Examination of Witnesses (Questions 20-39)
Wednesday 31 March 2004
Mr Mike Eland, Mr Mike Wells, and Mr Richard Summersgill
Q20 Mr Allan: To come back to the carousel
fraud issue which is completed, on table 16 on page 26, you have
set up a diagram of the different suppliers who have the stuff
he moves around with other companies. What I want to know is,
who are the crooks in this? Are they all crooks, people who are
knowingly engaged in fraud when you have this, or is there a risk
that legitimate businesses get caught up in this?
Mr Eland: It can vary; it can
be both. Legitimate businesses can get caught up in some aspects
of the fraud although, if it is a carousel fraud, I think one
would expect them to question quite why such a volume of traffic
is coming through. So, there are some grey areas in this. It varies
very much according to the scale of a particular operation.
Q21 Mr Allan: But, when you are dealing
with something like £1 million worth of mobile phones circulating
around here, everybody in this chamber presumably knows that they
are part of a fraud. This is not going to the Car Phone Warehouse
and things like that.
Mr Eland: I would not go so far
as to say that they know they are part of the fraud because what
they are doing is receiving from a legitimate company an offer
to sell some phones to them. It is only if that starts to sort
of escalate that you might expect them to suspect it, but they
could be used on a one off. These buffer companies can vary very
much. They are not necessarily always the same person. They are
designed deliberately to conceal the movement from us.
Q22 Mr Allan: Who is making the money
here?
Mr Eland: It is the organiser
of the fraud. They will use straw men in some of the companies
who will be paid a sum to do something.
Q23 Mr Allan: So, you do get somebody
who says, "£50,000 to set a company up to take some
mobile phones and sell them on, no questions asked."
Mr Eland: That would be obviously
deliberate fraudulent activity. So, in that case, that company
would be caught in that. Yes, it is that sort of thing.
Q24 Mr Allan: You have said these are
very large numbers but people think of VAT fraud as the archetypal
dodgy small business that says, "Pay me in cash and I will
give you a discount." This is big money.
Mr Eland: The missing trader fraud
is big money. There is organised crime involved. You have seen
the figures and the scale of the losses.
Q25 Mr Allan: You give in case study
8 on page 28 an example of what we would like to see happen to
somebody, a brother of a fraudster trying to set up a new company
and you simply refused to register the company and you estimate
that, by your act of refusal, you saved the taxpayer £4 million.
That begs the question as to why we cannot do that in far more
cases. If we look at paragraph 3.9, it tell us that, between 2002
and 2003, you received around 0.25 million applications to register,
just over 1% of which were granted due to concerns about possible
fraud. Do you have a working estimate for the number of those
registrations that were likely to have been fraudulent?
Mr Eland: What we are doing is
refusing outright quite a large number of registrations. Last
year it was around 1,500 and then there is another batch about
which we might not be fully convinced that the company is totally
right, so we might attach some conditions to that. Now, they might
look small in percentage numbers because obviously there is a
very big turnover in the economy and we are talking about over
100,000 registrations coming on each year, but what we are trying
to do is spot a fairly small number of people within that. This
is not a fraud, as you say, where there are large numbers of companies
involved.
Q26 Mr Allan: We know that over £2
billion has been taken by these people, so a number of them are
succeeding in registering. I am trying to identify the gap between
those—
Mr Eland: They were. As I said,
we believe we have brought that down by at least £1 billion
in the course of this year through the measures we have taken.
So, we would say that we are beginning to knock them out of the
system. I do not know if Mr Wells wishes to add anything.
Mr Wells: Obtaining new registration
is not the only way in which the fraudsters work. Recently, we
are seeing a trend of these people hijacking registrations. That
is to say that the fraudster simply adopts the identity of an
existing trader and hijacks their number. So, as we have been
successful in restricting opportunity to register in the first
place in their own guise, as it were, we have seen them hijacking
others.
Q27 Mr Allan: You surely would not send
a cheque to somebody who is using a fraudulent number.
Mr Wells: These individuals do
not enter into the system, as it were, with us at all. They masquerade
as traders. They purport to charge VAT to others who are registered
and then take the money out. So, we are not sending cheques to
these individuals at all, which is why they are able to purport
to be VAT registered when in fact they are not.
Q28 Mr Allan: So, the money is going
to the poor dupe further down the line who has sadly bought the
goods.
Mr Wells: Exactly.
Q29 Mr Allan: Regarding the recommendation
on page 6 at paragraph 22 about the VIES, the VAT Information
Exchange System, which is going to be one of the major tools or
has the potential to be one of the major tools to try and stop
all this happening, can you just tell us where we are with that.
Mr Eland: It is a system that
is in operation already and has been for some years. What we are
looking to do is to improve it in order to enable us to get better
assistance from it in identifying fraudsters. The essential point
is that, when the single market was introduced, we lost the information
that we were getting from import and export data on intra-community
movements. In place of that, this system was introduced where
companies in each Member State make returns to it and then that
data is swapped between the different Member States to give them
a picture of intra-community movements and trade, but that takes
place only once a quarter, so we are working very much in arrears
and there are defects in the data. So, what we are looking to
do is to work on that to improve the quality of the data and ideally
its frequency without putting any serious burden on legitimate
business activity within the Community area.
Q30 Mr Allan: And you are putting dodgy
British traders—?
Mr Eland: It is not dodgy, it
is listing all activity that is going on between legitimate traders
in order that you can then start to spot patterns. In addition
to that, we clearly are exchanging information on people we regard
as dodgy through separate arrangements, mutual assistance arrangements
as they are called, with tax authorities in the different Member
States.
Q31 Mr Steinberg: I would like to begin
with a very basic general point. If you could look at figures
1 and 5 together, in figure 1 we can see clearly that the biggest
source of revenue is VAT at £63.6 billion where you have
the biggest fraud of £11.9 billion.[2]
Yet, if you look at figure 5 and paragraph 2.10, it shows that
in fact the percentage of intelligence resource that is put into
the system seems to be completely out of proportion. You have
Class A drugs, 33% for intelligence source. I can understand that;
I have no quibble with that at all. What I do have a quibble with
is that you have VAT and insurance premium tax, a fraud of £64
billion, yet you have a 13% resource looking at that.[3]
On the other hand, you have tobacco smuggling/tobacco sales and
that involves £8 billion and yet you have 28% of your resources
looking into that. On the other hand, you have other tax coming
in which total something like £8 billion and yet you have
13% of your resources in that. So, you actually have many more
resources looking at £8 billion worth of income from tobacco,
yet for £64 billion worth of income, you only have 13%. That
seems totally out of proportion. Why is that?
Mr Eland: It is the nature of
the intelligence task in each of the taxes. When it comes to those
excise taxes to which you have referred, the problem is largely
one of anti-smuggling, ie people who are looking to keep away
from us, and therefore the intelligence task there is intelligence
gathering and attempting to detect those people—
Q32 Mr Steinberg: With great respect,
you are not answering the question, are you?
Mr Eland: I think I am.
Q33 Mr Steinberg: Why have you put so
much resources into that?
Mr Eland: Because we do not need
that type of intelligence resource as much in the VAT system because,
as I was attempting to explain, we have a whole range of sources
of information that companies have to deal with and have to come
into the system in order to perpetuate the fraud. So, the problem
is a totally different one. The intelligence resource is not—
Q34 Mr Steinberg: That is irrelevant.
Mr Eland: I do not think it is.
Q35 Mr Steinberg: In terms of resources,
the way I interpret this, it is a case of you getting a certain
amount of money or resources to put into intelligence to find
out who is smuggling, who is defrauding and who is doing what,
and you spend less money on trying to find out who is defrauding
out of £64 billion worth of tax that is coming in than you
do on £8 billion worth of tax of tobacco. You have more people
looking at smuggling tobacco than you do of defrauding the VAT.
It seems crazy.
Mr Eland: No, we do not. We have
resource in the VAT area who are collecting the information and
analysing it for risk purposes and passing it to our intelligence
people and to our investigation people but who are not called
intelligence staff. They are doing other activities within the
VAT system as well. So, to get a true comparison of that activity,
you would have to include them in the equation as well.
Q36 Mr Steinberg: So, let us include
those in the equation. How many or how much resource do you put
into getting the fraudsters who are defrauding you or us of £12
billion compared to the amount of resources that you put into,
let us say, the other taxes—I do not know what they are—of
£8 billion that are getting spent by yourself? How much money
is actually spent?
Mr Eland: You have the 8,000 VAT
assurance and collection staff and you have the investigators
and so on who are dealing with this problem. It is a very different
problem that we are dealing with here or a different set of problems
if you are looking at the whole of the £12 billion VAT loss
and so I do not think that is—
Q37 Mr Steinberg: Explain to me, if that
is the case, why are you reducing the amount because it was 16%,
if I read it properly, and now it is down to 13%? So, you have
actually reduced your budget by 3% when fraud is increasing by
1% a year.
Mr Eland: For that particular
activity we did switch some resource there into the tobacco area
which is also an extremely serious problem, but we were able to
substitute by using this wider VAT resource which enables us to
continue to keep a handle on the different types of fraud that
are occurring in that area. Just because somebody is labelled
"intelligence", it does not mean that that is the only
way we have of gathering information about these problems.
Q38 Mr Steinberg: What is the 1% difference
in terms of revenue that is being defrauded, as a matter of interest?
Mr Eland: I am sorry, the 1%?
Q39 Mr Steinberg: My understanding is
that the amount of VAT that has been defrauded has increased by
1% this year. How much is that equivalent of?
Mr Eland: The overall loss, it
is not all down to fraud and it was last year as well. This year,
we believe we have actually managed to bring it down by probably
at least £1 billion and maybe more.
Mr Wells: Each 1% equates to around
£1 billion.
2 Note by witness: £11.9 billion represents
the total VAT loss, not losses due to fraud alone. Back
3
Note by witness: £64 billion is the total net amount
of VAT collected, not the total amount of VAT fraud. Back
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