Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 100 - 119)



  100. May I ask why?
  (Mr Broadbent) Because they are operational matters. Ministers tend to focus on the strategic matters.

  101. Operational matters. That is all right then. That is fine. Not. Do you think if this were to happen again Ministers might want to be advised of operational matters?
  (Mr Broadbent) I do not think that Ministers particularly want to be troubled by somebody going to them —

  102. Ministers do not want to be troubled.
  (Mr Broadbent) If you let me finish it would be better.


  103. Please finish.
  (Mr Broadbent) I do not think Ministers particularly want to be troubled by somebody going to them frequently saying they might have a problem here, I may have a problem here, I have half a problem and am not sure whether it is a complete problem. They pay us to make judgements about when to go to them and say "I have made a judgement that I have a problem here. Here is the size and shape of it. Here are the options". I draw no distinction about operational matters. I tell Ministers what I believe is material, what I believe is well founded, what I judge we know enough about to give them a sensible view and they are able to take action on. Whether it is operational or strategic is not to my mind the issue. There is a question about simply going to Ministers and ringing your hands in front of them, which I do not think is helpful to them at all.

Mr Ruffley

  104. Finally, the Alcohol and Tobacco Fraud Review. According to Mr Roques this ". . . provided a real opportunity to make a step change in the Department's response to the growth in fraud and smuggling of alcohol and tobacco". His words are, "but this opportunity was not seized". He talks about "The failure to include estimates of losses in the report and the slow rate of implementation of recommendations all contributed to the failure to make such a steep change". Who is responsible for the failures in relation to that review that Roques describes?
  (Mr Broadbent) In terms of implementing recommendations, I am not sure he is suggesting that they could necessarily have been implemented significantly more quickly. Some of them had been slow to implement because a lot of them involved actions in the EU. It is actually to the credit of the ATFR and one of its successes that it did result in a significant raising of the profile of this issue in the EU with some quite important consequences coming down the line.

  105. What about failure to include estimates of losses?
  (Mr Broadbent) What Mr Roques does feel strongly about is that if the ATFR had included estimates, it would have stimulated debate and led to earlier action. In hindsight that is quite difficult to judge. What he does recognise is that the decision not to include estimates, because the Department felt that they were insufficiently robust, was taken in good faith at the time. His view was that it was a misjudgement.

  106. So you do not think there was any failure attached to the Alcohol and Tobacco Fraud Review, because Roques does. You are rejecting that part of his report.
  (Mr Broadbent) He believes that if we had included estimates in the ATFR at the time it would have stimulated debate and led to earlier action being taken. That is possibly correct. The difficulty was that at the time—and he recognised this was a judgement made in good faith at the time—we did not actually have estimates. What was available at the time was an estimate for a partial year, based on cases actually happening. Not, as he says later in his report, a properly analysed, properly evidence based estimate to which he attaches a lot of importance in section 5 of his report on estimating.

Mr Beard

  107. The report is fairly damning about Customs and Excise's ability to forecast. I quote here from pages 12 and 13, paragraphs 5.1 to 5.4. "A major factor reducing management effectiveness in the collection of excise duties was the failure to recognise and understand the reasons for the leakage which arises in each tax regime. The increase in leakage of tobacco revenues from less than £1 billion in 1996 to approximately £2.5 billion in 1999", fairly quick and fairly large, "was largely unmeasured and therefore undetected". He goes on and essentially his verdict is that the ability to forecast expected tax revenues was inadequate and ineffective. Why is that so? Why is that? Is it because essentially if you are forecasting leakage you are forecasting the failure of Customs and Excise and that becomes a disincentive of the organisation to focus itself on that process?
  (Mr Broadbent) At the time the revenue estimating was based on estimating the revenues the Chancellor could expect the following year. That was the task the Department was set and it discharged, and defined as that task the estimates are not bad. What Mr Roques points out is that there was another task, which it was not asked to do but which could have been done, which was to estimate total theoretical revenue and then work out what percentage we were collecting and that would lead to a different set of tasks possibly being laid in the Department. We have made it clear in our response that that is the better way to go and that is increasingly where we are going.

  108. Could you just explain which way you are going now and what it is you are changing?
  (Mr Broadbent) We are moving, and we have seen this with the tobacco strategy, towards an approach where we shall be estimating total potential revenue and in the PBRs we will be publishing estimates for other taxes. For the first time we shall be able to see the total theoretical tax take for the major indirect taxes with the caveat I made about VAT. Already with tobacco we have a target which is not to collect so much tax but to get to a certain market share of tobacco. We could probably anticipate over a period of time—it cannot be done overnight—that other targets in relation to alcohol for example will be developed in a similar form. Personally I welcome that approach.

  109. What discussions have you had with Treasury in relation to this difficulty of forecasting revenue in the areas which have been prevalent? Have there been discussions with Treasury about these matters?
  (Mr Broadbent) There have been some discussions with the Treasury, but it is less a case that the forecasts had errors in them. The point made by Mr Roques is that the forecasts as made were made to deliver the output requested, which was an estimate for revenue next year. Over time, and particularly as fraud itself has developed as an economic activity, both the Treasury and ourselves have come to recognise that we need to spend more time estimating total theoretical take and then how much we are collecting and that is a development over the last few years which is going to come to fruition in a couple of weeks' time.

  110. From where do you get your information on leakage? For instance, in my constituency for several years in the late 1990s landlords were complaining of the unfair competition from other landlords who were buying their spirits from men with white vans at the back door and selling it at half the price it was normally available at. It really was not a terribly covert operation in Kent and parts of South East London.
  (Mr Broadbent) Estimating fraud is very complex. I distinguish estimating fraud from understanding and working out what frauds are being perpetrated. Estimating fraud now starts effectively from expenditure data. You need to find out how much people are spending on, let us say, alcohol. That means going into expenditure surveys, national statistical data and then working back from that, deducting what is being exported, what is duty free, what is shopped and you finish up with a residual which with some work you can assume is a reasonable estimate of fraud and that is broadly speaking the methodology you will see in the paper we are going to publish. Distinguishing what fraud is being perpetrated is actually both as difficult and quite different and oddly enough I rather agree with you. We had to be guided somewhat there by what is happening on the ground up. This is one of the challenges. To work out what fraud is being perpetuated on the organisation, does mean starting with operational data very often and it is surprisingly challenging. This is something we are now more aware of and have organised to make much more rapid. The critical importance for an organisation like ours of having big open communication cables from the bottom to the top so that, although I would not guarantee it, I would hope that if somebody who was working in our organisation spotted a fraud he would come up the organisation rather quickly now. I shall not bore you with the detail but it is quite an organisational challenge there.

  111. Are you just relying on statistics or do you have investigators going out and spotting the white vans at the back of pubs and that kind of thing, or spotting that Andorra is getting so many cigarettes that the population would have died of lung cancer two years ago if they had smoked them all?
  (Mr Broadbent) In terms of understanding the nature of the frauds being perpetrated, we do now a great deal of intelligence-based work. In fact one of the changes we made in our reorganisation was to bring together all our intelligence activities. That, together with our investigative activities, does a range of work both here and overseas which ranges for example from detailed discussions with tobacco manufacturers, in the case of cigarettes, through to test-shopping illicit goods.

  112. If you have all that in place, where is the difficulty in forecasting leakage?
  (Mr Broadbent) It is being put in place now.

  113. It was not in place.
  (Mr Broadbent) It was not sufficiently focused. What this does is allow us to understand more clearly the nature of the fraud. The question of how to estimate leakage goes back to an analytical exercise with consumption data. There are endless issues with delays and lags but we have done enough work on that to start publishing data in the PBR this year.

  114. May I refer to one which is pending, which you were warned about? Page 14, paragraph 4.8 of the Roques report says, "There is some evidence within the NIS that fraud and smuggling to avoid hydrocarbon oil taxes is on the increase. This is particularly true in Northern Ireland but the problem is also thought to exist in Great Britain. There is also evidence of growth in fraud in the VAT regime. In neither case is early warning or measurement of these problems emerging from analytical activities and I suspect that they may become serious issues requiring urgent attention long before the capacity to estimate the leakage has been created". He is concerned about this. What are you doing about it?
  (Mr Broadbent) Two things. One is that I hope we have done enough work since the Roques report that if Mr Roques does us the honour of coming back to visit us again he might feel that some of his concerns have been assuaged. I should make this point, because I feel perhaps it did not come across in the debate we were having earlier. I personally take this report very seriously. I have been significantly guided by this. I remember saying to Mr Roques right at the outset, "You hire the professional help you need and do a job to give me a real insight into this organisation, because I want that". It is valuable to me and I have used a lot of this to make changes. I would never want to go so far as to say that it will never happen again, things are completely different. But I do feel directionally quite a lot of change is under way. May I try to elaborate on this without trying to pre-empt the PBR? The issue with oils is quite serious and there are some quite serious issues with VAT. I believe the fact that we know enough to be publishing later this month some quite detailed numbers, both in relation to oils and in relation to the area of VAT which I believe he is referring to, suggests we have come quite a long way since he wrote those words.

  115. What do you say about the co-operation of the staff with Mr Roques who obviously appeared somewhat defensive in that the chief investigating officer could not find a date to meet him over the whole five months of his inquiry?
  (Mr Broadbent) Mr McGregor was the one individual who did not meet him and I said to Mr Roques that if he felt he needed to see him, then I would not press him to meet his deadline for the report if it was important. Mr Roques took the decision in the end that it was not material. In terms of the co-operation of the staff, everyone without exception whom he asked to meet, met him and I am not aware there were any difficulties in those exchanges. It is quite a frightening thing for civil servants to go through this. They do feel they live in a very blameworthy environment and they do not always feel they get a good hearing. A certain amount of apprehension on their part is understandable.

  116. You are saying, in relation to this hydrocarbon and VAT question which is raised by Mr Roques, as I quoted, that the organisation is now no longer resistant to finding out and looking towards estimating leakage and that this problem which has existed with tobacco and drink will not be repeated for hydrocarbons.
  (Mr Broadbent) In terms of estimating they live and breathe it now. In terms of repetition of the problem, I am more wary. I have a lot of respect for the effort and the human and financial capital which gets invested in exploiting fraudulent opportunities. This problem will never go away. If we bring the organisation to be more flexible and responsive, we can be a worthy opponent.


  117. You referred to blame, but I think you would accept that if £668 million is lost in four years somebody should be blamed.
  (Mr Broadbent) Yes, I think that we should take our responsibility for that.

  118. It appears that £340 million of that, nearly half of that, was lost at one warehouse in the City. How did that happen?
  (Mr Broadbent) It is a large amount of money and it may have been too large an amount of money in terms of some of the issues which arise in individual investigations. Without wanting to sound . . . the context is important. This is a very large warehouse. We are talking about a warehouse which covers about one million square feet with about 13 different units, with 3,000 customers, 8.5 million cases of spirits going through it.

  119. £340 million is quite a large amount of money to go walking.
  (Mr Broadbent) The £340 million is over seven years. You are probably talking on average over those seven years of about ten per cent of the throughput, which is too high. I doubt it was actually anything like ten per cent in more than two years; it was probably a smaller proportion. The pattern of this fraud peaked very sharply in two years. There were probably two years when it was high and the rest of the time it was not anything like ten per cent. With the volume of throughput, the sheer size of this warehouse which was serving London, the number of movements and the time span, which have to be taken into account in making the judgements, it is not inconceivable this could have happened. John Roques did look at a number of our investigations. He had complete access to all our investigations, all the papers, which I have to say was quite a sensitive thing to do. He examined in detail a number of them and he does not make material criticisms of the individual investigations.

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