Select Committee on Northern Ireland Affairs Fourth Special Report

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."


".... 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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