not relevant to most commercial users, who will be able to reclaim it as input VAT. Back

14  See Q240. Back

15  As at 5 July 1999, the exchange rate between the pound and the Irish punt was £1=1.213 punt. Back

16  We also received evidence of commercial users filling their running tanks in the Republic of Ireland, returning to Northern Ireland and transferring the fuel to the running tanks of other vehicles, the legality of which practice appears to be a matter of dispute; see Q194, 197 and 201-3. See also Q133. Back

17  Ev. p. 29.  Back

18  Ev. p. 30. Back

19  Q38. Back

20  Appendix 11, p. 962 Back

21  This process is known colloquially as 'laundering' or 'washing'. Back

22  See also Q174. Back

23  According to HM Customs and Excise, kerosene may be mixed with either diesel fuel or gas oil, in proportions of up to 30 per cent, without damage to engines (Ev. p. 23). See also Q185 and Q174 and Ev. p. 27.  Back

24  It is unlawful to use Republic of Ireland gas oil as road fuel in the United Kingdom (Ev. p. 27). Although Republic of Ireland gas oil is more expensive than Northern Ireland gas oil, there is still a substantial price advantage over diesel fuel (see Ev. p. 28).  Back

25  Q50. See also Q6. Back

26  See, for example, Q33 and 42 and Appendix 6, p. 87 and Appendix 8, p. 88. Back

27  Ev. p. 15 and Q19 and Q184. Back

28  See, for example, Ev. p. 1 and 8; Q28-30; Q184. These profits may be enhanced by smuggling kerosene from Northern Ireland to the Republic of Ireland on the outward movement. See Q7, Appendix 9, p.89. Back

29  See Q6, Q40. Back

30  Ev. p. 29; Q17; Q130-1; 135-141. Appendix 2, p. 80. Back


 
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