Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 60-79)



  60. But it does not sound to me you are going to have a PSA target in the near future, because you do not know what the alternatives are to the marks system that you have looked at and rejected?
  (John Healey) With respect, you asked me about the existing PSA targets, and alcohol fraud, at that stage, was not set as a PSA target.

  61. I am trying to get you to explain why, and what the prospects are for some robust targets going forward?
  (John Healey) I think if you are looking for robust targets, then the prospects for those are good. How we precisely do that, we still need to settle in discussion with the Industry. The question of PSA targets, rather than robust targets in themselves, are a matter at the moment that we are considering, obviously in the context of the new spending review period, and the spending review settlement for 2002 we expect next month.

  62. What about the question about specific targets for VAT? What are your thoughts on that?
  (John Healey) Crucial area. One we have recently turned significant attention to. Crucial not least because the degree of fraud that we are able to establish accurately within the system will give a measure, not just of the loss to the Revenue and public finances, but the degree of distortion there is in the market for those businesses that do legitimately abide by the law and pay the VAT. As we explained in the Spring Report, and indeed in the PBR back in November, at present, what we are doing is assessing the extent of the revenue loss through VAT fraud and avoidance. We are still doing that work. It is important that we do that work in a way that gives us in Government, Customs, as the operational enforcement Agency, and Parliament and the public as well, a secure base line on which we can assess the scale of the problem, and then subsequently judge the impact or the outcome of any strategies that we put in place. Once we have completed that exercise satisfactorily, we will be in a position to produce what we are determined to put in place, which is a comprehensive strategy to try and deal with VAT fraud. That will be something that needs to tackle outright fraud; that will need to tackle avoidance; that will need also to encourage compliance; and will need also to encourage businesses that may at the moment be falling foul, essentially, through ignorance and error. So you can anticipate the need for a strategy that will deal with that range of problems right across this field. In a sense, Mr Ruffley, we will do what we have recently done with missing trader fraud. The process is the same: identifying the extent and scale of the problem, and understand the nature, i.e. sound analysis, and in that case, an estimated loss of revenue of between 1.7 to 2.6 billion per year, so certainly the most blatant form of VAT fraud which we are tackling. That is now then, as a result of that analysis, a top VAT fraud priority for Customs. Extra staff have been deployed to tackle this. We have targets for the outcome of this, in other words, the savings, the cut and the loss to the Revenue that we are looking for, which is 750 million by 2003-04, and we plan to report on progress towards the outcome that we are seeking with any updates of our analysis that may be required on that annual cycle that I explained earlier, when trying to establish this link to the PBR cycle and since. What I suggested to you is that we have serious work in progress and a serious intent to produce a comprehensive VAT strategy, and a sign of our serious intent is demonstrated with the missing trader measures that we have put in place, which was the most blatant, and, arguably, the biggest element of VAT fraud that we were facing.

  63. That work in progress, when do you expect it to be completed?
  (John Healey) I would hope that the assessment would be completed later this year to enable us to move towards the publication of a comprehensive picture, plus a declaration of the sorts of strategies that we want to put in place.

  64. Would you say you are pressing it urgently as a Minister, because obviously, the longer it takes for the assessment to be reached—and clearly, you have to do that work properly and thoroughly, we all agree with that—but the longer it takes to get action on this, the more the Revenue base is suffering?
  (John Healey) This is certainly the missing big piece of the jigsaw in terms of the proper analysis and the strategy. You asked about my determination and sense of priority in this, and it is certainly is there, it clearly has to be a centrepiece of what we try to do over the next few years.

  65. But you think the end of the calendar year? Is that what you were thinking?
  (John Healey) We are aiming, and I am pushing, to have the analysis and assessment, the fundamental work that we need to do in order to understand the scale, nature, trends of the problems that we face in order to sensibly then set out the plans. I would hope to see us in a position where we could confirm that assessment by the end of the year.


  66. If we can turn to governance, Minister. The Roques report, of course, uncovered a horror story of a Board. I think he said, "All the things I would have expected a Board to do, it did not do", and one of the things we questioned your predecessor about and are still concerned about is the relationship between the Board and you as the Minister responsible. If you do not receive minutes of Board meetings, if you do not send a Treasury representative to them, how are you properly accountable to the Department for the Commissioner's activities?
  (John Healey) Halfway through my third week, trying to understand the nature of the relationship, I have to concede to the Committee it is a complex area. We have Customs, which is, in some respects, a department of State, and in other respects, independently established and longstanding, with Commissioners formally appointed for Customs and Excise dating back to 1909. With certain rights and independence that flow from that, I have a dual role, as both Treasury Minister, and Minister responsible for the Customs and Excise, which, in other departments of State outside the Treasury, it would be quite simply described as sponsoring Minister for that department. I think, on balance, that is probably an advantage for customers rather than a disadvantage. But in simple terms, as far as there is a constitutional clarity about this, the Treasury is responsible for resources for Customs, the tax policy within which they operate, and the broad policy direction within which the Agency needs to work. Customs and Excise are responsible for the operational decisions, particularly over tax investigations and the day to day running, overseen, of course, by the Board. I think, particularly under the new Chairman, Richard Broadbent, he has made great strides in greater clarity in organisational management and accountability, and I think that was reflected in his Memorandum to the Committee. I have to say, Mr Fallon, I am now keen to try and achieve similar clarity in terms of the relations between the Treasury and Customs and Excise—Ministers and Customs and Excise, which, of course, you may have noticed, was not dealt with in these memorandums to the Committee, so, in a sense, I have taken the opportunity as a new Minister to have a fresh look and review this area. And I am very happy to let the Committee know of the conclusions and clarity that I hope I am going to be able to bring to this in due course if that is helpful.

  67. It is extremely helpful. We fully understand it is only week three, but I was genuinely puzzled, because after the last hearing, we had a letter from your predecessor who pointed out the constitutional position and she said, "The Chancellor of the Exchequer delegates responsibility, but is accountable to Parliament for the Commissioner's actions." That is not law enforcement, obviously, but generally, Commissioner's actions, and I was just a bit puzzled as to how you can be accountable for their actions if you do not receive the minutes of the Board and do not send somebody from the Treasury to occasionally see what is going on?
  (John Healey) I am not sure that the simple formula of receiving minutes and processing minutes of the Board is a sufficient guarantor that I would have the right information when I needed it in order to be able to either make decisions or undertake my responsibility in accounting to Parliament in the same way as a Minister in a different department, accountable for both the operation of a department and in the agencies that it sponsors. In a sense, we are faced with some of the similar questions: "What is the proper level of relationship?" "What is the proper exchange of information?" "What are the proper matters for discussion, decision, determination, or information?", and I think now is not a bad time for me to try and bring some sort of rigour to the role that I am expected to play in the future.

  Chairman: That is helpful, and interesting to know that you yourself are reflecting on that. We maybe look forward to hearing further from you. Can we now turn to the PSA targets in more detail. Nigel Beard.

Mr Beard

  68. It is your aim, according to the report, to reduce the availability of Class A drugs by 25 per cent by the year 2005, though, on the same period, your target for reducing smuggled cigarettes is to reduce it by only 4 per cent? That is, from 22 per cent to 18 per cent. It does not sound a tremendously demanding target?
  (John Healey) The Class A drugs target or the tobacco target?

  69. The tobacco target, compared with the Class A drugs target.
  (John Healey) Class A drugs target is a staged target over 7 years, going through from 1998-2005. I would suggest, Mr Beard, that is actually quite the opposite, that the tobacco target is a pretty formidable target, rather than being one that is either flawed or rather too soft. I say that because I think it is important to examine the point of where we started in examining the problem and setting the target. In other words, where we were with the scale and the problem of tobacco fraud in March 2000, and where we would be without any sort of intervention or strategy such as we have in place. Here, we would have seen, by the year 2000-01, the share of the consumption in this country risen to 25 per cent from cigarettes on which no duty was paid. If we had no strategy in place, by 2003-04, that would have risen to 36 per cent. In other words, we had very powerful trends at the point at which we were examining the problem and deciding what action to take. In those circumstances, the objective of first stabilising the increase of consumption from illicit sources, and then driving it down to where we aim to be, at 20 per cent in that year 2003-04, is actually, as I said earlier, a formidable challenge, one in which I think arguably, not a 4 per cent cut, but over and above what we would have had if we had not had the strategy in place, actually a 15 per cent cut. A gap, incidentally, that would be worth 2 billion to the Exchequer each year. So I would suggest to you this is actually quite a tough target, not an easy target.

  70. Are you suggesting, then, that the Class A drugs smuggling has not got the same growth momentum as cigarette smuggling?
  (John Healey) No. In the nature of any fraud, the comparability of the problems that are faced is very limited, and I think it is both in terms of targets and enforcement and the other intervention action, it is horses for courses. On the Class A drugs, that is also an extremely tough target. I think your colleagues on the Home Affairs Select Committee recently published a report which described it as "aspirational". In some sense, it was a PSA target that was set in the days when perhaps we did not have the fullest understanding of what the factors that can bear down or influence the availability of Class A drugs in the UK actually are. I do not draw any direct comparisons between the two because I think that is actually very difficult to do.

  71. The targets for tobacco smuggling for 2001-02 is 22 per cent, and next year, 2002-03, is 21 per cent, so it is a 1 per cent drop, but the report says that the knowledge of cigarette smuggling is not accurate to plus or minus 2 per cent, so how will you know whether you have hit it or not?
  (John Healey) I think you might accept that it is always very difficult, if not impossible, to get a precise fix on what is an illegal, an illicit operation. In the nature of this particular type of target, which is, in a sense, the impact or the outcome of what we trying to achieve, we can only first of all analyse that, then assess it, by actually quite a complex set of data that we might bring to bear. So I think it is inevitable, and quite right, that we would recognise a degree or a margin of error. That said, and I think you might accept that there is bound to be a degree of margin of error in such fields, the certainty that I can draw on, and perhaps the Committee might draw on is really twofold. First of all, the figures that Customs have painstakingly produced are accepted by the Industry, and secondly, they have been audited and they have not been disputed by the NAO. In a sense, both checks, are important to give a greater surety of the estimates and the targets that we are setting. In the final analysis, whether we examine the likely margin of error of plus or minus 2 per cent, what nobody at the moment who is a serious commentator in the field is disputing is that what was a rapidly accelerating and serious upward trend has been arrested. There is a degree of stabilisation in the proportion of illicit cigarette sales, and that the strategy that we have put in place is responsible for that improvement in the tobacco smuggling situation.

  72. One aspect of the tobacco smuggling position that we had illustrated to us on a previous occasion was of cigarettes that were legitimately manufactured in the United Kingdom with the Government Health Warning on, being exported. Andorra was one of the examples where the small state of Andorra was importing so many cigarettes, people would have had to smoke from cradle to grave for their lifetime to have consumed them, 24 hours per day, and there would have been some left over. Why is it not possible to deal with that, and how complicit are the cigarette manufacturers in this business?
  (John Healey) What would be described, technically, as you have outlined, as "Diversionary fraud" is an element of the picture. Our best figures suggest it is significantly reduced as a problem. It is a matter, incidentally, that your colleagues on the PAC have recently examined, and in fact called the Imperial Tobacco company, I think last week, to give evidence. Imperial Tobacco was the one major cigarette company with whom Customs did not feel that they could come to a proper understanding and agreement with, unlike the other major players in the field. A manufacturer responsible for the two brands which most commonly seem to find their way into the illicit sales in the UK. I hope that we will be able to reach the same sort of agreement to narrow down the possibility of diversionary fraud with Imperial Tobacco, just as we have with the others. The main problem with cigarette fraud now, in fact, lies between 70-80 per cent of the illicit cigarette sales consumed in this country . They are in fact cigarettes that have their source outside the European Union on which no duty at all is being paid, which is shipped in in bulk by freight, and it is those sources which at the moment are the main problem of supply into our market without any duty paid on them.

  73. Are those not more easily detected than the ones that have been legitimately manufactured, the same way as the ones that are on the market here?
  (John Healey) They are possible to detect. Some of the techniques are slightly different. I would not say they are necessarily easier, but they are part of the picture that we are having to try and deal with.

Mr Plaskitt

  74. Could I come to another aspect of the problem with cigarette smuggling. I had a look this morning at a website—I do not know whether you have had the chance to see it—it is called, "", and I can quote from it. It says, "As a European freight hauler, I have 8 lorries a week going over to France and Belgium. My drivers all bring back lots of tobacco which means I can supply you, the UK consumer, with tobacco at half the UK prices. I do all the hard work. I bring the tobacco to the UK. I put pouches in strong envelopes and the British Post Office delivers it to your door. HM Customs only confiscate at the port or my warehouse, if they can find it. Once in the UK post to you, they cannot touch it, and so you know your goods are going to get there." I also found several other sites offering the same service, including "" and "cigarettesfromspain. com". Does Customs and Excise have any idea how extensive this sort of trade is?
  (John Healey) I think I have given you an indication of the Customs assessment of that. Between 70-80 per cent is sourced outside the EU, as I was explaining to Mr Beard, brought in often by freight in bulk in a systematic and organised way. This is not a problem that is a product of people crossing the channel, bringing just a bit more than they are perhaps entitled to for their own personal consumption any more, this is organised crime on a large scale with very significant profits that accrue to the companies that get away with it. That is why the tobacco fraud strategy is something that the Customs are giving priority to at present, and this is why, as Government, we are backing it, with an extra 209 million, because it is an important one to crack.

  75. But can Customs and Excise get in and disrupt this web-based trading that is going on?

  Can these sites be shut down?
  (John Healey) They can and they do, and they disrupt the movement of goods, because however the sale or the contacts are made, in the end, the goods have to be moved. They cannot be moved virtually over the web, and Customs do get in and do that. There was a seizure from the Dover Customs just yesterday: 1.5 million cigarettes coming in under a consignment of carrots from Spain. That is the nature and scale of the sort of shipments, perhaps to order, rather as your website experience suggests. But however the promotion of sales might be done, in fact, the transfer of goods has to be done physically, and Customs do disrupt those movements.

  76. In the Annual Report 2000-01, there was quite a little feature on the introduction of the x-ray scanners at the ports, which was envisaged, I think, as quite an effective way of disrupting this part

  of the organised smuggling that is going on. How much progress has there been with those? How many more have been introduced?
  (John Healey) There are a number that have been introduced. There are extra staff that have been put on the frontiers. The approach that Customs are taking to interception, and indeed the penalties that they are levying when they intercept cross-channel goods in this way, have all been stepped up. The impact of that is that whereas we had been looking for a 10 per cent reduction in cross-channel smuggling in 2000-01, in fact, we have seen a reduction of 76 per cent, and clearly the scanners have played a part in that.

  77. Can you say how many scanners we have in use now?
  (John Healey) I would be dredging my memory from what I have read over recent days, but I can certainly supply that information to you.

  78. And is the number going to go on steadily increasing? Is the assessment that this is a cost effective way of undermining the trade, and, therefore, we are going to do more of it? Is that the position, more of these scanners?
  (John Healey) Scanners on their own are not sufficient, but if I supply you with the details about the scanners deployed so far, I will endeavour to answer that. This is an example of an operational issue which is clearly the responsibility of Customs, but in my role as accounting to Parliament for what they do, I will endeavour to give you that answer. It is not something that I would have been involved in the decision about. It is an operational deployment issue.

Mr Cousins

  79. When we are considering indirect tax fraud, we have considered the issue of revenue loss, but you yourself have drawn attention to other dimensions which are perhaps equally significant, and that is the role of organised crime, and, of course, that many of our fellow citizens are, in effect, drawn into illegal activities which become legitimated in their experience. And it is a bit disappointing that nowhere in this—you have been very frank with the Committee, and I do appreciate that, about the work that is going on to estimate VAT fraud, which clearly is the most widespread and the least known, the least bottomed-out—but it is a bit disturbing that nowhere can we seem to get hold of information on the work that is going on now to tackle VAT fraud, not the work that will go on in the future, but the work that is going on now?
  (John Healey) In the one dimension of VAT fraud, the missing trader fraud which I have mentioned, I think we have been clear in the PBR, and subsequently, with the PBR related documents, what we are doing on that front. I have to say to the Committee, Mr Cousins, really, in a sense, I am reluctant to push the Customs to the point that we produce what is our starting point, our baseline data, our assessment of what we are dealing with, which is not robust, because if we get that starting point wrong, and, frankly, any strategy, any subsequent tracking against target that you as a Committee may want to do will simply be flawed from that point. So until we have the assessment and the analysis in the sort of shape that I am confident about, that I feel we have discussed fully with other relevant agencies, then I am not ready to sanction its publication. I have given an answer to Mr Ruffley, I think, in indication of (a) how important I see this is—and you are quite right to bring us back to it—and (b) the sort of timescales that I hope we can confirm the progress that we are making.


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