House of Commons - Treasury

Select Committee on Treasury Sixth Report

SIXTH REPORT

The Treasury Committee has agreed to the following Report:—

HM CUSTOMS AND EXCISE: COLLECTION OF EXCISE DUTIES

Summary of Conclusions and Recommendations

(a) We are grateful that the Minister was able to brief us about the background to the problems with the collection of excise duties while Mr Rocques' inquiry was under way (paragraph 6).



(b) The Government owes Parliament an urgent statement about the scale of the loss of excise revenues between 1994 and 1998, the reasons for the loss, and the steps taken to prevent such losses occurring again. The Government should also explain the current status of the Rocques report and indicate the date by which it aims to secure publication (paragraph 9).



(c) We believe that Customs and Excise should demonstrate that adequate regulations and procedures are now in place to provide an effective check on the assessment, collection and proper allocation of revenue (paragraph 10).



(d) We believe that the extent of the knowledge of senior Customs and Excise officials about the scale of diversion fraud must be made clear. We also believe that the department must demonstrate that internal procedures and protocols are in place to ensure proper information reaches senior management and Ministers (paragraph 11).



(e) Significant revenue losses began to build up as a result of the conduct of excise fraud investigations from 1994. Ministers of the previous Administration do not appear to have been informed. Customs and Excise had identified these problems by 1998. Yet it was not until June 2000 that Ministers of the present Administration were informed. By then, losses had mounted to several hundred million pounds. We commend Ministers for commissioning the Rocques inquiry. But there can be no excuses for either losses on this scale, or for failure to report them to Ministers (paragraph 13).



(f) The recent problems with the collection of excise duties show that the need for Customs and Excise to be better managed is greater than ever. We hope that the forthcoming reorganisation of Customs and Excise will deliver the improvements forecast by the department and the Minister. We intend to continue with our regular scrutiny of Customs and Excise so that we can draw the progress made by the department to the attention of Parliament in future (paragraph 14).

Introduction

1. The Treasury Committee established a Sub-committee in 1998 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. The Sub-committee has completed inquiries into the Office for National Statistics (ONS),[2] the Inland Revenue,[3] the Valuation Office Agency,[4] HM Customs and Excise,[5] the Government's cash and debt management,[6] HM Treasury,[7] the Government Actuary's Department,[8] and the Royal Mint.[9]

2. In March 2000, the Liaison Committee recommended that all Select Committees should "assess progress on 'live' recommendations and criticisms, and report" by Christmas 2000.[10] In response, we prepared a report on our work from 1998 to 2000 which was published as part of the Treasury Committee's report on its work during this Parliament in December 2000.[11] In advance of this report, on 1 November 2000, we heard oral evidence from Mr Richard Broadbent, the Chairman of HM Customs and Excise, and other officials to follow up the recommendations we made in our report on his department and the Government's reply to them.[12] On 8 February 2001 we continued our scrutiny of the revenue departments by hearing oral evidence from Ms Dawn Primarolo MP, the Paymaster General. We have published the minutes of evidence from that session with this report.[13]

3. As part of our December 2000 report on our work we drew a number of conclusions about the management of Customs and Excise, the programme of Closer Working with the Inland Revenue, tobacco smuggling, the outcome of the 2000 spending review, and the new procedures for exports.[14] At that time, however, we decided not to pursue issues related to problems with the collection of excise duties which first came to public attention in June 2000. These issues were already the subject of an external inquiry. After hearing oral evidence from the Paymaster General we have decided to make this short report to the House about recent problems with the collection of excise duties.

Collection of Excise Duties: Background

4. On 30 June 2000, Customs and Excise announced that the Paymaster General had commissioned "a full independent investigation into the collection of excise duties in HM Customs and Excise". The inquiry arose from concerns about "serious weaknesses in the Department's control of excise duty collection, in particular the mechanisms for releasing dutiable spirits and wine from bonded warehouses", which were brought to the attention of the Minister at the beginning of June. An internal inquiry had shown evidence of "significant revenue losses" occurring between 1995 and 1998. The independent investigation was asked to consider "the policy, legislation, systems and resources within Customs and Excise relating to excise holding and movements to determine weaknesses and gaps including the efficiency of the current system of bonds and guarantees; how best to establish clear internal accountability for securing and protecting departmental revenue, and in particular whether there should be a single point of accountability within Customs and Excise for revenue cash management; and how best to ensure that sufficient weight is given to the protection of the revenue as a key criterion in Customs and Excise's handling of fraud investigations". "Any shortcomings in the systems and resources identified in the course of ongoing prosecutions" were also to be referred to the investigation at the conclusion of those cases.[15] On 7 July 2000, Customs and Excise announced that Mr John Rocques, ex-senior partner of Deloitte Touche, would lead the inquiry, which would report to Mr Broadbent and the Minister by the end of November 2000.[16]

5. The launch of the Rocques inquiry was raised during the debate on the Committee's HM Customs and Excise report, which was held on the floor of the House on 6 July 2000.[17] Press coverage at the time referred to a "revenue black hole that may have already cost the Exchequer up to £2 billion", "management failings" and "botched prosecutions" which had "cost taxpayers millions of pounds".[18] The Minister described the figures reported in the press as "inaccurate" but confirmed that she believed "hundreds of millions [of pounds] could potentially be lost".[19]

6. On 27 November 2000, we were briefed informally by the Paymaster General, at her request, about the background to the problems with the collection of excise duties and the reasons why she had launched the Rocques inquiry. Customs and Excise provided us in advance with a note about the system for collecting excise duties and, in response to our specific requests, a subsequent note about the actions taken by the department since 1998 to stop the revenue losses, both of which are printed with this Report.[20] We are grateful that the Minister was able to brief us about the background to the problems with the collection of excise duties while Mr Rocques' inquiry was under way.

The Rocques Report

7. We hoped that when the Minister came before us in February the Rocques report would have been in the public domain. On 18 January, the Paymaster General wrote to the Chairman of the Sub-committee in the following terms:

"You will recall that we had hoped to have concluded the inquiry by the end of November. This timetable proved to be too tight. John Rocques reported to Richard Broadbent and me just before Christmas and we considered his advice during the Christmas break. Customs tell me that although the basic facts have been established there is more work to be done before firm conclusions can be reached. Customs will therefore be asking John Rocques to carry out further analysis and to complete his work as soon as possible."

8. The Minister's letter gave us the impression that Customs and Excise had rejected the conclusions of Mr Rocques' report and had asked him to draw up fresh conclusions which would be more acceptable to the department. Such a view was supported by the recently reported comments of Mr Rocques that his report should now be published and acted upon.[21] The Minister assured us that "this is not about rejecting findings, this is about ascertaining the facts and the necessary steps thereafter".[22]

9. We pressed the Minister to set a deadline by which the Rocques report would be made public. While emphasising that she wished to see the problems with the collection of excise duties properly explained to Parliament, and appropriate action taken, she had "not set a specific deadline in terms of date".[23] She argued that it would be "inappropriate to gradually release information" to Parliament and the public.[24] Unfortunately, as a result of the delay in publishing the key findings and recommendations of the Rocques report, there is a danger of this happening. The National Audit Office has now published its preliminary conclusions about the scale of the loss to excise revenues and the causes of the loss.[25] The Government owes Parliament an urgent statement about the scale of the loss of excise revenues between 1994 and 1998, the reasons for the loss, and the steps taken to prevent such losses occurring again. The Government should also explain the current status of the Rocques report and indicate the date by which it aims to secure publication.

The National Audit Office Report

10. The Comptroller and Auditor General published his report on HM Customs and Excise's appropriation accounts, under section 2 of the Exchequer and Audit Act 1921, on 9 February.[26] He was unable to certify that "adequate regulations and procedures have been framed to secure an effective check on the assessment, collection, and proper allocation of revenue" or that "the sums brought to account in respect of such revenue are correct", because of the problems with the collection of excise duties.[27] The National Audit Office (NAO) estimated that, since 1993-94, £668.0 million of excise and VAT revenue had been lost as a result of the diversion onto the UK market of bonded goods (such as spirits) which were intended for export and on which UK duty had not been paid. A further £216.0 million revenue was lost as a result of diversion onto overseas markets where duty would have been due in the country of import had the goods not been fraudulently diverted. Most of the revenue loss occurred in the period between 1996 and 1998. £48 million has been recovered by Customs and Excise. In its accounts for 1999-2000, the department has written off £500 million and indicated that it is attempting to recover the remaining £336 million.[28] We believe that Customs and Excise should demonstrate that adequate regulations and procedures are now in place to provide an effective check on the assessment, collection and proper allocation of revenue.

11. The NAO attributed the revenue loss to "weak controls over the movement of alcohol", something to which we drew attention in our earlier report on HM Customs and Excise,[29] and the way in which the department investigated excise fraud. The NAO reported that around one-half of the revenue loss occurred because "suspect consignments of goods were allowed to leave warehouses under observation, in some cases over a period of months, in order to gather sufficient evidence to support prosecutions".[30] As a result "substantial amounts of duty-suspended goods were allowed to leave warehouse premises which then made their way onto the home market".[31] This not only damaged revenues. It also damaged legitimate commerce and all those taking part in it. Customs and Excise did not make an assessment of the costs and benefits of this approach and, when the scale of the losses became apparent, there was a failure to inform senior management and Ministers.[32] We believe that the extent of the knowledge of senior Customs and Excise officials about the scale of diversion fraud must be made clear. We also believe that the department must demonstrate that internal procedures and protocols are in place to ensure proper information reaches senior management and Ministers.

12. The Comptroller and Auditor General is preparing a more detailed report to Parliament on the causes of the problems with the collection of excise duties and the lessons which need to be learnt. We look forward to this report and the Committee of Public Accounts' scrutiny of it.

Conclusion

13. Significant revenue losses began to build up as a result of the conduct of excise fraud investigations from 1994. Ministers of the previous Administration do not appear to have been informed. Customs and Excise had identified these problems by 1998. Yet it was not until June 2000 that Ministers of the present Administration were informed. By then, losses had mounted to several hundred million pounds. We commend Ministers for commissioning the Rocques inquiry. But there can be no excuses for either losses on this scale, or for failure to report them to Ministers.

14. One focus of our inquiries into Customs and Excise has been the management of the organisation. In December 2000 we welcomed the new approach to management being taken by Mr Broadbent, who in oral evidence described the department he took over as "under managed", "slow to react, to learn" and exhibiting a "lack of clear strategic direction".[33] Since then, Mr Broadbent has announced a reorganisation of the department into two core units focusing on business services and taxes and law enforcement.[34] The recent problems with the collection of excise duties show that the need for Customs and Excise to be better managed is greater than ever. We hope that the forthcoming reorganisation of Customs and Excise will deliver the improvements forecast by the department and the Minister.[35] We intend to continue with our regular scrutiny of Customs and Excise so that we can draw the progress made by the department to the attention of Parliament in future.