Memorandum submitted by HM Customs and
Excise
FRAUDULENT USE OF DIESEL FUEL
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.
FRAUDULENT USE
OF DIESEL
FUEL
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.
BACKGROUND
Duty rates
Diesel
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.
Kerosene
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.
EXTENT OF
FRAUDULENT USE
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
|
|
| 1994 | 1995
| 1996 |
|
| DERV fuel | 377 | 350
| 370 |
| Other gas fuel | 438 | 417
| 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 |
|
| 1994 | 1995
| 1996 |
|
| Kerosene | 425 | 424
| 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.
NORTHERN IRELAND—OPERATIONAL
BACKGROUND
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.
STEPS TAKEN
BY CUSTOMS
AND EXCISE
TO HALT
MISUSE
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.
RESULTS
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:
|
| Period | Number of offence cases reported
| Proceeds from seizures, etc. (£) |
|
| 1 April 1995 to 31 March 1996 | 252
| 122,967 |
| 1 April 1996 to 31 March 1997 | 273
| 146,452 |
| 1 April 1997 to 31 August 1997 | 102
| 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.
| 
