Select Committee on Public Accounts Twenty-First Report

4 Collecting the right revenue from traders

13.  Over recent years Customs have developed a risk management approach to the collection of revenue. They have drawn up annual business assurance models to target traders who present the highest risk. The models have used several factors to assess risk, such as the complexity of a trader's business, the results of previous visits by Customs' officers and the trader's payment history. Traders have been placed in specific risk groups and staff at regional offices use their detailed local knowledge to select individual traders for examination within each group. Rather than visiting the trader in every case to check that they are paying the correct amount of tax, Customs' staff may gain assurance in other ways, such as by telephone, to aid efficiency and reduce the burden on the trader.[13]

14.  When conducting assurance visits Customs have relied on a number of techniques. For traders who routinely provide customers with VAT receipts, Customs' staff have made an assessment of the tax liability by comparing the trader's VAT return for the month with till rolls and other records. Where the trader has rarely given receipts to customers, such as take-away restaurants, Customs have applied other approaches, such as observing the trade conducted by the restaurant over a period as the basis of an assessment of the VAT liability. After producing one or two estimates in this way, Customs have been able to approach other take-away restaurants in the area with assessments of their VAT liability.[14]

15.  During 2001-02 Customs identified underpayments of £2.5 billion in VAT and Excise through their assurance work, an increase of 5% on the previous year. Nevertheless, one half of all VAT registered traders in the UK, some 750,000, have not been visited by Customs' staff in the last ten years, and of these traders approximately 500,000 have never had their VAT position assessed in detail. And despite Customs' concentration on high risk traders, they carried out 22% fewer VAT visits to such traders than planned for the year. Similarly, only 77 of all planned Excise visits took place.[15]

16.  Customs recognised that in visiting more of the difficult, non compliant, companies they had carried out fewer visits overall, and that they had not been making enough routine contact with traders to give them guidance. Following their internal reorganisation, and the adoption of a VAT strategy, the number of unvisited traders has already started to fall. Customs believed that by March 2005 the number unvisited would be approaching zero.[16]

  1. Customs' VAT compliance strategy, published in November 2002, is aimed at tackling fraud across all parts of the VAT system, and aims to achieve overall outcomes rather than focussing on individual outputs. At the same time as producing their strategy the Department published estimates of the possible extent of fraud and evasion across VAT and the other taxes and duties. Customs estimated that in 2001-02 the amount of VAT not paid through error, evasion or avoidance was between £7.1 billion and £10.2 billion, with a further £7.1 billion unpaid in taxes and duties payable on alcohol, tobacco and hydrocarbon oils due to error, evasion or legitimate cross-border shopping. Customs have identified two major sorts of VAT fraud: large organised fraud which they believed was in the order of £2 billion; and smaller fraud which was more difficult to distinguish from simple error, negligence and suppression. The Treasury have provided Customs with funds for 900 extra staff to address the issues raised in their Strategy, and expect them to recover £1.4 billion extra VAT by 2005-06 as a result. Customs' own internal target is £2 billion.[17]

13   C&AG's Report, paras 3.5-3.8 Back

14   Qq 43-45 Back

15   C&AG's Report, paras 3.2, 3.10-3.11, 3.21 Back

16   Qq 33, 131 Back

17   C&AG's Report, para 1.9; Qq 50, 87, 157-158 Back

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Prepared 12 June 2003