Select Committee on European Scrutiny Twenty-Second Report


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

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.


Legal base:
Department: HM Customs & Excise
Basis of consideration: Minister's letter of 7 June 2000
Previous Committee Report: HC 155-xxxiv (1997-98), paragraph 4 (15 July 1998) and
HC 34-xv (1998-99), paragraph 1 (30 March 1999)
Committee's assessment: Politically important
Committee's decision: Not cleared. Further developments awaited

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

9   (19221) 9384/98: see the headnotes to this paragraph. Back


 
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