Select Committee on Northern Ireland Affairs Minutes of Evidence

Memorandum submitted by HM Customs and Excise


  Thank you for your letter of 31 July asking for a memorandum setting out the extent to which diesel fuel allocated for agricultural use is fraudulently used in Northern Ireland.

  I attach a memorandum which highlights the issues related to diesel fuel allocated for agricultural use, as well as the wider issue of misuse of non-road fuel and cross border trafficking of fuel.

  I hope we will have explained these issues to the satisfaction of the Committee but please let me know if you would like clarification on any particular points.


  1. The Northern Ireland Affairs Committee has asked Customs and Excise to set out the extent to which diesel fuel allocated for agricultural use, which enjoys favourable tax treatment, is fraudulently used in Northern Ireland.

  2. The Committee asks for an estimate of the loss to the public purse as a result of the illegal use of diesel fuel and the effect on the road haulage business in Northern Ireland of unfair competition based on cheap, illegally used, diesel fuel.

  3. The Department's paper is also asked to cover the following points:

    —  the steps taken by Customs and Excise to halt misuse of agricultural diesel fuel in Northern Ireland;

    —  the number of staff employed by Customs and Excise in Northern Ireland on this subject and whether this number is sufficient;

    —  the extent to which other law enforcement agencies in Northern Ireland act to halt the illegal use of diesel fuel, either jointly with Customs or independently.


Duty rates


  4. Section 6 of the Hydrocarbon Oil Duties Act 1979 sets out the rates of duty payable on light oil and heavy oil. For the purposes of this legislation, diesel fuel is heavy oil and the current rate of duty is 40.28 pence per litre.

Gas oil

  5. Section 11 of the 1979 Act provides for a rebate of duty on heavy oil and so provides for an effective current duty rate of 2.58 pence per litre on gas oil. This establishes the large duty differential, 37.7 pence per litre, that might rise to misuse of gas oil.

  6. Gas oil is eligible for agricultural, horticultural, marine, rail, power generation and industrial uses as well as commercial and domestic central heating. It can also be used by hauliers for use in vehicle refrigeration units.


  7. Section 11 of the 1979 Act also provides for a full rebate of duty on heavy oils other than fuel oil or gas oil. This effectively means that there is no duty on kerosene for heating, aviation turbine fuel and lubricating oil, unless they are delivered for use as road fuel. This will be important to the Committee because misuse of rebated oil in Northern Ireland also extends to kerosene. Kerosene is used mainly for heating purposes in Northern Ireland.

  8. It is possible to mix kerosene with diesel fuel, either derv or gas oil, in proportions of up to 30 per cent, without damage to engines. The nil rate of duty on kerosene obviously makes this attractive. However it is illegal unless such a mixing is declared and the full derv rate paid. Amendments to the 1979 Act were introduced to this effect in the Finance Act 1996.

Use of rebated fuel

  9. Misuse of rebated fuel is not solely related to diesel fuel intended for agricultural use but also applies to road use or non-road use of a variety of products.

  10. Gas oil and kerosene are marked with a dye and a chemical (see Annex A) in the refinery before delivery and occasionally at approved remote marking premises. Users of marked heavy oil do not need the approval of Customs and Excise to receive it: we do however expect suppliers to act responsibly and ensure as far as possible that deliveries are for eligible rebated use.

  11. Details of the provisions for offences, the marking requirements for different products and the impact of EC Directives are contained in Annex A.

Cross border issue

  12. In addition to the misuse of rebated fuels, another major area of potential abuse is cross border trafficking of fuels. This is caused by the price differential between Northern Ireland and the Republic of Ireland where fuel is cheaper, mainly because of the Republic's lower duty rates. The strength of the pound is also a factor in this. This is an area where the Commissioners of Customs and Excise have introduced regulations to address the issue. These prevent the use of diesel in the fuel tanks of vehicles if it has not been taxed as road fuel in its country of origin: this particular measure helps stop widespread misuse of Irish rebated (off-road) fuel.


  13. It is not possible to quantify accurately the extent of misuse of non road fuels. However as a starting point we have looked at the volumes of gas oil, derv and kerosene used in Northern Ireland. These must be read with caution but if misuse were prevalent or growing we would have expected to see the amount of gas oil in use increasing in relation to derv. However the figures show the following deliveries into Northern Ireland (source: Digest of United Kingdom Energy Statistics 1997).

Thousand tonnes

19941995 1996

DERV fuel377350 370
Other gas fuel438417 284

  14. One would not want to read too much into these figures but they would indicate that use of derv (high duty rate) has been relatively constant while use of gas oil (low duty rate) has decreased markedly. That would indicate that misuse of gas oil is not as widespread as anecdote suggests.

  15. We then looked at deliveries of kerosene over the same period because this can be mixed with derv. (There is no duty on kerosene.) This shows:

Thousand tonnes

19941995 1996

Kerosene425424 493

  16. Much of this kerosene is used for heating purposes and climactic conditions could be responsible for the jump in the winter periods of 1996. However they might indicate that some of the growth in 1996 could be attributable to illegal mixing of kerosene with derv. The summary below of some recent notable prosecutions shows five out of eight cases involved misuse of kerosene.

  17. It is not possible to quantify the cross-border trade in road fuels and Customs no longer has the same presence on the land boundary that it did before the introduction of the Single Market in 1993. Our Treaty of Rome obligations make it impossible to set up routine check points to test road fuels in vehicle tanks or all commercial movements of fuels across the border. We now rely on targeted activity to identify those who may be breaking the law. Intelligence indicates that this is a growing area of abuse and targeted activity is now swinging in that direction.


  18. Over recent years the combination of national legislation, European Union Directives and Government policy have had an impact on the administration of law and order and the control exercised on the movement of goods and persons in Northern Ireland. These issues have introduced additional constraints on those responsible for enforcement of the revenue laws.

  19. There are operational issues in Northern Ireland that are particular to the area, primarily the existence of paramilitary groupings and the greater emergence of organised crime in serious revenue frauds, not restricted to oils matters. This has consequences for the role and deployment of the manpower resources available to other law enforcement bodies, particularly the Royal Ulster Constabulary. The current peace process is of course an influencing factor at present. The existence of a land boundary is also a major factor in revenue control which is not as marked in other parts of the UK.

  20. In this climate there are increased opportunities generally for illicit trafficking and organised crime, greater temptations for individuals and businesses to cheat the revenue, with perhaps a lesser expectation of being apprehended.

Policy impact on operations

  21. Recent Government policy on road fuel duty rates has had the effect of increasing the duty differential between road fuel (petrol and derv) and non road fuels (gas oil and kerosene). This is because the former now rise by at least 6 per cent in real terms each year while the latter have mostly been increased only by inflation. The policy on road fuel rates is primarily for environmental reasons but it does have a knock-on effect into compliance when the relative duty rates diverge and while vehicles can run perfectly well on non-road fuels. Retail prices in the Republic of Ireland are also a substantial factor in influencing behaviour as exampled in Annex A.

Impact on road haulage business

  22. The main issue for the industry is competitiveness and this is the case whether one is talking about misuse of non-road fuels or illegal cross-border movements of conventional fuels.

  23. Road fuel duty rates impact substantially on the haulage industry—the financial margin between the cost in the UK of derv and rebated gas oil is significant. Current duty rate differentials with the Republic of Ireland and a strong pound have created an added pressure on the Department to demonstrate that anti-smuggling controls are being exercised and that resources are deployed in accordance with the revenue risks and the expectations of the relevant trade bodies.

Numbers of staff employed

  24. Northern Ireland Road Fuel Testing Unit (RFTU) is part of the organisation of the Collection's Local Fraud District based in Belfast. The Unit has specialist responsibility for initiating the detection and investigation of hydrocarbon oils fraud offences in Northern Ireland. The role of an RFTU is to conduct targeted and roadside challenges of vehicles to establish that the fuel contained in their running tanks has borne the correct duty rate commensurate with the use of the vehicle. In Belfast it consists of:

    —  a Road Fuel Control Officer who has a management, planning, co-ordination and operational role;

    —  two officers each of whom has a mobile testing vehicle plus an assistant who acts as driver and tester as well as providing corroboration in day to day activities;

    —  clerical support at base; and

    —  two officers located in the Intelligence District and RFTU. These Officers examine the business records of oils distributors, haulage companies etc. in order to discern trends, obtain intelligence and identify suspected illegal use of oils. They provide additional expertise in the audit of the accounts and business records which may be maintained by offenders.

Indirect support

  25. Operational support for the activities of the RFTU is also available from:

    —  other Teams located in the Local Fraud District—Excise Fraud Investigation Team and Anti-Fraud Project Team;

    —  other Teams co-located, including principally Flexible Anti-Smuggling Teams and National Investigation Service staff.

  26. Direct intelligence support is provided by VAT/Excise Audit staff engaged in oils-related work by staff in the Intelligence District tasked for Local Fraud District activities and by other officers in the Collection who are generally aware of the role of RFTU.

  27. Indirect support and intelligence is provided through the links established historically with other agencies, including the Royal Ulster Constabulary and Department of the Environment Road Traffic Enforcement Branch. Both of these organisations have agreed to sight test road fuel (to check for the presence of red dye) on behalf of Customs and Excise in the course of their other duties and, where an offence is suspected, may obtain legal authority from Customs to detain vehicles pending examination and testing/analysis of fuel, etc., by RFTU officers.

  28. A 24 hour telephone answering service is operated by the Collection Co-ordination Unit based in Belfast. Requests from other agencies for attendance of Customs Officers are routed by the Co-ordination Unit directly to operational teams including on-call RFTU Officers.

  29. We are asked to comment if resources are sufficient in terms of numbers. The answer is that we believe so. A team of specialist staff with ready support is thought to be the most effective deterrent we can provide. The unit combines a mixture of targeted activity and roadside challenges to achieve its aims. In cases where additional resources are needed, these are provided from a pool of experienced staff.


  30. It has been the practice of the Unit to concentrate on the detection and prosecution of the more serious offences encountered in the Province and to promote intelligence between offices in the Department with other agencies, with the Revenue Commissioners in the Republic of Ireland and with the Road Haulage Association.

  31. The Belfast Unit has particular expertise and a recognised track record in detecting some of the more elaborate and sophisticated systems employed by oil fraudsters. It has sponsored and co-ordinated exercises with RFTUs on the UK mainland against specific targets. Intelligence Bulletins have been made available to DOE, RUC, other police forces on the mainland and to counterpart officers in the Republic of Ireland Customs Service. This expertise has been recognised within Customs and Excise nationally through the appointment of the Northern Ireland RFTU as a Centre of Operational Expertise. In this role, the Unit continues to make a significant contribution to relevant policy matters, to the improvement of national control measures and to the strengthening of legal powers.

  32. Intelligence is also transferred generally between Belfast RFTU and other Units in the UK, involving follow-up enquiries as appropriate in those cases where a detection is made and further offences are suspected.

  33. In the past, many of our checks on fuels were at the point of delivery from the refinery because this defined the duty point. To combat misuse of fuels, we are now having to increase the scope of our downstream checks. To gain intelligence on potential misuse, a recent initiative has seen the appointment of two additional officers in Belfast. Their job is to visit the distributors and users of fuels to conduct audits. Their objective is to identify who is being supplied with gas oil and kerosene and establish if possible the use to which they are being put. They will attempt to identify hauliers and other users who might have no clear need to be using rebated fuels. Where necessary, this intelligence will be passed to the RFTU who can then target their activity to check those so identified. This is a recent initiative and has yet to produce measurable results.

  34. In order to encourage closer working with other agencies, RFTU Officers visit RUC Training establishments and give formal presentations to new recruits on the role of Customs and Excise in combating oils fraud and misuse of rebated gas oils. There are liaison arrangements in place with the RUC with regard to enforcement of oils legislation, almost every RUC station in Northern Ireland has been provided with equipment to withdraw and sight test fuel found in the running tanks of vehicles. In the event of suspicion of a road fuel offence, authority may be obtained from Customs to detain the offending vehicle.

  35. The targeting of suspected offenders via other agencies, principally the RUC, is favoured by Customs. This is the main purpose of the links established with particular RUC Stations, Traffic Branches and individual RUC officers. This allows targets to be sight tested for intelligence purposes over a planned period of time at various locations without the direct involvement of Customs Officers.

  36. RUC Officers are also tasked to support Customs officers in operations where the execution of Search Warrants or arrest of offenders is planned and are especially best placed to provide reliable local knowledge on suspected offenders, location of premises and movement of vehicles, etc.

  37. Information on road fuel offenders is passed on a routine basis between Belfast RFTU and the Revenue Commissioners in the Republic of Ireland. This may include details of owner/driver, registration number and location of vehicles detected in either jurisdiction and details of other known or suspected oils-related offences which may have implications in the Republic of Ireland or in the UK.

  38. RFTU Officers also meet periodically with their counterparts in the Republic of Ireland Customs Service to discuss oils offences generally and to update information on particular offenders and other matters of mutual interest.

  39. Requests for specific information or assistance are also made to the Republic of Ireland Customs Service under the terms of a Memorandum of Understanding in place between the United Kingdom and Republic of Ireland Customs authorities and via the Fiscal Liaison Officer seconded from HM Customs and Excise to the British Embassy, Dublin.

Industry contribution

  40. It is clear that a considerable amount of intelligence of interest to this Department 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.

  41. Despite this Northern Ireland, RFTU staff continue to meet with Road Haulage Association representatives in order to address concerns about road fuel abuse. There has been some recent improvement in terms of the flow of information but much still needs to be done to convince the general membership of the merits of providing quality intelligence. We intend proposing a Memorandum of Agreement with the Road Haulage Association in Northern Ireland at our next quarterly meeting with the aim of improving our liaison/partnership work and enhancing information pathways.


  42. In addition to the activities organised with other agencies as mentioned above, the Unit conducts case planning, education and operational briefing of other agency and Customs personnel. These activities are part of the planning objectives.

  43. These objectives assume that the partnerships developed with other agencies and other Customs resources will assist in delivering not only a planned number of detections, but will also ensure that particular offenders are targeted and that the work of the Unit is advertised throughout the province and in the Courts.

  44. It is clearly best practice that the RFTU maximises the overall enforcement effort in the Province by planned use of Customs and other agency personnel and that specialist knowledge and intelligence is used to identify and target those persons/businesses involved in the more serious offences.

  45. The results achieved by the Northern Ireland Road Fuel Testing Unit in recent years include the following:

PeriodNumber of offence cases reported Proceeds from seizures, etc. (£)

1 April 1995 to 31 March 1996252 122,967
1 April 1996 to 31 March 1997273 146,452
1 April 1997 to 31 August 1997102 88,391

  46. A number of significant oils related fraud cases initiated by Northern Ireland RFTU have resulted in the Department either ordering criminal proceedings or compounding offences on payment of a financial penalty.

  A synopsis of some notable cases in recent years follows:

    (i)  Operation Rave—commercial haulage operator sentenced to 3½ years imprisonment for laundering (removal of markers) of estimated 250,000 gallons marked gas oil.

    (ii)  Operation Mongrel—commercial oil distributor given 150 hours community service for mixing/extending derv with kerosene for distribution to retail and commercial outlets.

    (iii)  Operation Knockadoon—commercial haulage operator penalised in the amount of £35,000 for use of kerosene as extender to derv fuel.

    (iv)  Operation City—commercial haulage operator fined £10,000 for use of kerosene as derv extender—eight heavy goods vehicles seized and restored for additional £2,800.

    (v)  Taxi operator penalised in the amount of £3,000 for use of UK and Republic of Ireland marked gas oil. Parallel VAT investigation finalised by recovery of arrears and fine totalling £7,000.

    (vi)  Taxi operator reported for prosecution for use of kerosene as extender to derv fuel—all fleet vehicles seized and restored for £8,000.

    (vii)  Operation North West—Commercial haulage operator fined £10,000 for misuse of kerosene. Nine Heavy Goods vehicles seized and restored on payment of additional £3,000.

    (viii)  Operation Huckleberry—directors of commercial haulage operator with premises in Co. Armagh and Co. Tyrone arrested for oil laundering offences. Laundering equipment and oil seized at both premises. Fleet vehicles seized and restored on payment of £32,000.

  It is notable that five of these operations involved misuse of kerosene.

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