TWENTY SECOND REPORT
The European Scrutiny Committee has made further
progress in the matter referred to it and has agreed to the following
Report:—
COURT OF AUDITORS REPORT:
REDUCED LEVY ON NEW ZEALAND DAIRY IMPORTS
(19221)
9384/98
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Special Report No. 4/98 by the Court of Auditors on importation at
reduced rates of levy into the Community and disposal of New Zealand
milk products.
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| Legal base:
| — |
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| Department: |
HM Customs & Excise |
| Basis of consideration:
| Minister's letter of 7 June 2000
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| Previous Committee Report:
| HC 155-xxxiv (1997-98), paragraph 4 (15 July 1998) and
HC 34-xv (1998-99), paragraph 1 (30 March 1999)
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| Committee's assessment:
| Politically important |
| Committee's decision:
| Not cleared. Further developments awaited
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Background
1.1 Ever since the UK joined the European
Community in 1973, specified quantities of New Zealand butter
have been entitled to enter the Community at greatly reduced rates
of levy, provided the butter concerned is indeed of New Zealand
origin, and meets certain other conditions. In addition to the
licence required by all imports of dairy products, New Zealand
butter also requires a document providing evidence that it meets
the eligibility conditions and is within the quota limit. New
Zealand cheese also benefits, to a more limited extent, from a
similar concessionary arrangement.
1.2 These arrangements were reported upon
in April 1998 by the Court of Auditors, which found "major
weaknesses" in the controls exercised by the UK authorities,
and in the Commission's oversight. As a result, the Court said
that its audit had identified under-payments of import levies
amounting to some 410 million ECU and undue payments of export
refunds amounting to 57,000 ECU. Of these sums, only about 118
million ECU was said to be recoverable (because debts can be pursued
only when they have been established by a demand within three
years of their arising).
1.3 As we noted in our Report of 15 July
1998[8],
the financial implications of this affair were also discussed
in the Explanatory Memorandum we had received from the then Financial
Secretary to the Treasury (Dawn Primarolo), who told us that further
irregularities not picked up by the Court of Auditors had since
been identified by HM Customs, thereby increasing the total arrears
to around £290 million. However, she went on to say that
the UK was arguing, with Commission support, that these amounts
would not ordinarily have been paid to the Community budget, because
the value of the quota had already been allowed. Also, the Commission
had recognised not only that a business would not have deliberately
been conducted in such a way as to incur a liability on this scale,
but that the arrears had arisen mostly through technical irregularities
and were "totally disproportionate" to any benefit gained
by the importers. She also said that the companies concerned did
not have the assets to pay the sums identified; that, if the debts
were pursued to liquidation, less than 10% of the estimated arrears
was likely to be recovered; and that Customs had been working
with the Commission to find a solution under which "appropriate
sums" could be recovered.
1.4 In noting this information, we said
that, before we could clear this document, we needed to have an
update on the sums required to be recovered, including any implications
for UK public finances. We also asked for information on the discussions
we had been told were taking place between the Ministry of Agriculture,
Fisheries and Food and the Commission regarding future detailed
controls of the arrangements for this quota.
1.5 We subsequently received two letters
from Treasury Ministers. The first, from the then Economic Secretary
(Ms Patricia Hewitt) on 4 September 1998, simply told us that
it seemed likely that Anchor Foods Ltd would opt for voluntary
liquidation, and that this was likely to satisfy the Commission
and other Member States that the UK had taken all steps in its
power to ensure recovery of debts. She added that it was unlikely
that more than £10 million would be recovered, but that the
remainder of the debt could then be written off. Pending further
substantive developments, we decided merely to acknowledge this
letter, but not to draw it to the attention of the House at that
stage.
1.6 We then received a letter and enclosure
of 17 March 1999 from the Paymaster General (Dawn Primarolo),
indicating that the level of arrears was of the order previously
indicated (about £290 million). It also referred to the 292
million ECU of arrears which the Auditors had seen as irrecoverable,
and said that Customs knew of no precedent for the Commission
demanding such sums from a Member State; indeed, the note added
that Customs believed this was not possible under the current
Own Resources regulations, but were consulting Leading Counsel
to confirm that UK public finances were not vulnerable in this
respect.
1.7 The note went on to discuss the implications
of the sale of the business and assets of Anchor Foods Ltd. It
said that this, together with payment of a proportion of the debts
to Customs, was generally seen as the most satisfactory resolution
to this problem, and that the Commission had indicated that such
a resolution would satisfy legal requirements, provided the UK
demonstrated due diligence in enforcing the debt. It added that
there had been concern that the value at which Anchor Foods intended
to transfer its business to another company within the group (New
Zealand Milk (UK) Ltd) would not stand up to scrutiny. Consequently,
Customs had obtained an interim injunction on 5 February 1999
to prevent this sale, and, at a High Court hearing on 26 February,
the judge had granted a continuing injunction, subject to a number
of conditions.
1.8 The note also dealt briefly with two
other issues that could have an effect on the level of arrears.
One — that spreadable butter should be regarded as eligible
for the New Zealand butter quota — would resolve demands
totalling £23 million if the view of Anchor Foods Ltd on
this point was upheld. The other — relating to an application
by Anchor Foods Ltd for remission of the arrears for licensing
irregularities, on the basis of proportionality — could
reduce the debt by around £100 million.
1.9 Finally, the note said that all of the
arrears demands had been appealed, and that consideration was
currently being given to the amount of security payable by Anchor
Foods Ltd in order that their appeals might be heard by a VAT
& Duties Tribunal. Once that issue had been resolved, Tribunals
on the specific issues could go ahead. Given that there was as
yet no agreed timetable for Tribunal hearings, the complex and
technical nature of some of the evidence to be considered, and
the rights of appeal that exist (including to the European Court
of Justice), Customs lawyers believed that final decisions could
be two or three years away.
1.10 In the meantime, on the other point
we raised in our earlier Report, the Paymaster General said that
proposals to improve control of the quota through minimum levels
of mandatory physical and documentary checks had been tabled by
the Commission at the Milk Management Committee. She added that,
although it was likely that several meetings would be necessary
before the proposal was adopted, it had UK support.
1.11 In the conclusion to our Report of
30 March 1999[9],
we noted that considerable uncertainties still remained over not
only the sums at stake here, but also the timescale within which
the outstanding issues might be resolved. In view of this, and
the amounts involved, we said that we were continuing to withhold
clearance, and that we would be grateful if the Minister could
let us know of any further significant developments.
Minister's letter of 7 June 2000
1.12 In her letter of 7 June 2000, the Paymaster
General has sought to bring us up to date on a number of aspects
of this report. She says that:
- the Milk Management Committee has now approved
a new Commission Regulation aimed at ensuring better control of
preferential dairy import régimes, including the New Zealand
quota system, by such means as greater frequency of checking,
and the need for certificates to be issued by the New Zealand
authorities rather than the Dairy Board: the rates of duty to
apply when a consignment breaches the terms of the concession
are also spelt out;
- as regards the under-payments already identified
by the Court of Auditors, all substantive issues relating to the
demands issued by Customs have been appealed, and the first Tribunal
hearing is likely to take place in the autumn;
- in the meantime, further litigation is continuing
to ensure that the Community's financial position is protected;
- despite the agreement reached between the Community
and New Zealand, arrears demands for spreadable butter issued
to Anchor Foods have not been withdrawn because Customs &
Excise has not been satisfied that the manufacturing process described
in the Tribunal and High Court appeal was used for all the spreadable
butter: this hearing is likely to take place at the end of the
year.
1.13 The Minister also raises two other
points in her letter. First, she says that Customs & Excise
has received a demand from the Commission for payment of traditional
own resources of £1.5 million plus interest arising from
the granting of an incorrect authorisation relating to the preferential
tariff rate for the use of cheese in the manufacture of cheese
sauce. She adds that the UK's principal concern is that, although
there are significant differences between the two cases, payment
could set a precedent in respect of any irrecoverable components
in the New Zealand dairy product arrears. Also, there is a need
for transparency and equity in bringing to account own resources,
and, whilst the UK supports the Commission's aim of introducing
greater accountability, it urges that any change of policy should
be applied consistently across Member States. It has therefore
advised the Commission that a decision on payment has been deferred
until the Commission has issued in July a paper clarifying the
financial responsibilities of Member States.
1.14 Secondly, the Minister says that the
Court of Auditors conducted in January of this year a follow up
to their earlier audit. She says that this latter report —
which is due to be published in November — concluded that
the action taken by Customs & Excise to protect the Community's
financial interests, and to quantify and notify the majority of
the debts, had been "commendable in a complex and time-consuming
case".
Conclusion
1.15 We are grateful to the Minister
for this further information, from which we note that the Community
has now taken steps to improve the controls over imported dairy
produce, and so avoid the sort of difficulties highlighted in
this case. We also note that, due to further legal action already
in train, it may be some time yet before the extent of any liability
arising from the past irregularities can be established, and we
are therefore continuing to withhold clearance until the position
on this is clearer. Finally, we note that a further report by
the Court of Auditors on this subject is likely to be published
later in the year, and we look forward to receiving then an Explanatory
Memorandum which will identify any salient points.
8 (19221) 9384/98: see the headnotes to this paragraph. Back
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(19221) 9384/98: see the headnotes to this paragraph. Back
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