Select Committee on Northern Ireland Affairs First Special Report

Memorandum submitted by HM Treasury


Since the Committee's report in Spring 1999, the Government has continued to monitor the impact in Northern Ireland of cross border road fuel price differentials. There have been two major developments since the Report and the Government's Response in October 1999.

Firstly, the Government established in September 2000 the Organised Crime Task Force chaired by Adam Ingram, MP, Minster of State at the Northern Ireland Office. This task force includes the Royal Ulster Constabulary, Customs, Security Service and National Criminal Intelligence Service (NCIS) as well as the Home Office and the Northern Ireland Office. It aims to tackle organised crime in Northern Ireland so that it does not hinder Northern Ireland's transition to a responsible civic society. An essential part of this will be the effective co-operation of all law enforcement agencies in Northern Ireland at all levels.

Secondly, in September 2000 Customs increased by a factor of four the resources devoted to tackling oils fraud in Northern Ireland, including smuggling and laundering of rebated gas oil (UK red diesel and RoI smuggled green diesel) . This additional enforcement activity, has been carried out with operational support from the Royal Ulster Constabulary.

In addition to the updates on specific recommendations you have also asked about the impact of Human Rights legislation on enforcement activity focused on oils fraud in Northern Ireland. All of the legislation which Customs and Excise operate under has been examined very carefully so that it is ECHR compliant. Customs have had number of appeals on ECHR grounds but are confident that they have acted legally.

Updates on Specific Recommendations

Para 69(b)

(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

Customs and Excise are currently completing work to produce updated estimates of revenue loss from oils fraud and legitimate cross border shopping. These estimates will be published once this work has been completed.

Para 69 (d) and (r)

(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

(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

From 25 September 2000, Customs and Excise have increased by a factor of four the resources devoted to tackling oils fraud in Northern Ireland. These resources are supplemented by strike forces from the mainland. Customs have continued to work closely with all the other agencies in Northern Ireland. Results in terms of detections have been encouraging and Customs are on course to double the volume of illicit fuel they seize in 2000/2001 as compared to 1999/2000. Customs are currently working closely with the oil industry in Northern Ireland to analyse the impact this increased activity has on the market.

Para 69 (e) (g) (h)

(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.

(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.

(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.

Customs continue to work very closely with the Royal Ulster Constabulary. The increased activity since September 2000 has been supported throughout by the Royal Ulster Constabulary, but a formal Memorandum of Understanding has not yet been concluded. Moreover, the Organised Crime Task Force will ensure the most effective co-operation between these two agencies and other law enforcement colleagues.

The Trading Standards Service have been carrying out testing work as part of their planned programme since October 1999. This closer working has helped Customs target areas of non-compliance and a number of successful seizures have resulted.

Para 69 (i)

(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.

Customs have regular meetings with trade bodies, including the Petrol Retailers Association and the Legitimate Oil Pressure Group, to ensure that all the information available is used to inform enforcement activity.

Para 69 (k)

(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.

Customs have adopted a tough vehicle seizure policy where they seize and do not restore any vehicle used to smuggled road fuels. These seized vehicles are disposed of in the most cost effective way for the Exchequer and in a way which means that they will not return into the hands of the smugglers. Roadworthy vehicles are sold in markets outside Northern Ireland while dangerous vehicles are destroyed.

Para 69 (m)

(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 fuels 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.

Solvent Yellow 124 was selected, in an open competition, to be the common marker for use in rebated fuels in the EU. This product is being tested by Member States. Following an analysis of the results the Commission will decide whether to adopt this as the 'Euromarker'. The UK will then be obliged to introduce it into legislation.

Para 69 (n)

(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 majority of retailers under the Dutch scheme is incompatible with Community law and should be repaid.

The Commission concluded that state aid in general is not a suitable instrument for compensating border companies for differences in taxes between two countries, and found against Holland in recent infraction proceedings.

It is difficult to envisage a scheme which would not fall foul of the Commission's State Aid rules.

Para 69 (q)

(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.

The UK published its Climate Change Programme in November 2000 (following draft document in November 1999). This includes a specific, disaggregated section on Northern Ireland and initiates a scoping study on the potential impact of climate change in Northern Ireland.

Para 69 (t)

(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 borders 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.

Customs staff have visited a number of countries in the EU over the last year to look at the way in which they deal with cross border road fuel price differentials. Lessons learnt from these visits will be used to inform future enforcement activity.

Para 69 (u)

(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.

No progress has been made on this to date, however the Swedish have indicated that they wish to make progress in this area during their Presidency.

Specific Recommendations - No progress to report/appropriate

Para 69 (a), (c), (f), (j), (l) (o) (p) & (s)

(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.

(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.

(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.

(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.

(l) We consider that the case for introducing an appropriate marker into duty paid fuel, as an anti-smuggling measure, should be further investigated.

(o) There is no doubt that the differential in fuel prices across the land border 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 for paramilitaries and racketeers. It is therefore damaging the social fabric of Northern Ireland.

(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.

(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 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 within 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. (Paragraph 66).

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