Appendix II
Memorandum submitted by the Financial
Secretary to the Treasury
This memorandum constitutes the response by Treasury
and Northern Ireland Ministers to the report by the Northern Ireland
Affairs Committee on the impact in Northern Ireland of cross-border
road fuel price differentials.
The Committee reached a number of conclusions and
has made recommendations about ways and means of ameliorating
the impact and consequences of smuggling and removal of fiscal
markers from rebated fuels. These are summarised at paragraph
69(a) to (u) of the report.
Paragraph 69(a)
There are upward trends in both petrol and diesel
consumption in the Republic of Ireland and significant downward
trends over the last three years in both cases in Northern Ireland.
While there are no doubt many factors contributing to increased
consumption in the Republic of Ireland, we believe it is highly
likely that one such factor is that some of this fuel is ultimately
used in Northern Ireland.
Ministers note the Committee's conclusion and agree
that it is not unreasonable to conclude that road fuel is moving
from the Republic of Ireland into Northern Ireland. Legal cross
border shopping will account for some and smuggling for the remainder.
Paragraph 69(b)
We consider it is important that the scale of
the problem be determined as accurately as possible. We therefore
recommend that the Department of Economic Development seek information
on estimated sales volume losses from each of the main distributors
of fuel in Northern Ireland and, from this, to draw up a reliable
estimate of the extent of the problem.
Preliminary discussions have taken place with the
Institute of Petroleum and several of the main distributors of
fuel in Northern Ireland to ascertain the availability of fuel
sales information. The Institute of Petroleum has confirmed that
it cannot provide sales data nor can this be obtained from the
major oil companies which it represents.
Nevertheless, DED will pursue its contact with distributors
in Northern Ireland over the coming weeks to obtain whatever relevant
data is currently available, and assess how best it may be used.
DED will also continue to work closely with Customs and Excise
to monitor the trend in fuel import statistics in order to generate
a robust estimate of revenue lost as a result of legal cross-border
fuel sales and smuggling. Current estimates indicate that £100
million was lost in 1998.
Paragraph 69(c)
Although we have been unable fully either to characterise
or quantify the problems, as they are manifested in Northern Ireland,
arising from the substantial duty differential on road fuels between
the United Kingdom and the Republic of Ireland, it is clear that
they cause substantial distortions of normal purchasing patterns
and create significant opportunities for unlawful activity.
Ministers agree that there are strong indications
of changes in purchasing behaviour as a result of fuel price differentials.
Paragraph 69(d)
Without knowing the overall size of the problem,
it is difficult for us to form a view on the effectiveness of
the measures taken to date by Customs and Excise to tackle both
smuggling and gas oil misuse. It is clear from the figures that
actual fuel seizures are very modest, both in absolute terms and
in relation to the volumes admitted to be smuggled. Actual volumes
smuggled are likely, in our view, to be considerably greater than
those discovered or admitted, which by definition only involves
the illicit activities of those apprehended. There is clearly
scope for a greater enforcement effort. We nonetheless commend
the staff on the success they have had to date.
As the Committee has identified, measuring the scale
of illegal activity is, by its very nature, extremely difficult,
particularly when it is combined with the perfectly legal activity
of cross border shopping. It is also the case that road fuels,
even more than other excisable goods such as alcohol and tobacco,
are intended for almost immediate consumption, even when smuggled
in commercial quantities. This tends to mean that seizures are
in quantities that are to hand. Fuel cannot be stockpiled to the
same extent as tobacco or alcohol.
It is a common complaint, by the legitimate oils
trade particularly, that the enforcement effort should be greater.
It is very tempting to think that the answer to the smuggling
problem is as simple as this and that it is only a question of
adding resources to bring the problem to an end. The Committee
has recognised and supports the strategy adopted by Customs and
its partner agencies for countering fuel smuggling and it is this
that underpins the enforcement effort.
Customs in Northern Ireland have reviewed all of
their activities and changed the emphasis from prosecution of
offenders (with its attendant resourcing implications) to disrupting
illicit trading. They have set objectives in relation to the oils
sector problem for all of their staff in Northern Ireland, including
VAT staff, and they have built new intelligence links with all
relevant agencies both in Northern Ireland and in the Republic
of Ireland. In addition they have worked with other agencies to
identify the benefits to be obtained from joint enforcement activity,
not only on the revenue issues but also for other regulatory regimes
including public safety, competition law and environmental legislation.
The greater enforcement effort sought by the Committee is being
achieved through improvements in deployment of all the resources
available.
Paragraph 69(e)
We support the strategy outlined by the Economic
Secretary for countering fuel smuggling. We were encouraged by
Mr Norgrove's description of the results of the pilot programme
of VAT assurance visits and we welcome the support for a multi-agency
approach.
Ministers are grateful for the Committee's support
of the strategy of adopting a multi-agency approach.
Paragraph 69(f)
One witness suggested that a licensing system
should apply to all fuel retailers and bulk users in Northern
Ireland, to seek to reduce the incidence of smuggling. We recommend
that this idea be examined further.
The current licensing system for the storage and
sale of petroleum spirit has its legislative basis in the Petroleum
(Consolidation) Act (Northern Ireland) 1929, which is concerned
with safety aspects. However, the provisions of the Act could
not be applied to liquids such as kerosene and diesel, in view
of the much lesser degree of safety risk associated with them
than with petroleum spirit. Similarly, since these fuels are not
classed as "highly flammable" it would not be possible
to use the legislation-making powers of the Health and Safety
at Work (Northern Ireland) Order 1978 to introduce a licensing
regime to control their storage. New primary legislation would
therefore be required to apply a licensing regime to the storage
of kerosene and diesel oil.
The resource implications of the introduction of
a licensing regime for kerosene and diesel would also be considerable.
Not only would there be a huge number of premises for which licences
would become necessary, but frequent and detailed inspections
would be required to implement the system.
More fundamentally, however, it is considered that
a licensing system is unlikely to have any significant impact
on the illegal importation of diesel. Even if such a system were
draconian in its requirements and enforcement arrangements, widespread
abuse could be anticipated.
Paragraph 69(g)
We understand that a Memorandum of Understanding
is being negotiated between Customs and Excise and the RUC; we
welcome this and look forward to its early entry into force.
Discussions between Customs and the RUC which will
lead to a Memorandum of Understanding (MOU), among other outcomes,
are continuing. The two agencies are lead players in the construction
of the intelligence and structural systems which form the platform
for the multi-agency approach and have been working together both
in planning and operations. A comprehensive compendium of legal
powers and offences to inform all of the regulatory bodies involved
is in preparation and exchanges of personnel are being actively
progressed. No date has yet been set for the signing of a formal
MOU but joint operations have already been mounted and will continue.
Paragraph 69(h)
We recommend that consideration be given to making
greater use of Trading Standards checks as part of the multi-agency
approach to countering road fuel tax abuse.
The Trading Standards Service (TSS) is developing
an action plan to deliver an extensive fuel sampling programme
throughout Northern Ireland. Working in conjunction with Customs
and Excise Intelligence Unit, TSS will target those areas where
non-compliance is perceived to be greatest. The programme will
commence in mid October 1999.
Paragraph 69(i)
We would urge individual members of the fuel retailing
and road haulage trades, and their trade associations, to co-operate
as fully as possible with Customs and Excise and other agencies
in the stamping out of illegal sales of road fuels.
Ministers note the Committee's comments and hope
that this co-operation continues to be forthcoming. There is no
doubt that the trade can be very effective in this area, providing
useful intelligence to complement the strategy employed by Customs
in their work with other agencies against illegal sales of road
fuels.
Paragraph 69(j)
A number of witnesses argued that elimination
of fuel smuggling and of gas oil misuse is likely to prove impossible
through enforcement measures alone. We agree. Nonetheless, the
general approach of Customs and Excise of attempting to enhance
the risk of detection, and thus deter such activity, in our opinion
is sound.
Ministers note the Committee's conclusion and are
pleased to note the endorsement of the general approach adopted
by Customs.
Paragraph 69(k)
We recommend that the presumption should be that
vehicles confiscated as a result of smuggling operations and which
are proved to have been involved in the unlawful transport of
fuel should be scrapped, to prevent their re-use in the same trade.
It appears to us that such re-use is a risk, however careful Customs
and Excise are in their disposal otherwise. In the long run, such
a policy might increase smugglers' costs, by reducing the pool
of cheap vehicles.
Arrangements have been made for the destruction by
the Army of vehicles seized by Customs. No vehicles adapted for
the smuggling of duty unpaid fuel and seized in Northern Ireland
will be returned to the owners or put up for sale by the Department.
However Customs do have to be mindful of, for example, hired vehicles
that are misused without the knowledge of the owner.
Paragraph 69(l)
We consider that the case for introducing an appropriate
marker into duty paid fuel, as an anti-smuggling measure, should
be further investigated.
Customs continue to keep all possible enhancements
to the procedures for movement of oil under review and to make
appropriate recommendations to Treasury Ministers.
Paragraph 69(m)
We recommend that work to develop indelible chemical
markers should be given a high priority by Customs and Excise.
Given that misuse of rebated oils is apparently a general problem
in the European Union (though perhaps most severe in the United
Kingdom because of the size of the duty differential), we further
recommend that any common EU markers should be chosen to enhance
the degree of protection against unlawful removal, and that the
Government should press the case for this with the Commission.
Such developments might be expected to inhibit generally the extent
of misuse of gas oil.
The chemicals industry is currently developing new
ranges of more sophisticated dyes and markers and Customs have
already had presentations from manufacturers competing to address
the fiscal problems faced by Member States. These include marking
systems that are visible only to laser detection, others that
rely on infra red analysis and at least one that is a bio-marker.
Initial indications are that these are much less susceptible to
unlawful removal.
For some time now the Commission has been conducting
a process to select a common marker for use in rebated fuels throughout
the EU. This process has resulted in the selection of a product
known as Solvent Yellow 124, a BASF product. Member States are
currently running blind laboratory tests on samples of oils marked
with this product. If this phase is completed satisfactorily,
as is expected, the Commission will move to adopt it as the "Euromarker".
This will be promulgated by Directive and the UK will be obliged
to introduce it into its legislation.
Solvent Yellow 124 was selected in an open competition
against a number of other markers including the current UK marker,
quinizarin. It achieved the highest score across a range of criteria
which included resistance to laundering. However it did not achieve
the highest score on that sole criterion; quinizarin was better.
This leaves the UK in the unsatisfactory position of having, in
due course, to adopt a marker which is slightly easier to launder
than our current marker at the very time when we need a marker
that is more resistant. The UK has made its position on this plain
to the Commission but they are not able or willing to unwind the
tender process for one Member State.
Customs will press the Commission, after it adopts
Solvent Yellow 124, to begin another programme to select a more
robust marker, based probably on technology mentioned earlier
that is not as susceptible to removal. Customs will also consider
carefully how to implement the use of Solvent Yellow 124 and whether
the UK should retain its current marker in addition. It is likely
that the Commission will have no difficulty with Member States
requiring more than one marker.
Paragraph 69(n)
In short, none of the general measures put forward
to meet problems arising from road fuel price differentials commended
themselves to Government, although we welcome Lord Dubs' undertaking
to look again, without prejudice, at the Dutch scheme. However,
we hold out little hope that such a scheme will be introduced
in Northern Ireland, not least because the Commission has now
decided that the financial support given to the majority of retailers
under the Dutch scheme is incompatible with Community law and
should be repaid.
Government is fully aware of the difficulties being
experienced by petrol retailers as a result of the fuel price
differential. The differential is however the result of wider
policy objectives. In addition, the differential results in part
from the normal operation of an open economy and needs to be seen
in the broader context of beneficial effects of cross-border trade.
The Government has strongly resisted the general concept of subsidies
to offset adverse market conditions.
The EC decision on the Dutch scheme has shown, as
the Committee has noted, that it would be very difficult to obtain
EC approval for a subsidy scheme. The Commission concluded that
state aid in general, and the de minimis rule in particular, is
not a suitable instrument for compensating border companies for
differences on taxes between two countries.
There would be significant resource implications
of introducing a subsidy. Estimates (based on fuel prices as at
24/25 August 1999) indicate that it would cost in excess of £220
million per annum to subsidise all petrol stations in Northern
Ireland to mitigate the effect of current fuel price differentials.
It would cost an additional £10 million per annum to mitigate
the effect of each 1 pence increase in the differential.
Even a de minimis scheme, which would restrict the
aid level to 100,000 euros over three years for each petrol company,
would cost around £4.5 million per annum for those stations
within 20 km of the border and £12 million for all petrol
stations in Northern Ireland. There is no provision for this within
current departmental baselines and there are already considerable
pressures in the public expenditure system. In addition, the low
levels of aid available under a de minimis scheme would have minimal
impact on the fuel price differential. Such a scheme might also
be costly, difficult to administer and potentially open to abuse.
There would appear therefore to be little scope for
Government action. A scheme like that suggested, even if permissible
under state aid rules, could prove to be both expensive and ineffective
and could set an unwelcome precedent.
Paragraph 69(o)
There is no doubt that the differential in fuel
prices across the land boundary in the island of Ireland is a
difficult issue and one that has serious consequences for fuel
suppliers and road hauliers. It is also a wider problem in that,
besides distorting trading patterns, it appears to have become
a means of funding paramilitaries and racketeers. It is therefore
damaging the social fabric of Northern Ireland.
It is accepted that the smuggling and misuse of oil
in Northern Ireland is a matter which has an impact outside the
loss of revenue. It is the recognition of the social impact (including
public safety, and moving vehicle offences) that has led to the
multi-agency approach that is now the accepted public sector response
in Northern Ireland.
Paragraph 69(p)
It would appear that the Government's position
can be summed up as sympathy for those affected, but that wider
policy considerations, such as the UK's Kyoto commitments and
the Single Market and consequent limitations imposed by EU law,
prevail, although the Government does not condone smuggling and
is keen to limit it. There is a certain irony in this situation,
in that the present position actually assists the United Kingdom
with its Kyoto targets, as cross-border purchases and smuggled
fuel count against the Republic of Ireland quota.
Paragraph 69(q)
There is a clear paradox, seen in the context
of the geographical reality of the island of Ireland, between
the Kyoto obligations of the Republic of Ireland, which is permitted
a 13% increase in overall emissions of the basket of six 'greenhouse
gases' to 2008-12, and those of Northern Ireland, which is part
of a country required to decrease such emissions by 12.5% over
that period. Government policy should recognise this; there are
no marked industrial and environmental differences between the
two jurisdictions in the island, and some of the consequences
of different fiscal treatment are at the root of this report.
Following Kyoto, the EU (under the UK Presidency)
reached a "burden sharing" arrangement in June 1998
for sharing out the EU's 8% reduction target. This means that
some Member States have big reduction targets (e.g. Germany -
21%; UK - 12.5%); whilst more recently joined states (e.g. Greece
and Portugal) can make significant increases. The burden sharing
agreement has yet to be established in legally binding form. Negotiations
took a large number of issues into account, including action already
taken, the scope for making further cost effective reductions,
and the need for Member States with relatively low levels of energy
consumption, such as the cohesion countries, to maintain their
social and economic development. A number of countries which share
land borders have different targets.
Under the terms of the Kyoto protocol, the UK has
a legally binding target to reduce its emissions of greenhouse
gases to 12.5% below 1990 levels by 2008-2012. This target is
binding on the UK as a whole - it is not disaggregated regionally
within the UK.
The UK Government is currently developing a UK climate
change programme, a draft of which is due to be published towards
the end of 1999 for consultation. The devolved administrations
and the Department of Environment for Northern Ireland are currently
assessing how they can contribute to the UK programme.
Paragraph 69(r)
While we note that the Economic Secretary considers
that Customs and Excise now has the resources necessary to tackle
the problem of road fuel smuggling in Northern Ireland, we recommend
that its staffing in this area be kept closely under review by
Ministers, and that the Government should not hesitate to increase
further the staff resources devoted to tackling the problem if
to do so would be cost effective.
The Committee will be aware that the resources available
to Customs and Excise were set under the terms of the Comprehensive
Spending Review for a period of three years. In the context of
developments in Northern Ireland, this means that Customs must
allocate those resources according to their perception of the
risk, taking account of their other priorities and calls on resources.
Ministers expect that if Customs decide the risk is high then
they will adjust their resources accordingly.
Customs are currently engaged in their annual consideration
of the resources to be allocated to their regions. The prime determinant
is risk and Northern Ireland Region has been asked to contribute
to that exercise, putting focus on the oils problem as a main
factor in the risk they are required to address.
Paragraph 69(s)
We also detected an element of complacency on
the part of the Government about the significance of the problem.
Lord Dubs commented:
".... We believe the overall policy is important,
both for Britain and for Northern Ireland, and there is sometimes
a price to be paid for it. That price is that, because we have
a land border, we have certain difficulties. I am concerned, on
behalf of the business interests who are suffering, but we have
had in the past situations where the movement has been the other
way and people have found that things are much cheaper in the
Republic and they have gone from there. At times it has been cheaper
in Northern Ireland. This changes from time to time."
The Economic Secretary said:
".... £100 million in the context of
£21 billion overall from fuel duties as a whole is really
a very, very small part of the overall picture."
and:
".... in relation to duty, particularly duty
on petrol and diesel, then until the European Union does set minimum
rates [cross-border fuel procurement] 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 in
the context of Northern Ireland structures."
We would only reiterate that the impact on the
Province is severe and that the loss of £100 million in revenue
is material.
There is no complacency on the part of Government
about the significance of the impact on the Northern Ireland economy.
However this is not the same as the loss of revenue to the UK
Exchequer.
Paragraph 69 (t)
We recommend that the Government investigates
further the experience of other EU Member States in dealing with
the problems of price and duty differentials across national boundaries
in relation to road fuels. The Treasury could provide us with
no information on this, which slightly surprised us as there are
other material differences in fuel duties and prices across Member
States' borders and corresponding difficulties: the existence
of the Dutch scheme alone is evidence of that. It may be that,
at European level, a consensus might emerge on measures to mitigate
the impact of the road fuel duty and price differentials between
Member States which are both effective and consistent with the
principles of the Single Market.
As the Committee mentions the Dutch scheme as evidence
of action being taken to deal with the problem of price differentials
it is worth noting the European Commission has recently declared
that the majority of subsidies paid under this scheme were incompatible
with the state aid rules. The Commission also stated that state
aid, even at a de minimis level, is not a suitable instrument
for compensating border companies for differences in taxes between
two countries. This illustrates the difficulty of identifying
measures to mitigate price differentials.
In addition, Customs staff in Northern Ireland have
in hand a series of visits to Member States where there are significant
cross-border smuggling problems. The purpose is to learn from
practitioners in other Member States lessons that will inform
operational practice in the UK.
Paragraph 69(u)
The Economic Secretary commented that a draft
Energy Products Directive that would restructure the European
Community framework for the taxation of energy products was under
consideration. She pointed out that a part of the Directive, which
the Government would support and which would increase the minimum
rates of duty on road fuels, would, if agreed, assist in reducing
the duty differentials between Northern Ireland and the Republic
of Ireland. The Economic Secretary cautioned, though, that acceptance
of the Directive seemed to be "quite some way off".
We recommend that the Government seek to encourage both the Presidency
and the Commission to make early progress on agreeing this aspect
at least of the Energy Products Directive.
Ministers accept this recommendation and will support
progress on this area in future negotiations of the Energy Products
Directive.
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