Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60-79)

Wednesday 31 March 2004

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

  Q60 Mrs Browning: Having been caught.

  Mr Wells: Or having come forward in some circumstances as well. So, this is mitigating down the higher penalties that we apply in cases where traders are not as cooperative and in fact, in these cases, we are getting in around 75% of the tax within three months rather than about one third under the arrangement that would have applied otherwise. So, we are actually getting in money considerably faster through this arrangement and clearly getting in the money at the end of the day is the biggest incentive of all.

  Q61 Mrs Browning: Of these mainly small businesses, we read that a third under declare. How persistent is that and what plans do you have to tackle that?

  Mr Eland: If they do under declare, they are liable without going through this civil evasion penalty approach to a misdeclaration penalty which is usually 15%. So, if we felt that it was justified, we would apply that sort of penalty each time. If we felt there was repeat behaviour, we might move up a notch and, as I say, ultimately we could move into prosecution. Also, it would change their risk categorisation, so we would be visiting them more frequently to make sure that that behaviour was not repeated. So, if you like, their credit rating with us would deteriorate and that would mean that we would pay much closer attention to the business.

  Q62 Mrs Browning: Do you categorise the businesses as I believe the Inland Revenue do in terms of sector, particularly focusing on those sectors which deal with cash a lot?

  Mr Eland: Yes. We do a central risk assessment of every individual company according to their history and, on top of that, we also do a sector examination and we are increasingly moving down that approach which we have found very beneficial and clearly there are some higher risk sectors than others. We have special cash teams that work in the areas that deal in cash trading.

  Q63 Mrs Browning: What analysis have you made of the scope of fraud and under declaration and all the things that are identified in this Report by companies and individuals who focus mainly on Internet trading? Is that something that is likely to compound these problems? Is that something which is compounding these problems?

  Mr Summersgill: We have done some research into the risk presented by the Internet and the different types of fraud, in particular, for example, with gambling, the risk of evasion or avoidance. In terms of VAT, we have also put in place systems to make sure that we can capture the VAT in respect of supplies over the Internet from third countries. So, it is something at which we have been looking but we probably do need to do a little more work in terms of looking at how the Internet might increase revenue risk in specific trade sectors.

  Q64 Mrs Browning: Have you undertaken an analysis in terms of what this might mean in terms of fraud or lack of revenue coming in which should be coming in? Do you have any idea as to what the size of the problem is?

  Mr Summersgill: We have some idea; we had to do some work on this. We think really the risk is in term of third country supplies of goods over the Internet and we have put in place a mechanism to capture that where traders in third countries are prepared to sign up to the system.

  Q65 Mrs Browning: Is there any strategy in place or being worked up to deal with this?

  Mr Summersgill: As I say, it is something at which we are looking. We do not consider it a great threat from the analysis we have but we are not complacent about it.

  Q66 Mrs Browning: We notice at paragraph 24 on page 7 that when you do bring these large criminal cases to court, you have to wait sometimes up to a year for court time and for lawyers to become available to try the cases.

  Mr Eland: Yes.

  Q67 Mrs Browning: What representations have you made to try and improve that situation?

  Mr Eland: We are talking to the Department of Constitutional Affairs. The problem is partly the complexity of some of these cases, which is why there are relatively small numbers of them, and we are looking to see whether we could actually have a dedicated court that has full electronic equipment in order that we can present thousands of documents electronically which would clearly help quite a lot.

  Q68 Chairman: You are dropping your voice.

  Mr Eland: I apologise. I was saying that we are talking to the Department of Constitutional Affairs in order to see if we can get a dedicated court with electronic document handling equipment which would very much help in this field, but there are also some constrictions on counsel. These are very complex cases and you need to have the people who have the skills to prosecute fraud. So, that does also lead to some restriction but they are both areas we are looking to address.

  Q69 Mrs Browning: Are you getting a favourable reception from the department?

  Mr Eland: Yes, we are.

  Q70 Mr Jenkins: You said in answer to the Chairman, "We are committed and we are going to close this VAT gap."

  Mr Eland: Yes.

  Q71 Mr Jenkins: It is easy, is it not, since the VAT gap is what is actually collected by you and an estimate of what should be collected by you. So, all you have to do is reduce the estimate and you have closed the gap!

  Mr Eland: I am sure that if I came to this Committee and used that as an argument, I would very rapidly be subject to difficult questioning. We are clearly looking to improve the yield and I imagine in future that is what you will be looking at.

  Q72 Mr Jenkins: In the Report, figure 2 on pages 11 shows that you use the top down approach whereas the bottom up approach would show that your gap is very, very quickly closing. What is the difference between the two in essence?

  Mr Eland: The top down is done by our analysts or economists and is essentially a statistical exercise. The bottom up approach is something we try to do using information coming through our operational teams and to build up a picture of how we see the fraud. So, that is what we are trying to do.

  Q73 Mr Jenkins: So, by merging the two and coming to a compromise figure, you actually close the gap, do you not?

  Mr Eland: We are not presenting it in that way. The figures by which the targets—

  Q74 Mr Jenkins: But it is possible.

  Mr Eland: I am sure it would be possible if that were the way in which we wanted to present it but we are not presenting it in that way.

  Q75 Mr Jenkins: In answer to another question, you said that VAT had increased by £3 billion.

  Mr Eland: Yes.

  Q76 Mr Jenkins: Did that VAT increase because of your efforts to collect the tax in or did that VAT increase because the economy was doing so well? When I go to my petrol station, I pay VAT. There are loads more traffic and loads more people on the roads, so we are collecting much more VAT in, are we not? So, which is it?

  Mr Eland: It is not the economic effects. If consumption has increased, that is taken out of the equation. So, it is largely, we think, as a result of our efforts. There will be an element. We have not fully analysed that £3 billion and we will not be able to tell until later in the year as to what its different components are but we are fairly confident, as I was saying, that at least £1 billion of that is because we have reduced the amount of fraud. So, it is not an estimate issue.

  Q77 Mr Jenkins: When you said in answer to Mr Steinberg's question that you have transferred resources to serious crime, you must have done a value for money approach on this.

  Mr Eland: Yes.

  Q78 Mr Jenkins: You must have looked at the amount of cost involved in the searching, investigating and the bringing to court of these cases against what would be brought in—I would not say it is either/or but, if you are switching resources, you have made that decision—by visiting small traders and capturing small traders and rolling them out, which I presume would be quite a quick exercise.

  Mr Eland: Yes.

  Q79 Mr Jenkins: There are two cases on pages 32 and 33 and the one on page 33 is where you visit the small trader, decide that he is not paying the requisite amount of tax in case 10 and you collect £73,000 in tax. How many cases of £73,000 would you undertake and wrap up and collect on at a time of involvement it would take in the serious crime squad?

  Mr Eland: The average amount involved in a serious investigation is about £17 million. In a big criminal investigation, it is about £1 million. In some of these smaller cases, it is below £100,000. So, those are the sort of ranges about which we are talking.

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