Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1-19)

Wednesday 31 March 2004

Mr Mike Eland, Mr Mike Wells, and Mr Richard Summersgill

  Q1 Chairman: Good afternoon and welcome to the Committee of Public Accounts where today we are considering the Comptroller and Auditor General's Report on tackling VAT fraud and we are joined by Mike Eland who is Acting Chairman of HM Customs & Excise. Mr Eland, would you introduce your colleagues, please.

  Mr Eland: On my right is Mr Mike Wells who is Director of Law Enforcement Policy and Strategy and on my left is Mr Richard Summersgill who is the Head of VAT Operations in the Business Services part.

  Q2 Chairman: Mr Eland, why do you lose a staggering nearly £12 billion a year in error and fraud?

  Mr Eland: The reasons are numerous. This is a picture of the whole of the VAT function right down from the simplest errors that are made to some very major frauds operated by organised crime. We have taken an initiative to measure that, we have set up a strategy to tackle all components of it and we are making good progress in getting it done and under control.

  Q3 Chairman: You are not complacent?

  Mr Eland: We are not complacent, certainly not. It is a worrying figure, I accept, and it is something that we are determined to tackle and bring down.

  Q4 Chairman: Do you have the remotest chance of meeting your target of reducing the VAT gap to 12% by 2006?

  Mr Eland: Yes, we believe we have. VAT receipts this year are now running £3 billion ahead of forecast and we believe that at least £1 billion of that is attributable to the way in which we have tackled missing trader fraud, which is the most serious of the frauds.

  Q5 Chairman: So, that is a firm commitment. When you come back here in 2006, we are going to see this target met.

  Mr Eland: I very much hope so, yes.

  Q6 Chairman: So, it is not a firm commitment?

  Mr Eland: I cannot commit in that sense but it is my strong belief that that is what we will be able to achieve, yes. I have confidence in that.

  Q7 Chairman: Is there a risk of an increase in missing trader fraud with the advent of new States into the EU? For the benefit of my colleagues, you might just take a minute and describe, in simple terms, carousel fraud.

  Mr Eland: It basically takes place where a firm in the UK is able to obtain goods free of VAT from another country within the Community. They then sell that on to somebody within the UK and then that firm disappears. It winds up as a company without paying the VAT over to the Exchequer. Other people in the chain can claim input tax for that VAT which means that the loss is sustained by the Exchequer. That is it at its most simple.

  Q8 Chairman: That is fair enough for us.

  Mr Eland: Or you can do it many times round and obviously that is why it is called a carousel fraud. As to whether there is a greater risk when the Union expands, we do not see an immediate risk to ourselves from that. Clearly, there will be a risk in the countries bordering the new applicants but one of the characteristics of this fraud is that the geographical proximity is an issue in it. Obviously, if you are looking to rotate through that carousel a number of times, it helps if you have geographical proximity.

  Q9 Chairman: Could you explain, for instance, what links you have with the Customs & Excise for, say, Lithuania, Latvia and Estonia.

  Mr Eland: We have had meetings with Poland and with Czechoslovakia, Hungary and I believe some of the other applicant countries to tell them of our experience of this fraud in order that they are prepared to tackle it and of course this is not something that is unique to the UK either. There are other existing States within the European Union who are suffering from this problem and they are engaged in those conversations too.

  Q10 Chairman: How can you tolerate a situation where up to 180,000 traders are not registered for VAT?

  Mr Eland: This is the number of usually fairly small businesses who are trading in the shadow economy and above the VAT registration threshold. We do not tolerate it. We do have a vigorous campaign to reduce that number and we are working with the Inland Revenue and the Department for Work and Pensions in tackling that sector of the economy.

  Q11 Chairman: Why did you wait until last year before starting to match records with the Inland Revenue?

  Mr Eland: The data matching exercise is something that we have not really had the ability to do under the terms of the exchange of information restrictions between ourselves and the Inland Revenue until those restrictions were modified a few years ago and I think this is one of the products of both that relaxation on information exchange and also a product of the closer working programme we had with them.

  Q12 Chairman: In the situation about which we are talking, that we are losing nearly £12 billion in error and fraud, I think the members of this Committee could be forgiven for being absolutely staggered that, until last year, you were not matching records with the Inland Revenue. After all, you are the government within the law system. There are a number of government departments but it is difficult to plead the law when you are in charge of the law. It is just an extraordinary situation.

  Mr Eland: I would like to make a distinction there between matching, ie the systematic comparison of records with the close working between investigators and some which is of very much longer standing than that, which we have had at the top end of the range. So, the data matching is very much focused around the VAT registration threshold where Inland Revenue, because they are collecting for very small businesses, have a business record which is not available to us because of our registration threshold relative to other countries in the EU. So, we do not have those businesses coming into our sight until they reach that level and the Revenue obviously have an earlier view of them and that is what is involved in this data matching exercise.

  Q13 Chairman: Can you look, please, on page 13 at paragraphs 2.2 and 2.3. I am asking here about non-compliance. Is it right that you do not know how much of the £4 billion that may be lost is due to error and how much is due to fraud?

  Mr Eland: We cannot split that out because, in order to determine that something is fraud, you have to prove it is a criminal intent. It is very difficult to do that statistically across a large block of activity. So, we have what we call a compliance continuum where you have a behaviour ranging from completely innocent error through to people who are slapdash and careless through to people who are actually positively reckless, turning blind eyes, and then through into outright criminal behaviour. So, it is that spectrum of behaviour. To try and estimate that in a statistical way is actually quite a difficult task. It is one that we accept we need to continue to work on and we will certainly be doing so.

  Q14 Chairman: You obviously have different methods to deal with blunderers and cheaters. I just wonder whether your methods are the right ones. How can you possibly have an effective solution when you apparently do not understand the problem?

  Mr Eland: We do understand the problem to a much greater degree than we did until the last two to three years. We have certainly been able to separate out the large-scale criminal fraud of the type that is involved in missing trader fraud. What we have more difficulty in doing is saying when there is a business which is continuing a legitimate business but maybe is suppressing part of its activity. It is quite difficult to establish when criminal behaviour occurs in that and when it is lesser behaviour than that. It is that sort of area that we are talking about.

  Q15 Chairman: Would you look at figure 12 on page 19 and at the bottom left-hand corner. Do we conclude from that that you only managed to successfully prosecute 69 people last year?

  Mr Eland: Yes. That is correct in terms of the number of prosecutions.

  Q16 Chairman: There are 1.7 million traders; is that correct?

  Mr Eland: Yes.

  Q17 Chairman: I find this extraordinary. Are you telling us—do I have this right?—that 1,699,931 traders are honest?

  Mr Eland: No, we are saying that we do not always take prosecution action in every case as table 10 shows and we also take civil evasion action which can lead to very significant financial penalties that fall short of a criminal prosecution.

  Q18 Chairman: Somebody might say that if an organisation is losing up to £12 billion a year and it only successfully managed to prosecute 69 people, they were being either complacent or incompetent. What would your response to that be?

  Mr Eland: I would say that is totally wrong because, as I say, you are looking to apply a range of sanctions for a range of different behaviours.[1]

  Q19 Chairman: Let me stop you there. Would you look at figures 8 and 11 on pages 16 and 18. If you are right in saying that you are relying on civil penalties, why have they fallen substantially in recent years?

  Mr Eland: Because what we have been doing is prioritising towards the most important cases which we are prosecuting criminally. In a missing trader fraud case, the average revenue at stake is, I think, £17 million. In some of the civil cases, it is very much less than that, it is about £50,000. What we are looking to do is to prioritise between those two and also with other criminal cases in addition to the missing trader fraud, concentrate our investigation resource on the missing trader fraud in the criminal cases and reduce some of it on the civil evasion area. What we are then doing in addition to compensate for the reduction in number of the civil evasion cases is that we are following through on those in our normal assurance effort where we can also impose a penalty up to 15% of the tax. So, we are not allowing any case where we are concerned at the level of tax going missing to go untackled and we are addressing at the appropriate level of penalty action in those cases.

1   Note by witness: As confirmed in the Report, the figure of 60 refers to the number of successful VAT prosecutions undertaken. These resulted in 92 people being convicted. A further 17 cases were unsuccessfully prosecuted. Back

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