Examination of Witnesses (Questions 180
- 199)
TUESDAY 4 DECEMBER 2001
MR GUS
O'DONNELL, MR
NICHOLAS HOLGATE,
MR ADAM
SHARPLES, MR
ALEX GIBBS
AND MR
JOHN KINGMAN
180. On the day of the Pre-Budget Report, without
a great deal of fanfare, you seem to have published this document
on tackling indirect tax fraud. I am not aware—and this
was mentioned by the Chancellor in his statement—it has
a very brief mention on page 97 of the Pre-Budget Report. You
published this new paper and it shows how the effectiveness of
the Government's approach has been demonstrated, which sounds
very encouraging. Then when you read the report you published
on tackling indirect tax fraud, you go to page 15 about something
you call VAT missing trader fraud which seems to be quite a significant
fraud in the VAT system which started quite recently, there is
this astonishing figure that you are estimating this type of fraud
cost the Exchequer between 1.7 and 2.6 billion in 2000-01, which
is a truly stupendous figure and a very large proportion of the
total VAT collected. Can you say a little bit more about this
and about whether there was this fraud prior to 2000-02 or whether
this has suddenly emerged and how successful you will be in dealing
with it?
(Mr Gibbs) Sure. Perhaps I could explain a little
bit about the document and why we are putting it out and I will
try to do so briefly and then come on to try to answer the question
about missing trader fraud. The reason we published this is essentially
that having previously had a problem with tobacco smuggling in
particular Customs established a strategy for dealing with that.
The purpose of this paper is to show how they now feel ready to
broaden that strategy out and apply it to other forms of fraud.
The essential approach is, having identified a problem, to come
up with the best estimate that you can of the size of the problem—those
estimates are explained in a separate paper on measuring fraud—specify
some targets, which would be done as part of the PSA process going
forward, and then measure delivery against those targets. On the
missing trader fraud actually the strategy is slightly more advanced
than I think your question implies. It has been in place since
September 2000. We do not yet have a full annual figure for its
success but the indications are from the monthly returns that
Customs are getting that the strategy is beginning to bite.
181. Can I ask when you first became aware of
the order of magnitude involved in this fraud? The top end of
your estimate is the equivalent of a penny on the basic rate of
tax. This is a pretty serious area of tax fraud.
(Mr Gibbs) It is serious. Customs put a strategy in
place to deal with it in September 2000. They were clearly aware
that the fraud was very serious by then.
182. Can you say what estimate you have got
in the accounts for the current financial year and the next financial
year for the costs of this fraud in terms of lost revenue: the
2001-02 and the 2002-03?
(Mr Gibbs) I do not think I can, no. I am not sure
that the accounts or the fiscal numbers forecast is prepared on
that basis.
183. Do you think you could send us a note on
that?
(Mr Gibbs) I do not think we have an estimate beyond
the one that is in the paper.
Mr Laws: You have no estimate for the
current financial year?
Chairman
184. I think this is important, Mr Gibbs, in
the light of the evidence the Sub-Committee has been taking in
this regard. We had Mr Rocques and others along. I would urge
you to send us as comprehensive a note as possible because I think
we will be coming back to this in the Sub-Committee.
(Mr Gibbs) Certainly we can send you a note on the
estimate but I should say for the benefit of the Committee that
of the types of fraud that the strategy paper identifies, this
one is by far the hardest to estimate properly. The reason we
are giving it a range is that basically you are trying to measure
it indirectly. The bottom end of the range is based on comparison
with other EU countries, this is an EU wide problem because the
fraud involves goods crossing national boundaries and the trader
disappearing and cancelling the VAT registration before the final
VAT is paid. One way of measuring it is to look at the experience
of other countries and try and see how levels of fraud there can
be estimated in a UK context. That gives the bottom end of the
range. The top end of the range is based on comparing data for
imports and exports, so whether the goods declared to Customs
in the UK as having been imported match up with what other governments
have been told about the goods exported to the UK. It is all a
very imprecise science relative to some of the other estimates.
That is why we have given a range and that is why the range is
so wide.
Mr Laws
185. I want to be very quick, the Chairman is
pressing me. Two quick things. One is would it not have been sensible
to mention the magnitude of this fraud in the Pre-Budget Statement,
Mr O'Donnell? It is quite a serious figure. The fact you have
to search through some document which usually even Members of
the Treasury Committee do not pick up, is slightly concerning.
(Mr O'Donnell) Like I say, there is a reference to
the paper, this is quite old, we are talking about September 2000.
186. Not that old.
(Mr O'Donnell) If anything on VAT, one of the things
that is of real import is the NAO audited assumption which requires
us to assume the VAT consumption ratio falls by 0.05 percentage
points every year. That assumption, I do not think is going to
be borne out in the future.
187. Can I just ask one last question about
this report which I found just as astonishing which is on page
30 when you give estimates of the revenue evaded through cross-Channel
smuggling, that grew according to your estimates for 1996-2000
and then between 2000-01 you cut the cross-Channel smuggling revenue
lost by 76 per cent in the year, including 93 per cent for beer,
84 per cent for tobacco. That is a most astonishing figure, is
it credible?
(Mr Gibbs) Yes.
188. If it was so easy why was it not done before?
(Mr Gibbs) Well, it has been done now and Customs
have put the resources in. The resources have gone in.
Chairman
189. Was it the hand of God?
(Mr Gibbs) No, it was more resources put by Customs
into identifying and detecting smuggling.
Chairman: We have not been impressed
by the evidence we have had in the Sub-Committee so far on what
has been happening. This seems an astonishing burst of energy
initiative. I would ask Mr Gibbs to give us a report, and as full
a report as possible, taking into account the evidence that has
been provided to the Sub-Committee. We will be coming back to
this in the Sub-Committee to deal with this.
Dr Palmer
190. Turning to the reduction in stamp duty
in undeveloped areas. Has the Treasury made any estimate of how
much of this tax cut will simply be reflected in an increase in
property values rather than reducing the net cost to purchasers?
(Mr Gibbs) We have not made an estimate of that, no.
I do not think it would be very straight forward to do so. I think
we do expect that over time, to the extent that the tax incentive
operates as it is designed to do, there will be some increase
in the prices of properties in the areas affected but I think
it is quite difficult to make estimates of the effect. It will
depend on everything else that is going on in the economy at the
time.
191. Let me put it perhaps in a little more
pointed way. If you own a property in the East End, one of the
affected areas, which you had been offering at £150,000,
and it attracts, perhaps, somebody for the City, when this announcement
came through would you have said "Oh, good, we will cut the
price" or would you have pocketed the £1,500?
(Mr Gibbs) I think the transactions that people make
are a matter for people involved. What we have done is we have
looked at the policy, we have sought to design the policy to have
the intended effect and one of the things it should do is affect
people's decisions about where they want to live.
192. The intended effect, would it be fair to
say, is not really to reduce the house price but to encourage
people to invest in deprived areas?
(Mr Gibbs) Yes.
Chairman
193. On the last point, the issue of the Saving
Gateway initiative, certainly a number of groups I have been working
with in campaigns such as Church Action and Poverty indicate what
they would consider the miserable level of benefits to live on.
It is not enough for day to day living. The idea of people at
that low benefit level saving money seems incredible to people.
Have you had representations on that? Have you considered that
issue?
(Mr Holgate) Perhaps I could take that up. I am not
sure we are intending that people living on benefit should be
trying to save as well. One of the things that we may be trying
out with the pilot starting next year is whether we make people
eligible for a Saving Gateway account through becoming eligible
for a Tax Credit or a Working Age Benefit "Passport".
It may be a good idea when people are moving into work that would
be a good chance to encourage them to develop a habit of savings
so that they are more self-reliant when other vicissitudes might
hit.
194. If I understand the Saving Gateway correctly,
it will offer qualifying benefits and tax credit claimants a pound
for pound matching for any saving they make up to £1,000.
It is for people on benefits who are saving. It is not correct
to say that you are not asking people on benefit to save because
this is part of the exercise.
(Mr Holgate) It may or may not apply to people over
a swathe of the income distribution. I should say that I do not
think we have yet decided that it is pound for pound. We anticipate
that there will be a matching element, it may not be pound for
pound. You are right to say that we are thinking in terms of a
maximum available match of £1,000.
195. Political statements have been made on
that pound for pound.
(Mr Holgate) I do not think we have quite got that
far. It remains a possibility.
196. You are trying to say the Secretary of
State has maybe gone too far.
(Mr Holgate) No, no.
197. You have drawn him back in.
(Mr Holgate) There are a number of parameters to be
set up just for the pilots, let alone the real thing later on.
The degree and extent of matching is one of those.
198. It is the end of the session but we may
come back to that at some stage. One other issue on that aspect.
When people are poor they are subject to unscrupulous lenders.
(Mr Holgate) Yes.
199. Have you considered this issue, that if
people are saving pound for pound you would have those unscrupulous
lenders targeting these people and giving them a loan in order
to access the 300 per cent tax free return which the matching
scheme offers?
(Mr Holgate) Yes, I have to say that precisely that
thought has occurred to me. It is a matter for the design of the
pilot in the first instance and how we monitor and see what happens
to people engaging in those pilots as to the extent of that sort
of risk in practice. I entirely agree with you, that is certainly
a problem.
| 
