Examination of Witnesses (Questions 180
WEDNESDAY 28 NOVEMBER 2001
PRIMAROLO, MP, MR
180. It is not yours, it is the Treasury's.
(Ms Primarolo) With respect, Mr Roques went wider
than his original remit because he saw that as relevant. He covered
a number of things, which are very helpful.
181. He said he considered that outside his
terms of reference.
(Ms Primarolo) What he has recommended, and he is
a well-respected authority in these areas, is what Customs has
to do to bring itself to where he believes it should be with proper
checks and balances and the combination now of the broad targets,
the monitoring through their PSA targets and the clear responsibility
182. Do you not think it is a Treasury monitoring
(Ms Primarolo) With respect, what is the point of
commissioning an independent investigation, getting them to make
recommendations, and then
183. Because that was not in his terms of reference.
(Ms Primarolo) Because it was not relevant. What is
relevant is what is happening in Customs, and that is what he
has identified. Surely it would be much more serious if I had
come here and said, "It was very interesting, but I am not
going to act on the recommendations". We commissioned an
independent investigation; it was very thorough and he made his
recommendations. That has all been acted on. There are new checks
and balances in place. The Department is being monitored and is
monitoring itself in a way that Mr Roques believes will therefore
ensure that it does not happen again. To instigate independent
advice and then not take it, is just
Mr Laws: That is not what I was suggesting.
Chairman: We want to move on to the estimates
184. The first one you might not be able to
talk about because you were not there. We are asking why, under
the Roques Report at page 192, he points out that the Department
preferred not to publicise the specific estimates which were available
on lost revenues on the grounds of the lack of robustness. Why
did the Treasury accept that decision not to publish, or were
Ministers even aware that estimates existed? You might not be
able to answer that because it was not on your watch.
(Ms Primarolo) I understand that Ministers were not
aware. I think that is what Roques says, that this remained internal
185. Were officials aware?
(Ms Primarolo) In Customs, yes, but not beyond, hence
the methodology now.
186. In terms of revenue and estimates (and
I have read the documents albeit briefly, discovering their existence
at lunch time) are you happy with the robustness, for example,
of the tobacco revenue estimate and the basis of arriving at that
(Ms Primarolo) Yes. The tobacco estimate was provided
when I was Minister and the strategy was again implemented by
the present Government and it is working very well. Part of the
reason, and I appreciate that you would not have had time to look
in detail at this, now for giving the methodologyand if
people have comments, they are going to commentis to expose
that to a wider assessment but certainly, in terms of the Treasury
and Customs, the tobacco strategy was subjected to considerable
scrutiny in terms of its correctness and its achievable targets.
I would say that when we introduced this strategy, we were told
that the targets would not be achieved, and they have been. For
instance, the 21 per cent
187. I am not so much worried about the target
as the information that the target is based on, the revenue estimates.
Can you assure me that the basis of it, which is 1992-93, and
having chosen that as a base, is that Customs and Excise tell
us that smuggling was minimal in that year.
(Ms Primarolo) In the sense that those figures have
now been scrutinised on a wider basis - and we get into quite
technical discussion about how these estimates are delivered -
I am assured that the rigour with which those estimates are now
made is very tight.
188. There is a question that can be asked about
the estimates because there are two ways of getting that: there
is a household survey and the report points out that they have
not published one since 1998. Having said that, the calculations
all relate back to 1992/93 when Customs and Excise, with this
appalling record over the last ten years, tell us that there was
minimal smuggling that year. Is that a good basis for thinking
these are robust?
(Mr Hodgson) Certainly with regard to the estimates
being up to date, you say that the data is based on 1998; yes,
we accept that. We have had to do a certain amount of extrapolation.
We will be looking at new data when it comes in. As regards the
assumption that there was not so much smuggling before the Single
189. It says it was minimal.
(Mr Hodgson) There is certainly operational evidence
from that time suggesting it was very limited. That is what we
have had to go on.
190. Three years later it was £1 billion.
(Mr Hodgson) It grew very rapidly.
191. Two years after that it was £2.5 billion
but it says it was minimal then. On what basis are you telling
the Committee it was minimal in 1993?
(Ms Primarolo) But Roques identifies the issues that
occurred then, the emergence of the Single Market, the removal
of all the internal arrangements that were possible before the
Single Market. He then identifies a number of other issues that
Customs were required to do that drew them further from direct
operational contact towards relying on risk assessments. As Roques
points out, there are better ways to do an assessment of your
likely exposure to fraud, hence the change now. So this is also
to do with how operationally Customs could operate before the
192. My next question is about indirect tax.
In the document you acknowledge that smuggling and fraud have
a debilitating effect on respect for the law and provide a source
of funding for those organised through networks. When considering
raising indirect taxes, how does the Government assess the risk
that this will encourage the public to seek illicit sources of
(Ms Primarolo) I think, firstly, we have to be clear
- and the Government would assess that - that in these areas it
is systematic and organised criminal activity, that the arrangements
and the activity around, for instance, alcohol diversion fraud
was not as a result of anything other than extensive criminal
activity that then shifts to find opportunity elsewhere. The NAO
and Roques point out that as you close one area down, people try
and seek out another area. If we look, for instance, specifically
at the cross-Channel smuggling, you will see that in the report
it clearly identifies huge success in breaking down that smuggling
to the point of reducing it massively. So the issue for Customs
and for t he Government has to be to understand the opportunities
for that organised activity, which leads to the massive loss.
The missing trader VAT fraud is a huge operation engaged in by
criminal networks, and not somebody just taking the opportunity
not to pay some tax. Many of these goods do not have any tax on
them at all.
193. Missing trader VAT fraud cost you £2.6
million in 2001. Is that the only type of VAT fraud that is significant
and, if not, what other types of VAT fraud are costing you significant
(Ms Primarolo) Naturally, as a result of the Roques
Report, we are asking Customs to look across the areas and to
report to us. At the present time, their report is on missing
trader fraud and they will have to report to the Minister on other
areas of potential fraud or actual fraud across the whole area.
That is being worked on now, as I understand it.
194. The Roques Report on page 69 at paragraph
3.20.5 states that in 1980 there were some 2,600 staff employed
on Excise control work. Successive cost-cutting exercises and
business re-engineering have reduced this number dramatically.
The current level of less than 400 staff is surprisingly low,
having been further depleted this year by the diversion of a further
100 staff to service the tobacco destruction strategy. Do you
think this is a situation that has contributed substantially to
the increased smuggling of alcohol and tobacco?
(Ms Primarolo) Again, forgive me, the Roques Report
accounts for what happened before this Government. I can tell
the Committee what we have done since 1997. For instance, on election,
we retained 300 anti-smuggling staff programmed to not be required
any more. By the end of 1997, we had put in 130 extra staff on
the IMPEX system. In July 1998, following the alcohol, tobacco
and fraud review, we put in a further 145 staff. In July 1999
we commissioned the Taylor Report. In March 2000, in publishing
that strategy, we put in place 955 staff. If we look over that
period, mainly new staff and some redeployed staff account for
some 2000 redeployed and recruited into these areas, which is
some 10 per cent of the total of the Department's staffing levels.
Whilst Roques comments on what happened before 1997, since 1997,
where it has identified a weakness, the Government has a systematic,
consistent and thorough record of addressing this issue and keeping
pressure on the Department to do that. I think you can see that
in the way that the Government was moving through this area in
looking at the number of anti-smuggling staff that we needed and
commissioning reports, trying to get to the bottom of the problems
195. Yesterday's publication, along with the
Pre-Budget Review, dealt with tackling indirect fraud and refers
to Customs as having deployed 340 staff to tackle VAT fraud and
having commenced the redeployment of an additional 146 officers
to tackle spirits fraud. It says that specifically. Are these
resources extra or are they redeployed from somewhere else?
(Ms Primarolo) These are redeployed from within the
Department as a result of the fraud estimates, particularly in
those areas, and a reassessment of best use of the Department's
resources in terms of where the pressure points are. Clearly,
as the Department moves into discussions on expenditure, the question
of resource will need to be addressed.
196. The Roques Report brings out the threat
of increased oil smuggling, tobacco smuggling and also the prevailing
increase in drugs smuggling. Why does this report specifically
mention spirits fraud? Is there a problem through all these areas?
(Ms Primarolo) Which report are you talking about?
197. I am talking about the one that came out
yesterday, entitled Tackling Indirect Tax Fraud.
(Ms Primarolo) In section 4, which starts on page
15, it states "tackling other forms of fraud" and goes
through: missing trader VAT fraud, oils fraud in Northern Ireland
and oils fraud in the rest of the United Kingdom. It then goes
on to alcohol and spirits. It is covering those areas.
198. So those numbers are not just related to
(Ms Primarolo) No. The 146 is just for spirits and
the warehousing issue.
199. Are you saying there are increases for
tackling the other frauds?
(Ms Primarolo) What I am saying is that in section
4 of this report it identifies the issues and explains what the
strategy is to deal with that fraud. That is in the document that
you are reading from, Tackling Indirect Tax Fraud. The
second publication is entitled Measuring Indirect Tax Fraud,
and that covers the methodology of how the figures were compiled
for scrutiny by others outside the Department.