Memorandum submitted by HM Treasury
THE IMPACT IN NORTHERN IRELAND OF CROSS
BORDER ROAD FUEL PRICE DIFFERENTIALS (JULY 1999) - PROGRESS REPORT
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."
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 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).
| 
