Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 140-159)



  140. But it took Customs and Excise five years to come forward with a strategy.
  (Mr Broadbent) It depends where you measure the starting point from.

  141. The first time it blipped on the radar.
  (Mr Broadbent) It is not clear to me, I am afraid I will have to go back and check, that anybody was aware at the time that was happening. As you know, we have only quite recently begun to measure fraud as part of our activities. At the point that it was becoming apparent, which I think was around the late 1990s, that was when the Government asked Martin Taylor to conduct his study which led to the strategy being put in place. Obviously if it had been put in place earlier our job, which is not an easy job, would probably have been slightly easier.

  142. I did a history degree, I am just wondering if this is the greatest ever revenue collection failure of modern times by Customs and Excise.
  (Mr Broadbent) I am not sure I want to speculate on that either actually.

  143. I cannot think of any others. You are losing £3.5 billion. Maybe we would have to go back to rum smuggling in the 18th Century.
  (Mr Broadbent) The numbers are obviously very material and the problem is a very serious problem.

  144. You are only responsible for the excise and the vat but presumably there is other tax lost in that there is no tax on the retailers. If all cigarettes were legally sold then the Inland Revenue would be taking money from tobacco retailers selling those products.
  (Mr Broadbent) That is true. Assuming, of course, as we believe, most of the smuggled product is UK manufactured then of course they are being taxed for corporation tax.

  145. It has to be a UK retailer.
  (Mr Broadbent) That is the vat and excise, which is what we are measuring.

  146. There must be corporate taxation on the retailer.
  (Mr Broadbent) Yes, I see what you mean, there must be an element of that although many of the retailers are quite small traders, I think. Of course you must be right, yes.

  147. So the actual sum is even larger, the total loss to the Exchequer is even larger.
  (Mr Broadbent) I would not know what that figure was or whether it was material but you must be right in principle, yes.

  148. I want to pick up something Mr Wells said but I did not quite catch it. He said that there were increasing problems of fraud of the mark, counterfeiting the UK Duty Paid mark, is that correct? He said something about 11 to 17%, if he could clarify that.
  (Mr Wells) We estimate that somewhere between 11 and 17% of all the cigarettes that we seize are counterfeit and we assume that is typical of the smuggling market.

  149. Counterfeit in the sense UK Duty Paid has been counterfeited?
  (Mr Wells) Entirely counterfeit in that the brand they purport to be is not in fact what they are. They are often manufactured in China or other parts of the Far East, purport to be Benson & Hedges cigarettes, a particularly popular brand to counterfeit, but in fact are not manufactured by the manufacturer of that brand. In addition to counterfeiting the brand itself they counterfeit the fiscal mark.

  150. Do you predict that to be an increasing problem as your strategy for having the UK Duty Paid mark is implemented?
  (Mr Wells) Certainly the problem of counterfeiting per se has been growing. If we are successful in getting additional co-operation from the tobacco manufacturers and reducing the presence of their own brands one would expect counterfeiting to become more predominant. It is certainly a problem that potentially has scope to grow.

  151. How can you go about stopping that? Do you have to go to China to stop it?
  (Mr Wells) It is an exceedingly difficult problem to stop. We do attempt to co-operate with agencies in the Far East but counterfeiting of tobacco is but one of many things counterfeited in that part of the world. Clearly we try to tackle it there and, as the Chairman said earlier, we have Fiscal Liaison Officers posted around the world, including in Hong Kong. Hong Kong is one of the places in which we have made particularly large quantities of seizures overseas. We do attempt to target it upstream. We obviously also target the main container ports into which traffic from the Far East comes and we have had some particular success against that form of traffic.

  152. It seems to me that as long as the duty is so high in the UK you are always going to have a problem with people looking at any way possible to get illegal cigarettes into the country. It seems to me this may be an emerging problem which one of the traditional measures would necessarily be very effective against. Will scanners pick up these cigarettes that presumably will be coming in in what seems like a legal fashion?
  (Mr Wells) I am sorry, if I misled you on that, I apologise. They are still smuggled when they arrive in the UK. Overwhelmingly cigarettes for the legitimate UK market are manufactured in the UK so it is extremely rare to find cigarettes legitimately being imported into the UK, so they are almost always disguised as something else when they arrive.
  (Mr Broadbent) If I could interject. The internationalisation of mobile trade, a lot of it in areas which are essentially no tax at all, does mean that whatever the UK tax rate, and indeed whatever the tax rate in Italy, Spain and elsewhere, these are problems that are going to be with us which is why it is important we change the way we are managed and driven. Although I understand taxation as a policy, the way globalisation has impacted these activities suggests that these problems are going to be with us for a very long time come what may.

  153. Presumably Customs and Excise have always had to adjust to changes in global trade.
  (Mr Broadbent) Presumably. It has had a long history and I have been there a relatively short period of time. It does strike me very much that most of the things Customs and Excise deals with effectively, given the fact they are illegal, are commercial flows which, like the rest of the UK economy, have undergone an enormous process of internationalisation in the last decade.

  154. On the use of prosecutions, and I do not want to rehearse the argument, I share the view of the Committee about you not making enough use of prosecutions, if I had a packet of cigarettes on me that did not have UK Duty Paid on it would I be committing an offence?
  (Mr Broadbent) Yes, I believe it is.
  (Mr Wells) It is unless you have bought those overseas with the intention of using them yourself.

  155. But it would be if I had gone into the pub and bought them?
  (Mr Wells) It would be, yes.

  156. Do you ever prosecute people just for possession of these cigarettes without UK Duty Paid on them?
  (Mr Broadbent) We have not prosecuted an individual for possessing a packet of non-marked cigarettes.

  157. One of the ways around Mr Gibb's view is that people do not regard this as too serious would be if you started prosecuting people for having these cigarettes on them and then they would be much more reluctant to buy them in pubs, off the backs of lorries and so on.
  (Mr Broadbent) I do have sympathy and I would like to emphasise that I am acutely aware of the need for balance here. If I can try and give you some pointers. The first thing is recognising the relative resources available, the ability to train people and to implement law, arrest people, is quite limited. Arresting individuals is a very, very labour intensive thing, you are taking people off other activities. The second thing is that you do have other sanctions available. The third thing, and I just say this, is that in some of the areas where this is most evident there are some quite material difficulties in arresting people. You often find, for example, the distributors are illegal immigrants so you arrest them and they are out the next day, or in some cases officers come under quite concerted physical attack. Where I worry most about the balance of prosecution is at the level of the small to middle distributor. It is very difficult, I think, to believe we can devote enough manpower to arresting individuals who have got 10, 100, 200 cigarettes.

  158. What about the police? Do the police say "this is too small for us"?
  (Mr Broadbent) I do not believe the police see it as their priority to do that.

  159. Have you had discussions with the police about making it more of a priority?
  (Mr Broadbent) We have had discussions and, indeed, we do joint operations with them. We had a big joint operation with the police recently in Chinatown, in Soho, where we seized hundreds of thousands of cigarettes. We have talked to the police, for example, about security on the Holloway Road where my officers have been threatened with weapons at times. Where I feel we need probably to be doing more than we are doing, because I do recognise it is not balanced, is the point just above.

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