Select Committee on Northern Ireland Affairs Minutes of Evidence

Memorandum submitted by the Petrol Retailers Association


  The Petrol Retailers Association (PRA) is a major Trade Association within the Retail Motor Industry Federation (RMIF). The Association represents the interests of 3,000 forecourt retailers throughout the United Kingdom. The forecourt retailers are independent of their motor fuels supplier.

  The RMIF serves and represents businesses concerned with all aspects of the retail motor industry products and services. It aims to assist, support and promote members with the highest standards of operation for the mutual benefit of themselves and their customers.

  The RMIF is the lead body for the motor and retail transport fuels industries whose combined total turnover is in excess of £85 billion per annum, whose workforce numbers 700,000, and whose customers contribute £32 billion per annum in motoring taxes, Excise Duty, and VAT.

  The retail motor fuels industry in Northern Ireland is conducted from approximately 500 service stations across the Province. The PRA represents about 100 of these locations. In 1996, before the advent of illegally imported products, the total fuel sales of around 700 service stations accounted for 2.8 per cent of the total UK market. Similarly, the percentage remained the same for Northern Ireland's share of all UK Excise Duty collected.

  The illegal sale of transport fuels occurs in Northern Ireland because the products concerned have been brought in from the Republic of Ireland without duty being paid. In simple terms they are being smuggled. The reason why they are smuggled is because petrol and diesel costs less in the Republic of Ireland, where the Government applies a lower rate of Excise Duty. They are purchased in the Republic and transported north into the Province where they are supplied to service stations for resale—without the UK's higher level of Excise Duty being paid by the supplier on entry.

  Northern Ireland has the UK's only land border with another EEC Country and therefore experiences a lot of cross border shopping; a quite legal practice. This consumer practice deflates sales in the fuels industry and other retail trades, but in reality it is quite a small effect experienced by service stations in proximity to the border areas. Smuggling of petroleum products, however, is not similarly contained in the border area and has an effect over the entire network of service stations in Northern Ireland.


A. Why is smuggling taking place?

  The cause of the problem is due to the price differentials between North and South. Petrol attracts Excise Duty of only 24.54 pence per litre (ppl) in the Republic of Ireland against 43.99 ppl in the UK and diesel 21.35 ppl in Ireland compared to the UK's 44.99 ppl. Opportunists, not necessarily associated with the transport or retailing industry in either country, are taking advantage of the situation because of the scale of the profit opportunity.

  Example (assuming road transport fuel taxation levels):

    Assume a road tanker carries 25,000 litres of diesel fuel from the south into the north of Ireland. The profit potential when sold to a service station for resale is the differential in cost price (44.99 ppl-21.35 ppl=23.64 ppl), less the cost of VAT paid in the Republic of Irelan12

    d at 21 per cent (4.96 ppl), less transportation costs (assume, 1.0 ppl).

  As a minimum, the net profit therefore is 25,000 litres x 17.68 ppl = £4,420.

  If the supplier of the smuggled fuel adds UK Value Added Tax of 17.5 per cent with no intention to pay the same amount to Customs and Excise, the profit is enhanced by a further 7.87 ppl.

  Revised value of net profit from one smuggled load of 25,000 litres x (17.68 + 7.87) 25.55 ppl = £6.387.50.

  Smuggling is also taking place because Customs and Excise, who own the problem, cannot contain the scale on which it is occurring.

B. What is being smuggled?

  The smuggling began in 1997 with diesel fuel oil, because the product was less hazardous and not subject to the strict rules applied under the "Carriage of Dangerous Goods" Act. These regulations would apply if petrol had been transported on a road vehicle. Furthermore, the much smaller quantities of diesel normally sold within the retail fuels market meant that correspondingly smaller vehicles could be employed. Risk of detection was therefore diminished.

  Today much of the diesel product being smuggled is fuel oil intended for use in the agricultural or construction industry. This form of "diesel" is used by vehicles "off road" and attracts a much lower level of Excise Duty, 5.0 ppl, in the UK. A marker (die) that can only be removed by adulteration of the base product identifies it. The term used when this practice is applied is that the diesel has been washed. The profit calculation outlined above increases substantially if this other fuel is sold as standard transportation diesel.

C. When did serious smuggling begin?

  In March 1998 the UK Budget raised Excise Duty on motor fuels by 6 per cent real and equating to circa 5.5 ppl (including VAT) on both petrol and diesel. Consequently the differential of rates compared with the Republic of Ireland became more pronounced. Opportunists previously referred to, were prepared to accept the risk of smuggling petrol as well as diesel. The scale of the problem has escalated steadily throughout 1998.


  The effects are severe already, and will become worse if no remedial action is taken. The following are the categories that are affected by smuggling.

A. Operators of service stations in Northern Ireland

  Unfair competition from other service stations, or temporary and inferior tank and pump facilities retailing diesel from the road-side (allowed because the Petroleum Regulations do not apply to this product), who sell smuggled fuel at prices below the UK norm threaten survival of the business.

  Service station operators who suffer financially, because they continue to purchase only legal fuels, may eventually be confronted by an unfortunate choice and as a consequence break the law. Their survival may only be assured if they increase profitability by purchasing smuggled fuel.

B. Consumer

  If many service stations are forced to close, consumers will lose local convenience to refill their vehicles and enjoy the other facilities that these retail outlets provide in the Northern Ireland market.

  Competition between fewer service stations in the aftermath of smuggling will be less. Implications are for higher fuel prices as market demand is satisfied at a higher profit.

  If washed diesel is supplied to a customer, it is unlikely that it will meet the required legal specification for the product. Damage to an engine could quite easily occur, and use of an inferior product would invalidate any warranty claim against the motor manufacturer.

  Hypermarkets have entered the Northern Ireland fuels industry. Total litres used is currently declining each year, and service stations that close now because of the effects of smuggling will not re-open. Consumers will drive further for their fuel and other necessities.

C. Residents of Rural Areas

  Perhaps the most vulnerable of all. A service station in these areas is also the provider of many other services that support the community. A focal point for residents, providing a range of retail services from banking to car servicing. Once closed, many will never re-open because of the costs that will remain a barrier to entry.

D. Major Oil Companies

  Those companies currently supplying the retail fuels industry are experiencing a greatly reduced demand for their products. If they do not see a lasting solution implemented to protect their considerable investment in service station facilities within the Province, they will inevitably revise their mid and long-term plans.

  In the short term the oil companies have to consider supporting some retailers to sell fuels at uneconomically low prices to address the retail price of smuggled fuel. This practice is not commercially sustainable and will influence the timing of the previous example.

E. Local Fuel Oil Distribution Companies

  These companies supply service stations across Northern Ireland whose annual sales volume is too small to be supplied by a major brand such as Esso, Shell or BP. They sustain the survival of sites in more rural areas, such as around the border, which without their existence would have no other source of supply in Northern Ireland.

  These distributors have suffered significantly since smuggling increased in 1998. It is impossible for this type of business either to supply legal motor fuel products at prices competitive to those smuggled, or assist retailers to reduce price when unfair competition arrives in their trading area.

F. Transport Companies based in Northern Ireland

  Fuel costs are a large part of the operational expenses for a transport company. With dramatic price differences between the UK and the Republic of Ireland, any transport company from the Province competing for business against one located in the south is in an impossible position. The financial effects can obviously not be sustained for any period of time, and are bound to threaten survival of many in this sector.

G. HM Treasury

  With a sharp decline in demand for motor fuels carrying UK levels of Excise Duty, HM Treasury is in receipt of less income. Furthermore, this total is increased by non-collection of VAT on the fuel sales and from taxes paid by service station operators and others on declared profit performance.

H. Northern Ireland Economy

  The failure of a business means unemployment and a cost to Government. In many rural areas, alternative employment will not be easily found in another retail sector. It should not be forgotten, however, that the effects of smuggling do not just apply to these areas and that they will impact to a greater degree in all urban areas of Northern Ireland as well.


  There are no precise figures available, as has been confirmed by a Government spokesman. As at the end of November 1998, Customs and Excise in Belfast confirmed that they had seized 48 vehicles involved in smuggling. In addition over 400,000 litres of fuel had been seized by Customs, and they had confirmed that a further 24 million litres had entered the Province illegally.

  It should be assumed that this is a very small part of the overall total.


  There is no accurate way of defining the value of smuggled product as there is no manufacturing source of motor fuels in Northern Ireland. Excise Duty is paid when leaving the refinery but then movement is not tracked as it moves to other parts of the UK. So, the performance of the retail fuels industry compared with the previous year is not possible.

  The major oil companies all confirm significant shortfalls in volume sold to retailers, and it is even realistic to speculate that, year on year, some experienced losses of 40 per cent. A very conservative estimate of the cumulative effective loss to the Treasury is £100 million per annum.


  It has already been demonstrated why the implications to the retail oil industry of Northern Ireland are wide-ranging and extremely serious. A prolonged period during which the smuggling issue is not adequately confronted by the UK Government may well see at least one of the major fuel brands reconsider its presence in the Northern Ireland market.

  Assessing the situation today, and without an implemented solution in the short term, a likely long-term scenario for the retail fuels market is the decimation of service station numbers, with certain destruction of customer choice and local convenience.

  The economic implications are clear. If an illegal practice is allowed to dismantle the infrastructure of one of Northern Ireland's established industries, more consumers and businesses will be forced into cross-border shopping, the reason being that sufficient retail fuel facilities will quite simply not exist within the Province.


  The ultimate solution is harmonisation of applied levels of Excise Duty between the Republic of Ireland and the UK. With the Irish Government choosing not to increase Excise Duty in their December Budget, and with a differential that fixes the UK at approximately double the level in Eire, it is not realistic that this will occur in the short or medium term.

  The PRA accepts that that EEC Regulation prevents the UK Government from introducing a two-tier structure of Excise Duty within regions of the UK. However, cross-border differentials exist elsewhere in the Community between members countries, as, for example, between The Netherlands and Germany. In that case, the price difference is a fraction of the problem currently affecting Northern Ireland motor fuel retailers, but nevertheless the solution adopted by the Dutch Government is one that can be transferred.

  A concession is allowed on payment of Excise Duty depending on distance from the German Border. Those filling stations within 10 kilometres are given an allowance that permits them to equal the German prices, those 11 to 20 kilometres distant have a retail price that is set at half of the market differentials.

  This concession has been allowed to small and medium-sized businesses for approximately 16 months and with the knowledge of the EEC Competition Authority.

  Similar distance-based criteria would not be sufficient to address the problem in Northern Ireland, because of the physical size of the Province, and the relatively short distance to the border with the Irish Republic from any point. But more importantly, because of the extent to which smuggled products are now being offered for purchase in Northern Ireland, all service stations in Northern Ireland should therefore receive a concession, off invoice at the time of purchase, to harmonise retail fuel prices exactly with the Republic of Ireland.

  The PRA suggests the mechanism is the correct one and recommends its support by the Northern Ireland Affairs Select Committee to the Government.


  It is evident that Customs and Excise in Northern Ireland do not have sufficient resources to prevent smuggled motor fuel crossing the border in increasing quantity. The modes of smuggling are at best described as inventive. The opportunities for profit are considerable and made even larger when smuggled product is resold from service stations. The environmental hazards posed by illegal and dangerous facilities in Northern Ireland are considerable. The efforts of HM Customs and Excise to date have made little real impact on the volume of smuggling. Failure of Customs and Excise to deal with the problem has led to new entrepreneurs appearing daily. Not surprisingly, these circumstances have attracted new participants to both the transport and retail fuel industries, with financial resources gained from other illegal practices.

  Unfair competition, through smuggling affecting the financial performance of service station profitability, has forced a number of law-abiding retailers to consider carefully if the only remaining way to save their livelihood is to purchase smuggled products.

  The situation is now arising where the volume of fuel supplied by smugglers is already supplying greater quantities of illegal fuel than some of the legitimate oil companies based in Northern Ireland. The present situation means that some legitimate oil companies may withdraw completely from the supply chain in the Province. The infrastructure of the fuel oil industry is under threat, and its decline will mean a long lasting effect for the economy of Northern Ireland.

  The PRA believes that any solution has to be cost effective, practical, sustainable, give no reward to those involved in the fuels industry for illegal gain, and be so totally transparent that it is easily acceptable to authorities in both London and Brussels. The solution that has been proposed will provide those qualities; and its implementation should be urged upon the Government with the utmost urgency so that many service stations can continue to contribute to the well-being of the economy and the people of Northern Ireland.

13 January 1999

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