Examination of Witnesses (Questions 260
- 279)
WEDNESDAY 23 JUNE 1999
LORD DUBS,
MR JOHN
RITCHIE, MR
DAVID GIBSON,
MS PATRICIA
HEWITT MP, MR
STEVE KELLY
AND MS
HEATHER MASSIE
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.
Chairman
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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