Select Committee on Public Accounts Twenty-First Report

5 Customs' debt management performance

18.  Traders are responsible for calculating and remitting to Customs the amount of tax they have to pay. Customs collected a total of £105 billion (net) in taxes and duties in 2001-02 in this way. But not all traders complied with their obligations, some paid late and some never paid. Customs' policy has been to take a constructive approach where businesses found themselves in short-term financial difficulties. They make an economic judgement as to whether deferment of tax would allow the trader to survive. But if necessary, they would let the business close in order to secure the tax.[18]

The reasons for increase in debt

19.  Customs categorise debt in several different ways, but all categories have increased significantly with debt growing by some 55% during 2001-02.[19] Customs faced some 50% more debtors in that year than three years previously. Traders who in the past had sent in their payments at the same time as their declarations had recently been delaying the payment and gaining 30 days at Customs' expense. The largest increase in debt in 2001-02 was in routine recoverable debt.

20.  Over the five years since March 1998 the total amount of debt owed to Customs increased more than threefold. Customs identified several reasons for this increase. They had been seeing record levels of tax liability, and as a consequence, debt to collect. They also had been successful in identifying large fraud-related liabilities following the introduction of their fraud strategies. And finally they had experienced changes in trader behaviour, as more of them challenged their assessments or appealed. These factors, combined, accounted for about one half of the increase in debt over the five year period. Customs mainly attribute the remaining increase to the economic slowdown, which had a direct impact on business and on the level of debt Customs had to manage.[20]

Figure 1: The increase in Customs' debt since 1998

Source: Customs

21.  Customs reorganised their debt management function during 2001-02, reducing the number of debt management units from 29 to 10 and creating a centralised civil recovery unit. The reorganisation sought to improve performance standards and deliver efficiencies. It involved large scale changes in information systems, manpower and accommodation. But IT changes designed to facilitate debt collection were delivered three months late, building refurbishment caused upheaval in the work of one of the largest debt management units, and delays in the recruitment and training of staff at all units affected the programme. The closure of some of the debt management units allowed Customs to achieve a reduction of 101 staff years, but at the cost of a further 128,000 unresolved debt cases at the year end. Customs believed, however, that the reorganisation had improved the effectiveness of debt collection and that they were collecting a higher proportion of debt than before the reorganisation.[21]

22.  Customs' public service target for 2001-02 was to restrict debt owing to them to 1.41% of the total amount collected. They did not meet this target, and debt outstanding at the end of that year represented 1.95%. But they expected be very close to the target for the 2002-03 financial year. Customs said that a decrease in the overall debt figure could be a matter for concern, if it meant that they were not doing as much as they could in tackling fraud and collecting tax.[22]

The effect of missing trader fraud on Customs' debt

23.  Customs attributed about 30 to 40% of the growth in debt in the year to missing trader fraud. In its simplest form this fraud is perpetuated by traders who sell goods at a VAT inclusive price, but who then disappear before paying over to Customs the VAT they had collected. But it can also be a highly organised type of fraud involving large numbers of buffer and artificial companies. The Department retained the debt on their records until the perpetrator had been caught and prosecuted, or until civil recovery action had been completed. In tackling this type of fraud Customs recently introduced a policy of denying VAT repayments to companies thought to be linked to the fraud. They had reduced repayments to certain industrial sectors to less than half of what it had been six months earlier, a decrease of £50 million to £100 million a month. But Customs recognised that they have to avoid penalising legitimate traders. They had also established specialist teams to recover assets from the directors of the companies involved. They had obtained assets to the value of £2 million by January 2003 and were working on the recovery of a further £47 million in cases before the courts.[23]

18   Qq 23, 98 Back

19   C&AG's Report, para 6.3 Back

20   Ev 23-24 Back

21   C&AG's Report, paras 6.7, 6.9, 6.15, 6.18; Qq 13, 129 Back

22   C&AG's Report, para 6.1; Qq 199-200 Back

23   C&AG's Report, paras 6.12-6.13; Qq 13, 51, 53, 190 Back

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