Select Committee on Northern Ireland Affairs Minutes of Evidence

Examination of Witnesses (Questions 260 - 279)



Mr Beggs

260  Let us move on to some questions of tackling smuggling. One way of tackling sales of laundered or extended diesel fuel, in particular, might be to prosecute the seller under trade descriptions legislation. However, the memorandum submitted to us indicates that the chemical analyses carried out on seized fuel are of little or no evidential value. What steps are being taken to ensure that the standard and detail of analyses of road fuel samples provide evidence necessary to sustain a possible trading standards prosecution?

  (Ms Hewitt) That is an extremely interesting question, which I am afraid is a bit too technical for me to answer, so I am going to ask my colleague in Customs and Excise to respond to that.
  (Ms Massie) Following the evidence that I gave to the Committee several months ago, we did submit a memorandum about methods of detection of laundering in particular. I indicated, at the time, that we used two sorts of tests. We used roadside tests and we used tests which are carried out by the Laboratory of the Government Chemist. Without going into obviously the precise details of the types of laundering and types of tests we use, we are satisfied; and we have recently had more field tests done by the Laboratory of the Government Chemist; that we can detect the presence of the marker or the dye even after they have been laundered.

261  How do you actually assess the level of resources needed to devote to anti-smuggling activities in each Collection?

  (Ms Hewitt) What we did, as part of the Comprehensive Spending Review, was to look at the resources that Customs and Excise needed to deal with identified risks of smuggling, to be able to achieve specified measurable targets in order to counter that smuggling. So, for instance, as part of their strategy for countering this particular problem of fuel smuggling, we will have VAT assurance staff visiting over 500 oil traders and road hauliers this year. We will disallow claims to input VAT on suspect invoices. We will have anti-smuggling teams disrupting the smuggled fuel by challenging suspect oil tanker movements both into Northern Ireland and Great Britain. We are targeting major oil smuggling organisations for investigation and, as Alf Dubs has indicated, the more intelligence we have the more we can do that. In order to support that, we are developing new intelligence-gathering pathways to deal with fuel frauds, and we are taking the lead in the multi-agency approach. Now, by defining the objectives that we wanted to achieve in relation to the scale of the problem, in so far as we can assess it, it was then possible to reach agreement that what we needed was this very, very substantial increase in staff, so we then funded Customs and Excise staff accordingly within the Comprehensive Spending Review.

262  In fact, the 13 additional officers, permitted to be engaged by Customs and Excise, met their expectations of what was actually needed?

  (Ms Hewitt) Yes.

263  And yet we have not, as yet, had any satisfaction that the resources presently being applied to this problem are having sufficient effect. Should Customs then, in Northern Ireland, not deliberately allocate more of the resources under their control to really hit this issue hard?

  (Ms Hewitt) That is, I think, an operational matter for Customs and Excise.
  (Ms Massie) Within an individual Collection, in the same way as resources are allocated within the Department according to risk and risk assessment, resources within the Collection will be allocated according to risk and risk assessment. Although obviously the problem of fuel smuggling is a serious one in Northern Ireland, the number of activities that Customs and Excise are involved with is quite extensive; and there are other serious problems of VAT fraud, of drug smuggling, of alcohol and tobacco smuggling, which clearly Customs also has to address. So there is a balance to be struck. That is a balance which is struck by local management.

264  It occurs to us that, if we know that there is £100 million at least drifting away from the Exchequer, the application of an additional half million in funding is not all that much. It does not indicate a really serious effort to stop what is happening. If, after a reasonable time, Customs conclude that they need even more resources, are they likely to receive that additional resource, having put up a good case for it, from the Treasury?

  (Ms Hewitt) Let me stress, first of all, if I may, in response to that, that the £100 million revenue loss does not only come from smuggling. It really is important that I underline this because it would be a great pity if people beyond the Committee got the idea that we were losing £100 million to the smugglers. The £100 million revenue loss is an estimate of the effects of perfectly legal cross-border shopping. It used to go in the other direction, now it is going this way. We cannot break it down as between the illegal and the legal activities. But the resources that we have given Customs and Excise, as a whole, are really very substantial because the Comprehensive Spending Review concluded last year provided Customs with an additional £106 million over and above the inherited expenditure limits to fund higher operational targets. Obviously that is across the board, it is not just in relation to fuel smuggling in Northern Ireland, but it does indicate this Government's commitment to giving Customs and Excise the resources they need to modernise their operation, to set and achieve realistic operational targets, so that we counter the problem of smuggling as effectively as we can, whenever and wherever we meet it.

265  Could I finally ask Lord Dubs to comment on the issue of trading standards and whether or not, as this would be a Northern Ireland issue for action, something can be done at his end.

  (Lord Dubs) My understanding is that the trading standards people are seeking to enforce these matters where they can. I am not aware that they are short of resources but perhaps I could ask if Mr David Gibson would care to comment, as these are matters which come within the Department of Economic Development.
  (Mr Gibson) The Trading Standards Office, as you know, is responsible, amongst other things, for ensuring that when somebody buys petrol of a certain quality, that they are actually getting petrol of that quality. It does that by sampling petrol sales around Northern Ireland. If it finds that the petrol is not of the quality which it is advertised to be, then an offence has been committed under the trading standards legislation and prosecution will follow. As with all of these things, the amount of resources you devote to this sort of exercise is a balance. In a sense, you could put unlimited resource into that, and have one trading inspector checking one petrol station every day. It is a balance between the need and the resource.

266  I would have thought that one officer, checking one station every day, would be rather low productivity. It might be of use to the Committee, in its considerations, if we actually had some indication of just how many samples have been taken over the last 12 months by trading standards officers.

  (Lord Dubs) We can let you have that information. We will see what we have got and let the Committee have it.

  Mr Beggs: Thank you.

Mr Grogan

267  I really only have one question and it harks back to the question the Chairman first asked about revenue leakage loss and so on. As you say, this is a feature of the open market and cross-border. Have you made any calculations as to what is an acceptable revenue leakage loss in these circumstances? 0.5 per cent is about the figure that the estimates would indicate revenue leakage loss through illegal cross-border shopping. How does that compare to revenue leakage loss for cigarettes and alcohol, for example, which you mentioned? Is it a worse problem than we are looking at this afternoon or is it the most serious problem of cross-border leakage or are the others worse?

  (Ms Hewitt) I am extremely sorry, I probably should have anticipated that question, but it is my colleague, the Paymaster-General, who is generally responsible for Customs & Excise issues. I am responsible for environmental taxation, which is why I am here. I do not have those figures. I cannot give you that comparison in relation to tobacco and alcohol smuggling, but if it would assist I could provide a brief supplementary note on that point.

268  The question has been burning on my mind all day, so if you could I would be grateful.

  (Ms Hewitt) Of course.

Mr Barnes

269  I want to ask some questions about the harmonisation of duty. I appreciate the differentials that exist as far as currency is concerned. They have muddied the water on any assessment that is made in connection with duty differentials, but if we could in some way concentrate on this end of the spectrum. Does the Government accept that as long as duty differentials remain in the order of magnitude that they are or get wider then that is going to be a significant incentive for the residents of Northern Ireland to make cross-border purchases of fuel either illicitly or legitimately?

  (Ms Hewitt) As I understand the position, cross-border shopping for fuel has been a feature of the situation between the Republic of Ireland and Northern Ireland for many years, but the trade used to go in the opposite direction when prices were lower in Northern Ireland and people came north to buy their fuel. Some of them now go south. As I understand, and as we were discussing earlier, it is not only petrol that people cross the border in one direction or another to buy, it is other goods. I think this is part of the larger picture that within a Single Market, and increasingly within an open global economy, people will buy their goods and their services wherever they can get the price and quality that they want and this is a very large transformation that is taking part in the economy. Clearly, where you have a land border and there is a very obvious differential in the price, then that is likely to attract a particularly intense degree of cross-border shopping for a particular product and similar situations arise with land borders on the mainland continent of Europe. As I say, I think that is a feature of a Single Market and an open economy. We are looking in the context of the European Union at a proposal for an Energy Products Directive that would restructure the European Community framework for the taxation of energy products. There is a part of that Directive that we would support which would increase the minimum rates on road fuels and certainly if that provision were agreed then that would assist the particular problem that we are talking about in relation to Northern Ireland. I have to say that acceptance of the Directive does seem to be quite some way off.

270  Did that answer mean that you felt that there was a significant incentive by the differentials that existed in duty? Sometimes it might work one way or sometimes it might work the other, but the current situation is that this was nevertheless highly significant. Until the European Union comes along in the long term and offers some fresh Directives then that is just how the cookie crumbles and we have got to make the best of it?

  (Ms Hewitt) Duties are only part of the reason why people shop across the border. In the case of petrol, as I indicated, the exchange rate is clearly an additional factor. In the cases of other goods and services, quality may be as much of an issue as price. But in relation to duty, particularly duty on petrol and diesel, then until the European Union does set minimum rates it is a problem that we will have to live with and it is a problem we will clearly take into account in terms of setting the overall United Kingdom policy and it is an issue that in terms of its immediate impact within Northern Ireland will obviously need to be dealt with within the context of Northern Ireland structures.

271  One possible solution for solving this problem, although it would not overcome the currency difficulty, would be the harmonisation of duties across the island of Ireland of duty on petrol or sufficient harmonisation in order to make it no longer worthwhile for people to be involved in this trade. What is the Government's policy on this? I suspect it is opposed to this notion and if it is opposed to it then what are the reasons that it gives for that opposition, because it seems on the surface to be quite a logical and sensible resolution to the problem on one island?

  (Ms Hewitt) I am sorry, I thought that was a question for Lord Dubs.

272  I am asking why the Government does not see the harmonisation of duty levels in these areas across the island of Ireland as being the avenue down which they will go and the solution to the problem because that ends the incentive to move from one direction to the other?

  (Ms Hewitt) You are absolutely right that if the duties were the same then the only factor that is left would be the exchange rate, but we do not think it is our job as the United Kingdom Government to tell the Irish Government how to meet their Kyoto targets, that is a matter for the Irish Government. We do believe very strongly that although there is an important role for minimum rates to be set across the European Union where there are Single Market implications, taxes are in most cases a matter for national governments and should remain so.

273  The means of bringing about harmonisation could be that we reduced our duty levels within Northern Ireland while we had negotiations taking place with the Republic of Ireland to try and get them to raise theirs and there might be some pressures in connection with Kyoto that might lead them in that direction. We could bring them sufficiently in line with each other while having a differential as far as the tax is concerned between that which is levelled on the mainland and that which is levelled in Northern Ireland. I think the Government is opposed to that and I would like to know why.

  (Ms Hewitt) Yes, we are opposed to different duty rates for different parts of the United Kingdom. That is partly because that shifts the border problem from the border between Northern Ireland and Ireland to the water border between Northern Ireland and mainland Britain. Secondly, we would not wish to reduce fuel duty rates across the United Kingdom because that would remove a major plank of our environmental policy. Thirdly, to have a reduced rate for Northern Ireland only would require us to get a derogation from European Union Directives which require a national government to have a single duty rate on a single product within their national boundary. There are some derogations, for instance in relation to several of the Greek islands, but they apply where countries already had different rates in operation at the time when they joined the European Union and they were allowed, as part of their membership terms, to hang on to those differential rates. As far as I am aware, there have not been any new derogations granted to Member states since they joined, and there is really no prospect of us getting a derogation even if it were in the way you are describing, in the hope that eventually we could go back up again because the Republic had moved in that direction.

274  Seeking a derogation in this particular case may be not as difficult as the long-term position that is being looked for as far as the European Union is concerned in order to implement Kyoto across the whole of Europe, including the Republic of Ireland. It should be possible, if the will was there, to take on a particular area. When we are thinking of the policy as far as duty is concerned throughout the United Kingdom, a factor with Northern Ireland is we are talking about three per cent or so of the population of the United Kingdom. So we are not talking in terms of developing overall harmonisation policies or doing something that is going to seriously harm the rest of the policy that has been engaged throughout Britain because if this adds to pressures in order to smuggle from Northern Ireland into the mainland then there is a limited number of ports of access in connection with that. That is something that can be controlled by Customs & Excise, but the harmonisation policy would be for a small bit of the United Kingdom, although it might have a tremendous impact upon the situation which exists with these problems in Northern Ireland.

  (Ms Hewitt) Can I just stress that, although it might indeed help solve or reduce the problem that we are discussing here of smuggling, there is no prospect at all of a derogation from the European Union on this. It would be a very, very clear example of illegal state aid. One reason why it would be rejected at a European level but would also not be acceptable to the United Kingdom Government is that it would immediately give rise to pressure from other groups in other parts of the country for derogations either in respect of this or other duties. We would have rural communities, for instance, wanting different duty rates for petrol and diesel. You would simply open up a whole series of requests here, each of which might be very powerfully justified but which, taken as a whole, would make a complete nonsense both of the environmental policy and of the effective operation of duties.
  (Lord Dubs) If this concession were made, I would see immediate pressure coming to extend it to other products like cigarettes and so on where there are duties. It would put the Government in a very difficult position and it would be virtually unmanageable if we started opening the door in this way. We cannot tell other governments what to do about their tax policy, but post-devolution there will be opportunities in the British-Irish Council for environmental matters to be discussed in the sense in which they affect all the countries that are represented there, the Republic, Northern Ireland, Scotland, Wales and so on and that might be an opportunity for that sort of argument to be taken forward and those sort of points to be taken further to see whether one can move towards a policy environmentally covering all those countries.


275  The Economic Secretary both earlier and in this latest exchange has referred to the Kyoto targets of the Republic of Ireland. Would she like to remind the Committee what the Irish target is?

  (Ms Hewitt) What has happened is that the European Union as a whole has agreed a target which is eight per cent, that is an eight per cent cut in CO2 emissions by 2010. That has then been shared between the member countries. Ireland is allowed to increase its CO2 emissions by 13 per cent by 2010 taking account of the rapid rate of economic growth and development in the Republic of Ireland compared with the position in 1990.

276  If that figure is correct, and it was the figure I was expecting you to give, it does not seem to me that it suggests that the Government of the Republic of Ireland is likely to increase their duties.

  (Ms Hewitt) I have referred to Kyoto because that is indeed central for us because we have very stretching targets not only for Kyoto, we have our own domestic targets for a further reduction in CO2, but there are also local air quality issues which are extremely important. I think we are all aware, for instance, of the shocking increase in asthma, particularly amongst children, and chest problems generally, and particularly amongst elderly people. Those are very much a function of local air quality and countries that experience rapid economic growth in industrialisation tend to find that problems of congestion and pollution go with them. I cannot comment on the situation in the Republic, I am not familiar with it, nor am I responsible for it, but certainly our own view of the fuel duty escalator is that it contributes towards our local air quality targets as well as to the CO2 targets which I referred to earlier.

Mr Hesford

277  Chairman, the Economic Secretary has already mentioned the currency issue and I think in many ways you have said probably what you needed to say. Just on the currency issue affecting the smuggling, are you able to say any more about what the Government's attitude is and the effects of currency issues on the smuggling issue?

  (Ms Hewitt) I could not offer you numbers on how far the extent both of smuggling and of legalcross-border trade is driven by the exchange rate and how far it is driven by duty differentials. I am simply making the point that the exchange rate is an important factor here, but as you will be well aware, we do not have an exchange rate policy, we have an inflation target and we have a policy of macro-economic stability that we believe will deliver a stable and competitive exchange rate and will be met in the long term.

278  Is the currency issue an incentive that we as a Committee and you as the Government need to do something about and be more than just be aware of?

  (Ms Hewitt) I think we do need to be a aware of the impact of the exchange rate upon any issue of cross-border shopping as well as cross-border smuggling, but we do not have an exchange rate target and nor would it be wise to do so.

279  Mention has been made of the Dutch scheme and about how we might subsidise to get round the problem. I am given to understand that there is a French scheme for commercial users of road fuel whereby there is a partial fuel duty rebate on fuel used in vehicles above a certain size and up to a certain annual amount. What is the Government's policy on this? Whose responsibility is it for looking at that, is it Treasury or NIO?

  (Ms Hewitt) It would really be a matter for the Treasury and the Department of Environment jointly. 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. There have been suggestions that there should be some kind of rebate on duty, which might be a grant subsidy scheme more like the Dutch scheme for so-called essential users, and then more a matter for DETR. The Road Haulage Association has put forward a proposal for that. They define essential users as their own members. I think it would be rather difficult to justify a scheme in support of essential users that did not, for instance, include doctors, ambulances, other emergency vehicles, perhaps community nurses, perhaps drivers with disabilities. It is very, very difficult to define essential users let alone administer the scheme. I would also stress that the Road Haulage Association suggested that the rebate to their own members could be paid for by a three pence increase in the duty per litre on petrol or diesel for everybody else, which I do not think would commend itself to other drivers but would exacerbate the problem that we face in Northern Ireland.

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