Examination of Witnesses(Questions 1-19)
MR RICHARD
BROADBENT AND
MR MIKE
WELLS
MONDAY 29 APRIL 2002
Chairman
1. Welcome to the Committee of Public Accounts.
Today we are examining the Comptroller and Auditor General's Report
on the Department's Appropriation Accounts. Specifically, we are
concentrating today on Part 5 of the Report which deals with Tobacco
Duty. We are very pleased to welcome Mr Richard Broadbent, who
is Chairman of HM Customs & Excise. Would you like to introduce
your colleague.
(Mr Broadbent) Mike Wells, Director of
Law Enforcement Policy in Customs & Excise.
2. This of course is a very important subject.
We are talking this afternoon about no less than £3.5 billion
lost to the Revenue every year through smuggling. We are talking
about 2 billion cigarettes, some 20% of all consumption, so it
is a subject that we take very seriously indeed. May I start by
referring to your Strategy and that is dealt with in paragraph
5.4 on page R22 where it says that: "Customs published their
strategy to tackle tobacco smuggling in March 2000, with the aim
of putting smuggling into decline within three years." You
have committed £209 million to this effort. In monetary terms,
Mr Broadbent, what has been the impact of your strategy to date?
(Mr Broadbent) In monetary terms the figures in the
last Budget show that tobacco revenues for the year just ended
increased for the second year in a row from £7.6 billion
to £7.8 billion and were also higher than the forecast figures
for the second year in a row. I would not want to make a simple
association between one and the another, but there is no doubt
that for the first time in several years tobacco revenues were
above forecast and, indeed, increased in real and nominal terms.
3. Can I ask you to refer to paragraph 5.30
on page 25. That is your provisional estimate that the level of
smuggling in 2001-02 had been restricted to 21%. Can you confirm
this estimate.
(Mr Broadbent) Outcome targets are very different,
of course, from the targets with which we have historically worked.
Outcomes are made up of many, many inputs and take time to assess
and are often subject to revisions after the event. I am sure
that there will be some minor revisions but the estimate is correct
within the margin of error given in paragraph 5.30, plus or minus
2%. I believe it to be correct well within that margin of error.
4. If you refer to paragraph 5.6 you have got
the Public Service Agreement target which is to reduce tobacco
smuggling to 18% by 2004. We are talking in terms of reducing
by percentage points and all the rest of it but even if you hit
this target we are talking about a very significant amount lost,
in excess of £2 billion. Are you content with that? Are you
not setting your sights too low?
(Mr Broadbent) Certainly as we go forward we will
be reviewing the target each year. I would not for a moment want
to say now that as we come to set the next PSA that the target
for future years will not be more ambitious. That matter has not
yet been decided. I would like to put the point in context. In
the Tobacco Strategy, which was published in March 2000, the market
projections then in the absence of action show the market share
taken by smuggling to be in excess of 30% that year and rising.
Indeed, in other countries where we have seen smuggling problems
we have seen smuggled market shares in excess of 50%. I am not
for a moment suggesting that 18% is good enough but relative to
where the market was heading in the absence of action, although
it does not appear a highly ambitious target, by any means I think
it is a highly challenging target.
5. I would hope you would not be happy with
it. This is a very serious situation indeed. We have got a situation
where everybody knows that the law is being evaded. Everybody
in the community knows it. Everybody in our constituencies knows
that they can get hold of illegally smuggled cigarettes. Is this
not "fiddling while Rome burns"? You are talking about
these targets and reducing it by 1% a year. What do your own officers
think about the situation? What does it do for their morale when
20% of all cigarettes consumed in this country—and alright,
it might be going down to 18%—are smuggled? It is an extraordinary
situation, is it not?
(Mr Broadbent) I think the officers on the ground
are very much aware of the difficulty of making the sort of impact
we are making on this problem. I think they are also highly motivated
because they are pleased that the problem has been recognised,
the strategy has been laid out clearly, the targets have been
set, and the effort is being funded. I am not for a moment suggesting
that the problem is not serious and I am also not suggesting for
a moment that the problem is easy. Tackling smuggling is an extremely
challenging undertaking. It has not been done successfully in
the past by many countries. We have made quite a material impact
already. You are right of course, there is more to be done, but
I think most of the people in the frontline are happy that action
is being taken.
6. If we look at the figures, if we look at
a packet of cigarettes, say, in France, on a rough back-of-a-cigarette-packet
calculation, which I did with officers of the National Audit Office
before this meeting, we calculated that in the United Kingdom
you are paying £2.82 in tax and in France £1.67 in tax.
How much revenue do you raise from tobacco every year? Is it around
£9.5 billion?
(Mr Broadbent) The total revenue was £7.8 billion
in the last full year.
7. Just as a matter of interest, if you were
to reduce, just as a matter of interest, revenue on cigarettes
to what it is in France, how much would you raise?
(Mr Broadbent) That is a very difficult calculation
to do.
8. I know it is a difficult calculation. I was
warned that might be an answer you would give because of course
people smoke different brands in France than here. You must be
able to give us a rough guide.
(Mr Broadbent) I do not know the number offhand but
I could tell you how much revenue is raised in France, that is
a number I can provide. I do not know and I am not sure we are
able to calculate with any degree of certainty—and we have
not calculated—what the impact might be of such a step downward
in rates in the UK given there is a major smuggling problem and
given that most of the product which is smuggled bears no tax
at all because it does not come from France, it comes from the
Far East or East Europe.
9. If I said to you that if you were to reduce
your tax on tobacco to French levels your revenue take might reduce
in the order of £5 billion, and you are already losing £3.5
billion from smuggling, you can see that the difference is not
very great, is it?
(Mr Broadbent) We currently collect £7.8 billion
in tax. I do not know how the £5 billion is reached. That
would be £2.8 billion less than the current level of revenues.
There is a decision there about the way the Government chooses
to collect revenues. But I think one also has to have regard to
the reasons why we have a high tax policy in this country, which
is to discourage smoking. If you reduce the tax on cigarettes
and reduce the average price of cigarettes you will increase the
numbers who smoke and hence the numbers who die each year from
smoking.
10. Can we turn to the use of scanners. Can
I refer you to paragraph 5.14 on page 24. You expected to seize
50 million cigarettes in the first year of scanners yet you only
achieved 13 million. Does this suggest that scanners are not as
effective as you might have hoped?
(Mr Broadbent) The scanners are a completely new technology
which we are introducing and we are facing some teething issues
in introducing. The scanners are proving effective and as we get
more familiar with them they will get more effective. We are still
at a very early stage in introducing scanners. We now have 12
but, of those 12, six have only been in place for six months and
the previous year to which those figures related was very, very
early days of scanners. We have more to do on scanners but they
are also proving their value in what they are detecting.
11. Can I refer you to Table 14 and perhaps
you can discuss with us some of the practical problems you have
had in introducing scanners. Each one costs between £1.4
and £1.9 million. Should you have had more preparation with
staff and training and that sort of thing before you introduced
them?
(Mr Broadbent) We had two sorts of issues with scanners.
One is a set of external issues to do with port working, port
hours, and patterns of ferry sailings. They are things we have
had to work with people outside Customs to fix into our scanning
patterns. Then we have had a set of internal issues one of which
was training. Should we have done more before we introduced scanners?
It is very difficult because the key issue on training we discovered
was the need to invest more training in image interpretation and
this was something we only really came to terms with when we started
working with scanners and getting the inputs. These scanners have
been customised for our own use. They are not yet used widely
elsewhere in Europe.
12. You have a very restricted site in Dover.
I understand that because the site is so restricted the scanner
there cannot get round the vehicles. Is that right?
(Mr Broadbent) The scanner can get round vehicles.
The difficulty we have in doing it is that it takes some time
to get the vehicles through the scanner and once through they
have to reverse out. It has reduced the number of lorries we can
put through the scanner per hour and hence reduced the number
of scans that can be performed in one day.
13. What proportion of the vehicles going through
Dover are scanned?
(Mr Broadbent) I am not sure I have a figure offhand
for Dover. I can tell you we have our challenge rate up nationally
to 3.6% of traffic. That is about a 250% increase over the last
two years. That is 155,000 challenges a year, to give you some
idea of the number.[1]
14. If you look at paragraph 5.15 on page 24,
we can deal with that point straight away. What is the current
utilisation rate of your scanners and how many vehicles or containers
are scanned by each on an average day?
(Mr Broadbent) At the moment the numbers scanned in
a year at the main ports range from roughly 10,000 to 20,000 per
scanner. The experience in each port is different. This will be
partly a function of the working in each individual port. You
have referred to Dover. We had to make some assumptions about
throughput and when you have a restricted entry lane, for example,
it is hard to achieve that. It also reflects certain issues we
have had in using scanners. This is completely new technology
for our staff and, as you have said, we have had to train people
more than we had thought. That has affected throughput. The throughput
is rising. The figures given here of 30,000 to 50,000 were the
calculation of what could be done according to the manufacturers'
specification. As we learn more about scanners we will be setting
separate targets for each port reflecting different port conditions.
15. You have 12 scanners at present?
(Mr Broadbent) We have 12 scanners at present.
16. If we look at sanctions and the outcome
of all this, if I refer you to paragraph 5.23, this is a rather
worrying paragraph. During 2000-01 prosecutions from cigarette
smuggling decreased by around 19% from the previous year and asset
seizures amounted to only £8 million compared with an estimated
£15 million. Are your measures effective?
(Mr Broadbent) As with almost everything
else in this area, we are changing our approach to prosecution
in order to achieve the outcome that we have been set. I do not
want to labour the point but it is a very, very novel thing for
an organisation to be set an outcome target. We have to judge
every tool we have, including sanctions, by an acid test which
is its contribution to that outcome, and the pattern of prosecutions
we had was essentially large numbers of small prosecutions which
were not contributing a great deal to tackling tobacco smuggling,
which was rising very, very rapidly. The numbers of prosecutions
have fallen but the quality of prosecutions is rising sharply.
In particular, the average sentence is going up, the number of
defendants per case is going up, the number of custodial sentences
of two years or more is going up, and the value of confiscation
orders is going up. Whilst we need to keep this balance carefully
under review, we are quite deliberately driving our prosecution
policy tool to deliver the outcome rather than simply a prosecution
policy where we prosecute anybody who has been caught in a particular
situation.
17. I am very worried about this. You are not
suggesting that these smugglers are going away. Are they finding
other ways of evading these taxes, distributing the loads in a
different way, wrapping them up in other materials? Broadly speaking,
the problem is getting worse, you are prosecuting less people
and the seizing of assets is not working. If we look at paragraph
5.24: "Customs adopted a policy on Heavy Goods Vehicles,
seizing vehicles on first offences, where the amount of duty evaded
exceeds £50,000." If somebody is caught smuggling and
evading duties of £10,000 or £20,000 why are you not
confiscating the vehicle? It seems that you are not taking this
matter as seriously as perhaps one might have hoped.
(Mr Broadbent) We are taking it very seriously. In
the case of HGVs, an HGV may have a value of £100,000 and
we have to be careful for legal reasons to ensure that our sanctions
are proportionate to the offence. To seize an HGV which is worth
£100,000 is a major sanction. It is a very, very important
sanction to us and I hope that this new policy introduced last
July will be as effective as the light vehicle seizure policy
we introduced the previous July which has proved to be highly
effective. We do need to ensure that in all our sanctions and
in all our policies we are proportionate.
18. Let's look at what other countries are doing
and we can see that in paragraph 5.1 on page 21 we have one of
the highest duties in Europe but obviously other countries face
smuggling as well. What successful measures do they employ which
your Department does not?
(Mr Broadbent) We do a lot of work with our counterparts
abroad. I think it would be a very foolish person who said there
were not things we could learn from other people. It is probably
fair to say in this area we are the market leader and most other
countries look at what we do in terms of combatting smuggling
and try and learn from us. We do keep in touch with them. The
critical thing in international co-operation is swapping intelligence.
The detection methods obviously follow the intelligence on which
you can act.
19. On that point, have you got a problem with
the Commission if you hold people up too much and cause too long
queues and therefore is not intelligence of the utmost importance
when you have to rely increasingly on intelligence, so you concentrate
on certain vehicles which you should scan?
(Mr Broadbent) Intelligence is essential. It we tried
to solve this or any other problem by simply stopping vehicles
at random, not only would you have long queues but our success
rate would be very, very significantly less than it is now. We
do have to be very aware of the European law which prevents us
from restricting free travel and free trade between countries
and that is why all our acts—and we have made it very clear
to the Commission in this case and indeed the United Kingdom courts—are
proportionate and are carefully designed not to impede travel
by law-abiding citizens.
Chairman: Thank you very much for that.
Jon Trickett: As you can tell my voice
is going, I hope you will be patient with me.
Mr Gardiner: Too many fags!
1 Note by witness: Of the 155,000 challenges
last year, 70,000 were scanned. Back
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