Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 1-19)




  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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