House of Commons - Northern Ireland Affairs

Select Committee on Northern Ireland Affairs Third Report

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

RESPONDING TO THE PROBLEM

22. Legitimate cross-border purchases will in practice be restricted to duty paid petrol and diesel in the running tanks of vehicles.[59] Unlawful products and movements may include:

bulk supplies of petrol, diesel or Republic of Ireland gas oil in road vehicles, not accompanied by the required documentation;[60]
bulk supplies of laundered or adulterated gas oil, in vehicles or at retailers' or transport operators' premises;
gas oil, or laundered or adulterated gas oil, in the running tanks of road vehicles.

Republic of Ireland petrol and diesel supplies are indistinguishable from those in the North, so it is not possible to determine the source of such fuel from analysis of running tank contents or retailers' or operators' supplies. The presence of gas oil can be determined by laboratory analysis and, often, visual observation. In many cases, laundered fuel can be identified by laboratory analysis, which frequently reveals remaining traces of the markers, or evidence of the chemicals used to seek to remove them.

23. Gas oil misuse is primarily driven by the duty differential between that product and diesel road fuel; the price difference between Northern Ireland and the Republic of Ireland is very much smaller than for road fuels. Both smuggling of petrol and diesel and cross-border shopping have a common root cause — the duty differentials compounded by the currency differentials. Both may be expected to respond to policy changes which reduce or eliminate one of the causes. Such measures alone will be effective in reducing lawful cross-border purchases as, within the Single Market, overt border controls are not permitted. However, in the case of unlawful sales or supplies, other actions and policy changes may reduce or eliminate the problem. We therefore consider first the question of unlawful sales, before turning to possible policy changes designed to reduce the common incentives that underpin both unlawful sales and cross-border purchases.

Smuggling and gas oil misuse

24. A number of witnesses were very critical of both the scale and the effectiveness of Customs and Excise attempts to stop the smuggling of road fuels and misuse of gas oil. As Mr Leslie Murray, of the Legitimate Oil Pressure Group put it:[61]

"Finding people who are happy with Customs and Excise ... is a difficult task."

The Petrol Retailers Association commented[62] that:

"The efforts of HM Customs and Excise to date have made little real impact on the volume of smuggling ...."

It also drew attention to the relative infrequency of control visits to fuel retailers in normal circumstances.[63] The Road Haulage Association commented that the scale of the Customs and Excise operation in Northern Ireland was "pathetically inadequate"[64] and such that the risk of being caught was very small. It was also of the view that the penalties were such that "the prospect of saving £200 per tank of fuel may be considered a risk worth taking."[65] The Freight Transport Association considered that Customs and Excise in Northern Ireland were "probably under-resourced."[66]

25. Concern was also expressed to us that, when information was passed to Customs and Excise on apparently dubious retailing operations, it was very slow to take action. Mr Archer, of the Freight Transport Association, considered that Customs and Excise should be checking the source of very cheap fuel advertised, typically, on main roads.[67] The view was also expressed that greater co-ordination with other institutions, such as the Royal Ulster Constabulary and the Inland Revenue, would be appropriate.[68]

26. In their written evidence, Customs and Excise described the measures taken to seek to counter misuse of road fuels.[69] The Belfast Road Fuel Testing Unit has developed particular expertise in this area. A Memorandum of Understanding is being developed with the Royal Ulster Constabulary and Customs work with the Revenue Commissioners in the Republic of Ireland, with whom information is exchanged. Mr Norgrove commented that co-operation with a number of other agencies in Northern Ireland, including the Health and Safety Executive, the Inland Revenue and Trading Standards was "very good and very fruitful".[70]

27. Mr Norgrove conceded that criticism of Customs and Excise for not closing down illegal sites immediately was 'understandable'.[71] He cited two general grounds for not doing so:

the information provided often falls short of the standards of evidence required; and
the retailers' continued operation may be instrumental in helping Customs and Excise to formulate a case against a supplier.

He also commented that requests for further and better particulars did not always lead to further information being forthcoming.[72] In their September 1997 memorandum, Customs and Excise had commented that:[73]

"It is clear that a considerable amount of intelligence .... is available from within the ranks of the transport industry. It is of some concern that, in relation to road fuel offences, quality intelligence continues to be generated without any significant input from road haulage operators."

28. On the overall scale of the problem, Mr Norgrove conceded that this was not known, but the numbers of successes was increasing.[74] More incidents were being detected, which might mean either that Customs and Excise were having greater success, or that the problem was increasing, or some combination of the two factors. He commented:[75]

"It would be wrong of me to claim that Customs have this problem solved and that we are as on top of it as we would like to be. It is a big problem. The scale of it is large, it is a serious and widespread problem and the nature of the land boundary and the illicit nature of the transactions involved makes it very difficult for us to claim confidently that we are on top of this problem. Nevertheless, I am encouraged by our recent successes ...."

29. On the incidence of 'washing' of gas oil, Mr Norgrove commented that there was still evidence of this practice on both sides of the border, that Customs and Excise had not managed to shut down all operations and that new areas were always liable to spring up when others were closed down. Nonetheless, the incidence of seizures of 'laundered' fuel was not rising as steeply as general seizures of duty paid fuel.[76]

30. Mr Logan, the Northern Ireland Collector, described the Customs and Excise strategy as 'intelligence driven',[77] and Mr Norgrove commented that intelligence was increasingly at the heart of Customs and Excise operations generally. Both Mr Logan and Mr Norgrove drew attention to different ways in which information was being brought together from a variety of sources to build up a pattern which was proving increasingly effective in countering smuggling. Mr Norgrove summed up the position thus:[78]

"I think our increasing success reflects our greater sophistication in the use of and quality of intelligence ...."

31. At the time when Customs and Excise staff gave evidence to us, 20 staff were uniquely dedicated to the task of countering road fuel duty evasion, but Mr Norgrove pointed out that resources were deployed "fairly flexibly" so additional resources could be found to assist in particular operations whenever the need arose.[79] In addition, the resources of the National Investigation Service and staff of the mainland could be drawn on. There has been substantial reinforcement of Customs and Excise staff in the Northern Ireland Collection. Mr Norgrove told us[80] that there had been reinforcement of the staff complement, from 1 April, with the addition

of six further specialist staff to enhance the resources dedicated to countering road fuel smuggling. A new Deputy Collector was also being appointed,[81] one of whose tasks would now be to take charge of this issue and to improve co-ordination with other bodies with an interest in this problem. He has responsibility for delivering on the various performance indicators and targets set for the Collection in relation to countering road fuel tax evasion, which have been made substantially more stringent for the current financial year.[82] The Economic Secretary commented that, in the preceding six months, Customs and Excise had had an extra 13 full-time staff in Belfast to deal with road fuel duty evasion, an increase of more than 50 per cent since the start of the year.[83]

32. Cross-border co-operation clearly has an important part to play in deterring smuggling. There is a Memorandum of Understanding with the Revenue Commissioners in the Republic of Ireland on excise matters, amongst others, and Customs and Excise work with the Revenue Commissioners obtaining information on supplies of fuel.[84]. Mutual assistance direct between agencies is used operationally to gain information and intelligence for control, compliance and investigation purposes. Mr Norgrove commented that, on occasions when investigations needed to be pursued on the other side of the border, "the operational co-operation between the two sides is first class."[85]

33. In addition, a member of Customs and Excise staff serves in the British Embassy in Dublin as Fiscal Liaison Officer.[86] His primary role is to facilitate mutual assistance and mutual legal assistance for the purposes of preventing, detecting, investigating and prosecuting trans-national commercial fraud common to the interests of the United Kingdom and the Republic of Ireland. He has been able to assist cross border co-operation between Northern Ireland Collection and Irish Customs through helping to co-ordinate local arrangements with wider operational arrangements.

34. Customs and Excise and the Economic Secretary have successively updated us on the results of their anti-smuggling and gas oil misuse operations.[87] The key elements are reproduced in the Table below:

	22 December 1998 memorandum	24 March 1999 memorandum†	23 June 1999 evidence
Successful prosecutions	2	4	5
Cases with DPP	10	13	12
Arrests	25	34	39
Compound penalties (value)	6 (£59,300)	6 £59,300)	7 (£78,300)
Vehicles seized	48	63	68
Fuel seized (litres)	420,098	583,588	884,000
Fuel smugglingadmitted (litres)	24.2	24.75	29.1
Ongoing investigations	40	18	*

All results are since 1 April 1998

* = No figure given

† to 28 February 1999

35. Without knowing the overall size of the problem, it is difficult for us to form a view on the effectiveness of the measures taken to date by Customs and Excise to tackle both smuggling and gas oil misuse. It is clear from these figures that actual fuel seizures are very modest, both in absolute terms and in relation to the volumes admitted to be smuggled. Actual volumes smuggled are likely, in our view, to be considerably greater than those discovered or admitted, which by definition only involves the illicit activities of those apprehended. There is clearly scope for a greater enforcement effort. We nonetheless commend the staff on the success they have had to date.

36. Both Mr Norgrove[88] and the Economic Secretary[89] drew attention to the increase in the staff of the Belfast Collection to tackle this problem, with a view to enhancing the rate of detection, which the Economic Secretary described as "the most effective deterrent". She added that:[90]

Ms Massie commented that, although the problem of fuel smuggling in Northern Ireland is serious, the Collection also faced a number of other serious problems and a balance had to be struck as to how overall resources are deployed.[91]

37. The Economic Secretary summarised the forward strategy for countering smuggling as including the following elements:[92]

VAT assurance staff will visit over 500 oil traders and road hauliers this year and input VAT will be disallowed on suspect invoices;
anti-smuggling teams will disrupt fuel smuggling by challenging suspect oil tanker movements both into Northern Ireland and Great Britain;
targeting of major oil smuggling organisations for investigation;
developing new intelligence-gathering pathways to deal with fuel frauds; and
Customs and Excise taking the lead in a multi-agency approach.

It was on the basis of these objectives that the staffing increase was decided.

38. We support the strategy outlined by the Economic Secretary for countering fuel smuggling. We were encouraged by Mr Norgrove's description of the results of the pilot programme of VAT assurance visits[93] and we welcome the support for a multi- agency approach.

39. In the context of the programme of VAT assurance visits, we note that it is apparently a condition of petroleum storage licences that the licensee takes a dip reading of the tank and a meter reading of each pump connected to the tank at least once each weekday and to keep appropriate records of these readings and of all deliveries to the tanks. Such records must be produced on demand to the licensing authority. Given that petrol smuggling appears to be increasing in prevalence, it may be that these records will provide a useful further means of seeking to identify where smuggled petrol is being sold. One witness suggested[94] that a licensing system should apply to all fuel retailers and bulk users in Northern Ireland, to seek to reduce the incidence of smuggling. We recommend that this idea be examined further.

40. We have looked in the course of this enquiry at the contributions of two agencies in particular: the Royal Ulster Constabulary[95] and the Trading Standards Service.[96] We understand that a Memorandum of Understanding is being negotiated between Customs and Excise and the RUC: we welcome this and look forward to its early entry into force.

41. We were somewhat concerned from the evidence submitted by the Trading Standards Service that their test results might be of limited evidential value in that the degree of contamination of the fuel in some of the cases cited was insufficiently clearly determined. We were therefore glad to note that testing methods are now in place which are capable of quantifying contaminants in samples of road fuels. While we can see the merits of the general approach of the Service, namely to ensure through close liaison with Customs that the most effective response is made, it is in our view sensible that, if trading standards offences may have been committed, evidence is gathered to the required standard.

42. We were somewhat surprised to learn that, between June 1998 and June 1999, Trading Standards Officers took only 15 samples of road fuel in response to complaints or enquiries from the public.[97] We were also surprised that no breaches of the trades descriptions legislation had been found in the past, given the earlier evidence supplied by the Trading Standards Service,[98] which revealed that several fuel samples referred to in that evidence had clearly been adulterated.[99] We recommend that consideration be given to making greater use of Trading Standards checks as part of the multi-agency approach to countering road fuel tax abuse.

43. We note that Customs and Excise frequently stressed the importance of an intelligence-led approach. In the light of the evidence we received, notably from the Road Haulage Association and the Freight Transport Association and from the Petroleum Retailers Association, there would appear to be room for closer co-operation between members of the relevant trades and the Customs and Excise, given that there appears to be a common interest in driving out the illegal trade. We would urge individual members of the fuel retailing and road haulage trades, and their trade associations, to co-operate as fully as possible with Customs and Excise and other agencies in the stamping out of illegal sales of road fuels.

44. Evidence was received[100] from the Petrol Retailers' Association of difficulties in arranging meetings with Ministers, both Treasury Ministers and Northern Ireland Ministers, to discuss the concerns of the trade about these matters. We are pleased to report that, since the inception of this inquiry, a meeting has taken place with a Northern Ireland Minister.[101]

45. A number of witnesses argued that elimination of fuel smuggling and of gas oil misuse is likely to prove impossible through enforcement measures alone.[102] We agree. Nonetheless, the general approach of Customs and Excise of attempting to enhance the risk of detection, and thus deter such activity, in our opinion is sound. We set out below a number of practical suggestions for making life more difficult for fuel smugglers and gas oil misusers.

46. First, we note that it is now Customs and Excise policy not to return seized vehicles on payment of supplementary penalties.[103] This appears to be eminently sensible, although most of the confiscated vehicles we saw in Belfast appeared to be of variable value: no doubt smugglers are aware of the risks of confiscation and may therefore invest as little as possible in the vehicles. We recommend that the presumption should be that vehicles confiscated as a result of smuggling operations and which are proved to have been involved in the unlawful transport of fuel should be scrapped, to prevent their re-use in the same trade. It appears to us that such re-use is a risk, however careful Customs and Excise are in their disposal otherwise. In the long run, such a policy might increase smugglers' costs, by reducing the pool of cheap vehicles.

47. One of the difficulties faced by Customs and Excise is that it is impossible to distinguish between duty-paid road fuels sourced from the United Kingdom and those sourced from the Republic of Ireland. This increases the difficulty for Customs in tracing the provenance of 'legitimate fuel', petrol or diesel, whether in running tanks of vehicles, or on retailers' or transport operators' premises. One option which might assist in this process would be to introduce a marker into United Kingdom duty paid road fuels. The absence of the marker, or an unduly low level, in bulk supplies, including supplies in transit, would be prima facie evidence that the fuel was smuggled. We understand that a number of practical difficulties would need to be overcome,[104] but that the proposal would not be inconsistent with Community law. We consider that the case for introducing an appropriate marker into duty paid fuel, as an anti-smuggling measure, should be further investigated.

48. Finally, we were alarmed by the evidence we received about the relative ease and apparent success with which both the colorant and the chemical marker could be removed from gas oil. We recommend that work to develop indelible chemical markers should be given a high priority by Customs and Excise. Given that misuse of rebated fuels is apparently a general problem in the European Union[105] (though perhaps most severe in the United Kingdom because of the size of the duty differential), we further recommend that any common EU markers should be chosen to enhance the degree of protection against unlawful removal, and that the Government should press the case for this with the Commission. Such developments might be expected to inhibit generally the extent of misuse of gas oil.

Safety

49. We note that the practice of smuggling fuel involves operators, who may lack any training, storing, syphoning and transporting substances which are hazardous and /or pollutant. The dangers inherent in this practice are such that we are pleased to note that the Health and Safety Executive is an active participant in the Customs and Excise-led multi-agency approach.[106]

General measures

50. We now turn to policy measures designed to reduce the price differential in fuel and thus reduce the incentive both to smuggle fuel or to purchase fuel in the Republic of Ireland. Four principal measures were put forward in evidence to us:

a subsidy scheme similar to that operating in the Netherlands in border regions with Germany, where petrol prices in particular are significantly lower;

total or partial harmonisation of duty rates between Northern Ireland and the Republic of Ireland, with the consequent creation of a duty differential between Northern Ireland if Ministers were not prepared to make a general reduction in the UK fuel duties;

the Road Haulage Association's proposal for an Essential User Rebate; and

a rebate scheme similar to that operated in France.

We consider each in turn.

A subsidy for border sales

51. The scheme operated by the Dutch Government for fuel retailers close to the German border was described by Customs and Excise.[107] In essence, it provides a subsidy to such retailers to reduce the incentive for Dutch motorists to purchase petrol in Germany. It does not apply to diesel sales, where the price differential is very much smaller.[108] We understand that it was introduced in 1997 following an increase in Dutch excise duties on petrol, following pressure from petrol retailers. About 620 enterprises qualify for the scheme, which is a temporary one and will stop operating in July 2000, or earlier if the difference between the Dutch and German excise duty rates fall below a certain threshold. The rates of subsidy payable were reduced from 1 May 1999, to take account of an increase in German excise duty rates.

52. Customs and Excise also reported that the scheme was under investigation by the Commission as a potential illegal state aid. We understand that the Commission is concerned about the fact that the subsidy is paid to individual filling stations, rather than commercial enterprises. This may result in levels of benefit exceeding the de minimis level for permitted state aids.[109] Lord Dubs saw a number of substantial difficulties with such a scheme operating in Northern Ireland and doubted whether it would be effective in tackling the underlying problems. He felt it was "not the best way forward".[110]

Harmonisation

53. A number of witnesses argued for total or partial harmonisation of duty rates between Northern Ireland and the Republic of Ireland. The Economic Secretary conceded that such harmonisation might reduce smuggling,[111] but would not countenance any change in overall United Kingdom fuel duty policy, citing its centrality to meeting both Kyoto commitments and the United Kingdom's further aspirations in terms of the reduction of carbon dioxide emissions.[112] To have a separate duty rate in Northern Ireland would require a derogation from the relevant EU legislation, which she was adamant would not be forthcoming.[113] The Economic Secretary was opposed to different duty rates for different parts of the United Kingdom,[114] partly on environmental grounds, partly because the border problem would be shifted from the land border on the island of Ireland to the water border between Northern Ireland and Great Britain[115] and partly because of the precedent it would set.[116]

The Essential User Rebate

54. In essence, the Road Haulage Association's proposal[117] would provide a rebate of around 21 pence per litre to Heavy Goods Vehicle Users at the expense of a 3 pence per litre increase in fuel taxation for other, 'non-essential', users. On this basis, the scheme would be revenue-neutral.

55. The Economic Secretary was not attracted to this scheme either, not least because of the limited scope of the potential beneficiaries and the expected administrative difficulties.[118] We can also see other difficulties, not least that the fuel price differential would actually increase for all users other than beneficiaries of the rebate. This might exacerbate the problems across the land border in the island of Ireland.

The French Scheme

56. The French scheme provides for a rebate of duty paid, within certain limits, in respect of purchases of fuel for vehicles over a certain size. In that respect, it has similarities to the Road Haulage Association's proposal. Customs maintained that this would not offend any state aid principle because it was not of regional benefit:[119] the benefits would be available to all hauliers, not just French hauliers, while operating in France.[120] The scheme required a derogation under Article 8(4) of Directive 92/81: the Government did not oppose the French request, agreeing that it was a matter for subsidiarity and it was approved earlier this year. Customs and Excise has no information yet on how foreign lorries are treated under this scheme.[121]

57. Both the Economic Secretary and Lord Dubs raised doubts as to whether the French scheme, or something similar could be applied to Northern Ireland. The Economic Secretary said:[122]

"The difficulty is that if we try and cut the level of duty for any group of people we then find ourselves immediately up against the state aid and faced with the need for a derogation ...."

She also emphasised the centrality of the consideration as to whether a measure might be held by the Commission to constitute an illegal state aid,[123] and Lord Dubs commented:[124]

".... the French scheme is not regional, it covers the whole of France and I think there would be some difficulty in principle in applying that sort of scheme to Northern Ireland."

58. In short, none of the general measures put forward commended themselves to Government, although we welcome Lord Dubs' undertaking to look again, without prejudice, at the Dutch scheme.[125] However, we hold out little hope that such a scheme will be introduced in Northern Ireland, not least because the Commission has now decided that the financial support given to majority of retailers under the Dutch scheme is incompatible with Community law and should be repaid.[126]

Road hauliers

59. Although the primary thrust of our enquiry related to the impact on fuel retailers, we also received evidence about the impact on road hauliers. The Road Haulage Association told us that hauliers typically operate on a margin of 3% turnover, and that fuel costs can represent anything from 25 to 40% of total operating costs.[127] Access to cheaper fuels therefore had a marked competitive impact on hauliers, and had been exacerbated by the March 1999 Budget increases in fuel duty and also, for the heaviest lorries, Vehicle Excise Duty rates for heavy lorries,[128] which in both cases widened the differentials with the equivalent Republic of Ireland duties.

60. Concern was expressed to us that these large duty differentials might encourage hauliers to transfer some or all of their operations to the Republic of Ireland and then take advantage of the freedom to operate throughout the European Union to carry on their Northern Ireland business much as at present.[129] As Mr Armstrong, of the Freight Transport Association, put it,[130] many larger operators in Northern Ireland who already have depots in the Republic of Ireland "are actively considering or actively engaging in "flagging out" activity[131] or, at the very least, transferring the bulk of the fleet to operate in the Republic [of Ireland] and perhaps maintaining only a smaller proportion of the total fleet in [Northern Ireland]."

61. In the light of this evidence, we sought further written evidence from the Department of the Environment for Northern Ireland, and questioned Lord Dubs as to the extent of the problem. He doubted[132] if this was a serious problem, as companies would need to take an overall view of the advantages and disadvantages of moving, and that Vehicle Excise Duty had increased only for the largest vehicles, which constituted only 120 vehicles out of the 20,000 vehicles in Northern Ireland.

59 Certain commercial vehicles may also be carrying small supplementary tanks of gas oil, for example, to power refrigerated units. Back

60 Appendix 11, p. 92. Back

61 Q17. Back

62 Ev. p. 11. Back

63 Q37. Back

64 Q192. Back

65 Ev. p. 50. Back

66 Q191. Back

67 Q191. Back

68 Ev. p. 1; Q40. Back

69 Ev. p. 25-6, 30-1. Back

70 Q102. Back