Memorandum submitted by HM Customs and
Excise
1. The Government is committed to tackling
tax fraud in order to protect the revenue required for investment
in public services, to protect legitimate businesses, and to protect
society from organised crime.
2. Since 2000 HM Customs and Excise (Customs)
has taken a new strategic approach towards tackling revenue losses,
based on the achievement of outcomes which have a direct and measurable
impact on the problems the Government is trying to solve. The
approach has a number of key components:
— analysis: understanding of the nature
of any revenue loss problem is an important first step in measuring
its size, analysing the trends in its development, and ensuring
the effective deployment of strategies to tackle them;
— estimates: it is also important to
establish a robust baseline of the size of a problem against which
targets can be set and monitored. Estimates of the revenue loss
problems facing the indirect tax regimes are now published on
a routine basis wherever possible;
— targets: the new approach has seen
a switch from a focus on outputs to a balanced combination of
activities designed to hit outcome targets. Each strategy needs
to be geared towards a clear outcome in terms of its impact on
the scale of the problem, so that the appropriate operational
responses can be drawn up to meet those targets, and so the effectiveness
of the strategy can be routinely measured;
— responses: each strategy must feature
a range of measures which apply proportionate and well-targeted
pressure at all levels of the problem. In some cases, where losses
occur because of fundamental weaknesses in the way the tax is
controlled, the first step must be to establish a sustainable
control regime; and
— monitoring: performance in meeting
the key outcome based targets is measured and reported on a regular
basis, accompanied where relevant by operational data which shows
progress in individual areas. The development of the problem must
also be carefully monitored so that operational responses can
be adapted accordingly, and new measures brought forward.
3. This memorandum covers fraud in the tobacco,
alcohol and oils sectors. It describes the steps taken to reduce
the levels of fraud in these sectors, the impact these have had
on the level of fraud, and on the compliance costs of businesses
in those sectors.
MEASURING EXCISE
FRAUD
4. Measuring the scale of, and trends in,
excise fraud is inherently problematic because of the difficulties
in estimating total consumption from survey data. Customs first
published an estimate of the scale of excise fraud for spirits,
cigarettes and hydrocarbon oils, along with an explanation of
our methodology, in 2001.[28]
We have updated our estimates and explained developments in our
methodology annually since then. A complete set of the latest
estimates are contained within the Customs' paper "Measuring
and Tackling Indirect Tax Losses" published at the time
of Pre-Budget report (PBR) 2003, which is submitted here as part
of our evidence to the Committee. The UK government is the first
to produce systematic estimates for fraud in this way.
TACKLING TOBACCO
SMUGGLING
5. Customs' Public Service Agreement (PSA)
target for the 2003-04 to 2005-06 period is to reduce the illicit
cigarette market to 17% by 2005-06. The joint Revenue and Customs
PSA target for the years 2005-06 to 2007-08 extends this target
to reduce the illicit market to 13% by 2007-08. We have made good
progress towards our targets. Since the introduction of the Tackling
Tobacco Smuggling Strategy in 2000 we have reduced the illicit
market to little more than half that projected for 2002-03 in
the absence of a strategy—see Table 1 below. At this intermediate
stage, we believe we are on course to meet our target to reduce
the illicit market to 17% by 2005-06.
TABLE 1
MEASURING THE
TOBACCO GAP
6. Estimates of consumption of cigarettes
and HRT are calculated using the trend in the population and the
trends in smoking prevalence for these products. The prevalence
rates are taken from the General Household Survey (GHS), and from
1999 are combined with those from the Omnibus survey. An allowance
is made for underreporting by taking a base time when there is
considered to be no smuggling and applying the trend. For cigarettes
the base time is 1992, and for HRT 1984.
7. UK duty paid consumption is taken directly
from Customs' clearance data, which records the volumes of cigarettes
and HRT upon which duty has been paid. Because duty on cigarettes
is paid when the products are removed from excise warehouses,
rather than when they are sold for consumption, the monthly data
on clearances are smoothed to remove the effects of "forestalling",
ie the stockpiling by the trade of "cheaper" products
in advance of an anticipated duty increase.
8. EU duty paid cross-border shopping is
estimated using the International Passenger Survey (IPS). The
expenditures for cigarettes and HRT are converted into volume
using prices of EU countries from which the products were purchased.
The duty free and on board ferry sales cigarette volumes are provided
by tobacco companies.
9. Our latest estimates, published in Pre-Budget
Report (PBR) 2003 suggest that some £2.4 billion[29]
is lost annually due to tobacco smuggling. At the time of the
last PBR, GHS results for 2002-03 were not available so the published
estimate for that year is provisional. Updated estimates will
be published in the forthcoming PBR.
NATURE OF
THE FRAUD
10. The majority by volume of tobacco fraud
detected by Customs involves large-scale organised smuggling of
large quantities (typically between one to 8 million sticks at
a time) in freight. These cigarettes are generally sourced from
outside the EU and will carry little or no tax. Seizures of large-scale
freight-smuggled cigarettes very rarely involve stock that has
had duty paid anywhere within the EU. A typical smuggling operation
will involve a number of independent groups working as links in
a chain to get illicit product from source to the UK smoker. Each
organisation involved in moving product along the illicit distribution
chain will expect to profit from its part of the process. Typically
there will be at least four links in the supply chain. Genuine
products sourced in global wholesale markets may be obtained for
as little as 70p per pack (significantly less still for counterfeit).
The typical UK illicit street price is around £2.50 per pack.
11. At the lower end of the smuggled market
more product is sourced EU duty paid and brought into the UK by
large gangs of air passengers working as "runners" for
organised groups.
12. When Customs' strategy to tackle this
problem began in 2000 the majority of product seized was of UK
manufactured origin. Since then the preponderance of UK manufactured
product has fallen steadily and an increasing proportion is counterfeit.
In 2002-03 41% of seized cigarettes were counterfeit compared
to 15% in the previous year.
SMUGGLING VIA
THE INTERNET
13. For many years smugglers have used the
international postal system to try to circumvent UK Customs' controls
on drugs, obscene material and excise goods. However the smuggling
of cigarettes through the post is a relatively recent phenomenon.
Cigarette seizures in postal depots increased significantly alongside
the growth in use of the internet and the increasing numbers of
websites illegally selling cheap cigarettes to UK customers. In
2002-03 over 13 million cigarettes were seized at postal depots.
We have had some success in shutting down these sites but, given
the nature of the internet and the ease with which sites can be
set up and removed, it has not proved possible to eradicate the
problem altogether.
TACKLING TOBACCO
SMUGGLING STRATEGY
14. The Tackling Tobacco Smuggling Strategy
(TTS) was launched in 2000 against a background of increasing
growth in tobacco smuggling which, it is estimated, would have
seen the illicit market grow to some 34% by 2002-03 if no action
had been taken.
15. The strategy is based on attacking the
economic profitability and risk/reward ratio of smuggling through
an end-to-end strategy of disruption. It involves the suppression
of supply of UK manufactured product, legislative change, the
use of new technology, and increased resources both at the ports,
overseas and inland. Taken together this has reduced the profits
available to smugglers by driving up their costs and has increased
the chance of their getting caught.
16. Prior to the introduction of TTS Customs
adopted a tactical approach where success was defined in terms
of outputs, such as increasing numbers of seizures. This approach
did not provide the best focus on how we could achieve the desired
outcome of reducing the size of the illicit market. TTS allowed
us to re-focus our activities in this area, and was funded by
an extra £209 million over three years, which we have invested
in increased resources and in new technology.
Increased resources
17. We have increased front-line and investigative
staff by almost 1000 allowing better detection through improved
intelligence. This has been successful both at the frontier and
inland. We have also further developed our network of officers
based overseas because of the crucial role they have to play,
particularly in the Far East and Eastern Europe. The officers
work closely with local enforcement agencies to detect tobacco
(counterfeit or otherwise) targeted on the UK by international
criminal gangs and provide tactical and profile intelligence enabling
better targeting by detection and investigation staff.
Investment in new technology
18. We have installed a national network
of x-ray scanners to detect high volume cigarette smuggling in
freight. Since their introduction in 2001, these have detected
over 700 million smuggled cigarettes and 45 tonnes of Hand Rolling
Tobacco. In addition to their contribution to the tobacco strategy
the scanners have also detected over 450 kg of Heroin, almost
600 kg of Cocaine and identified 1,600 illegal immigrants.
Legislation
19. The new legislative measures introduced
"UK Duty Paid" fiscal marks on tobacco products to help
prevent, detect and deter the handling, distribution, sale and
purchase of smuggled tobacco. The introduction of the mark was
accompanied by a range of new offences and penalties designed
to crack down on the sale of illicit tobacco. In order more clearly
to distinguish between smugglers and genuine shoppers, the guide
levels for cigarettes and Hand Rolling Tobacco (HRT) were increased
in October 2002 from 800 to 3,200 and from 1 kg to 3 kg respectively.
These amounts represent a generous six months supply for the average
smoker, and we are not aware of any other EU Member State having
higher guide levels.
20. Eight of the Member States that joined
the EU on 1 May 2004 were unable to raise their rates of tobacco
excise duty to EU minimum levels so it was agreed that they should
be granted a transitional period in which to do so. It was also
agreed that until these rates are reached, existing Member States
should be allowed to impose restrictions on the import of cigarettes
and some other tobacco products bought in those countries for
own use. Once the minimum rates are reached, travellers from these
countries will enjoy the same benefits as those from countries
already complying. The Member States to which the restrictions
apply are the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland, Slovakia and Slovenia.
Suppressing illicit supply in co-operation with
the tobacco manufacturers
21. Customs now work very closely with tobacco
manufacturers to apply control over their export markets. This
is our principal means of applying pressure to the source of illicit
product, and is achieved by targeting countries where supply has
risen quickly and where there are questions about the ability
of the domestic market to sustain the level of imports they are
experiencing.
23. All three major UK manufacturers have
now signed Memoranda of Understanding with Customs and have said
that they want to do all they can to help Customs tackle smuggling.
Co-operation at present is generally good with seizures of genuine
cigarettes continuing to fall, both in volume and as a percentage
of overall seizures.
24. Our work with the tobacco manufacturers
has successfully restricted the availability of genuine tobacco
products to smugglers, and as a result the smugglers have turned
to counterfeit supplies of cigarettes. As stated above, 41% of
cigarettes seized in 2002-03 were counterfeit compared to 15%
the previous year. These fake cigarettes are completely unregulated
and carry potentially increased health risks, and we continue
to work closely with the Department of Health on these issues.
This changing pattern in smuggling also demonstrates the ruthlessness
of the criminals involved and their organised criminality.
Publicity
25. Customs has taken a proactive approach
to publicity and in the course of the strategy has run a £3
million publicity campaign to remind would-be smugglers of the
penalties for being caught, and to discourage ordinary members
of the public from buying the illicit goods used to fund organised
criminal networks.
STRATEGY REVIEW
AND REFRESHMENT
26. Customs monitors performance against
all our strategies and we seek to adjust and enhance our approach
both in anticipation of and in response to changing patterns of
behaviour as the fraudsters react to our efforts. In the case
of tobacco this has meant
— taking further measures to restrict
the source of cigarettes for smugglers, through our work with
the tobacco manufacturers and by working with overseas agencies
to target the source countries for counterfeit product;
— continued targeting of organized
criminals gangs responsible for the vast majority of smuggling
volumes;
— making a long term impact on inland
distribution and sales networks; and,
— undermining smoker's confidence in
"cheap cigarettes" by highlighting the greater risk
of counterfeit product.
27. With the raised profile, publicity and
increased success in tackling cross-channel smuggling, we have
seen an increase in air-passenger smuggling. Deployments to tackle
air-passenger smuggling need to be proportionate to the level
of sector threat and its relative importance in delivering the
PSA target. To tackle this growth in air smuggling we intend placing
greater emphasis on inveterate offenders who are part of organised
gangs.
THE IMPACT
THESE STEPS
HAVE HAD
ON THE
LEVEL OF
TOBACCO FRAUD
AND ON
COMPLIANCE
28. To measure delivery of the strategy,
key targets were set for the percentage of the market accounted
for by smuggled cigarettes for each year up to 2005-06. Since
the introduction of TTS we have managed to slow, stabilise and
reverse the growth in tobacco smuggling, reducing the illicit
cigarette market share to 18% in 2002-03, against a target of
21%—see Table B below. The illicit market share of smuggled
cigarettes for 2003-04 will be published at PBR.
TABLE B
| Year | 2000-01
| 2001-02 | 2002-03
| 2003-04 | 2004-05
| 2005-06 |
| Smuggled Share Target (%) | 21
| 22 | 21 | 20 |
18 | 17 |
| Smuggled Share Actual (%) | 21
| 20 | 18* | nya
| — | — |
| | |
| | | |
*Estimated using Omnibus data, may be subject to revision.
CIGARETTE SEIZURES
29. The volume of illicit cigarettes targeted on the
UK has fallen sharply from a peak of over 18.5 billion sticks
in 2000-01. As this has fallen, so the number of cigarettes seized,
year on year, has also fallen. Large-scale commercial smuggling
continues to account for the vast majority of seizures as shown
by the chart below. However, increasingly smuggled loads are of
mixed brands and are often well concealed. Air seizures have grown
as a proportion of total seizures most probably as a consequence
of a move to air smuggling by lower-level smuggling gangs that
previously would have operated on the cross-Channel passenger
routes. Inland seizures have reduced again this year, although
fiscal marks appear to continue to be effective at preventing
illicit cigarettes from penetrating the legitimate retail market.
OTHER INDICATORS
30. The first two years of the strategy saw an 81% reduction
in all forms of cross-Channel passenger smuggling, representing
a decrease in the cost of cross-Channel smuggling from £1.55
billion in 2000 to £290 million in 2002, and substantially
exceeding the 10% year on year target set in 2000. In the same
period we have seen a 42% rise in legal cross-border shopping
for alcohol and tobacco, indicating that we have struck a good
balance between protecting the rights of the travelling public
to shop, whilst clamping down on smugglers.
31. In the first three years of the strategy our activity
has
— reduced the number of cigarettes successfully
smuggled into the country by 2.5 billion sticks a year;
— disrupted 190 tobacco gangs;
— doubled the average length of sentences, which
reflects the focus on major criminal gangs; and,
— raised receipts and protected some £3 billion
of revenue.
32. During 2002-03, we:
— seized 1.9 billion cigarettes—1.2 billion
in the UK and 641 million en route to the UK—making a total
of more than 7 billion cigarettes seized during the first phase
of the strategy;
— seized 400 million cigarettes by using our fleet
of x-ray scanners, 50% of those seized at UK freight seaports.
33. Specific results are as follows:
PROSECUTIONS
| 2000-01 | 2001-02
| 2002-03 |
| Number of People sentenced | 884
| 431 | 106 |
| Average Sentence | 13 Months
| 17 months | 27 Months |
| | |
|
VEHICLE SEIZURES
| 2000-01 | 2001-02
| 2002-03 |
| Vehicles Seized* | 10,219 |
11,064 | 8,616 |
| | |
|
*Vehicles seized for all offences.
GANGS DISRUPTED
| 2000-01 | 2001-02
| 2002-03 |
| Gangs Disrupted | 43 | 60
| 87 |
| | |
|
TACKLING OILS
FRAUD
34. Customs' PSA target for the period 2003-04 to 2005-06
is to reduce the illicit diesel market in England, Scotland and
Wales to no more than 2% by 31 March 2006. The joint Revenue and
Customs PSA target for the period 2005-06 to 2007-08 is to ensure
that the illicit market for all road fuels is no more than 2%
by 2007-08.We also have a supporting target to maintain the upward
trend in the delivery of legitimate road fuel in Northern Ireland,
established in 2001. As a result of Customs' strategic approach
the level of diesel fraud reduced by almost one third between
2000 and 2002, and deliveries of legitimate road fuel into Northern
Ireland were up 7% in 2002—the second successive annual
increase following five years of decline.
MEASURING THE
OILS GAP
Great Britain (GB)
35. Consumption is measured differently for oils than
alcohol or tobacco. Data published by the Department for Transport
(DfT) on total vehicle kilometres travelled by vehicle type are
divided by fuel efficiency figures to produce total fuel consumption.
This is done separately for diesel and petrol vehicles.
36. Duty paid consumption is taken from Department of
Trade and Industry (DTI) deliveries data, which give a measure
of the legitimate supply of fuel by type, and UK country. Customs'
clearance data are not used as they do not split between GB and
Northern Ireland (NI).
37. Cross border shopping estimates are based on a 2003,
Customs sponsored, survey of hauliers making international trips.
38. Our latest published estimates (for the year to 31
December 2002 and published in PBR03) suggest that some £650
million is lost annually due to oils fraud in GB.
39. Customs publish estimates for non-UK duty paid petrol
consumption in GB but as this is very small (under 2%) and there
is no operational evidence of a petrol fraud problem Customs do
not attempt to disaggregate this figure between fraud and legitimate
cross-border purchases.
Northern Ireland (NI)
40. For Northern Ireland there is limited data on distances
travelled, therefore a different approach has to be applied. Customs
assume that negligible oils fraud and smuggling took place in
NI pre-1997 when the duty rates were low in comparison with the
Republic of Ireland (RoI). Delivery data for 1996 is, therefore,
assumed to represent the total consumption for that year and this
is the index point of the time series. The trend from this point
is calculated by multiplying the change in fuel consumption per
vehicle measured in GB by change in the NI vehicle population.
When applied to the index point this gives an estimate of the
total consumption.
41. Because of the difficulties in conducting a survey
around the Irish land border, which is some 350 miles long and
has over 500 crossing points, it is not possible to estimate the
quantity of oils legitimately supplied into vehicles in the RoI
and driven into NI for consumption in those vehicles (cross-border
shopping). Therefore, rather than reporting the illicit share,
Customs reports the proportion of the market that is non-UK duty
paid, without distinguishing between illicit and legitimate cross-border
shopping. For Northern Ireland, our latest published estimate
suggests £230 million is lost annually due to oil consumption
which is non-UK duty paid.
NATURE OF
THE FRAUD
42. In Great Britain, Oils fraud revenue loss is principally
a result of rebated fuels fraud—the laundering, mixing and
misuse of red diesel and kerosene, and some oils used for industrial
processes known as "tied" oils. Set out below are the
key fuels that are involved in these frauds.
— Red Diesel—Carries a lower rate of
duty, (4.22p per litre, compared with 47.1p for ultra low sulphur
diesel (ULSD)) and is for use in heating and off road vehicles,
such as farm machinery. A chemical marker and a red dye are added
to identify it as a fuel only to be used in off-road vehicles.
— Kerosene—Also known as paraffin,
it carries no tax when it is used for running domestic heating
systems. It is chemically marked, and is now dyed yellow following
the introduction of a Euromarker.
— "Tied" Oils—Also known
as technical oils or base oils, this range of oils carry no tax
when used for specific industrial purposes such as anti-rusting
agents or lubrication oils and are duty free.
43. In addition to the fraud types above Northern Ireland
has the problem of cross-border smuggling, where duty-paid fuel
purchased in the Republic of Ireland is brought into Northern
Ireland for re-sale, exploiting cross-border price differentials.
44. This exploitation of duty differentials, whether
between UK and Irish fuels or domestically sourced rebated fuels
and road fuels, provides the incentive behind all oils fraud.
Given that fuel accounts for approximately 30% of the overheads
for a business in the road transport sector (such as a coach,
taxi or haulage company) the use of illicit fuel in a competitive
market can offer a lucrative option for undercutting rival firms.
With 50% of all diesel being used in HGVs the revenue effects
for the Exchequer of any widespread misuse problem are clear.
45. The main fraud types are:
— laundering—the treatment of rebated
and duty-free fuels with chemicals to remove their markers and
dyes and make identification of use as a road fuel harder;
— mixing—combining rebated and duty-free
oils to make an illegal road fuel or to dilute road diesel; and
— misuse—illegally using unadulterated
rebated and duty-free fuels in road vehicles.
46. Although low-level and straightforward private and
commercial use of rebated product in on-road vehicles has long
occurred, the particular and growing threat has been the commercial
scale supply of adulterated product, typically to large-scale
commercial users of fuel.
47. The large-scale supply of the illicit market, particularly
through laundering plants, is organised by criminal gangs producing
millions of litres per year. The infrastructure required to buy,
process, transport and sell such volumes of illegal fuel is only
at the disposal of serious, organised criminality.
UK OILS STRATEGY
48. Our comprehensive strategy to achieve our PSA targets
is focused on stopping large-scale criminal and commercial fraud
by combining law enforcement action centred upon the large-scale
supply and use of illicit fuel with a better control of the sale
and distribution of red diesel, kerosene and "tied"
oils. We have been given additional resources to deliver this
outcome.
Legislation
49. Customs launched the oils fraud strategy in September
2002 introducing preventative controls higher up the supply chain
and improved targeting of potential misuse. At its heart was the
introduction of a control regime for suppliers of rebated fuels
(the Registered Dealers in Controlled Oils (RDCO) scheme) which
required all businesses selling them to be authorised by Customs,
to exercise a duty of care when selling those fuels, and to record
information on their sales and provide that data to Customs monthly.
Increased resources
50. The strategy also provided for extra officers, including
Road Fuel Testing Unit (RFTU) staff to tackle commercial fraud,
investigators to tackle the gangs behind the large-scale supply
of the illicit market, and a new Oils Central Co-ordination Team
to guide and co-ordinate all our operational responses to oils
frauds.
51. Underpinning this was investment in a new testing
technology and markers better to prevent and identify fraud, a
national publicity campaign, and tougher sanctions. The strategy
also introduced a new "Euromarker" to be applied to
all rebated gas oils and kerosene in the EU to help identify fraud.
Priorities
52. Customs' priorities in the UK Oils Strategy are:
— to ensure compliance with the RDCO scheme so that
it is increasingly difficult for fraudsters to get hold of rebated
fuels to misuse, mix or launder;
— to crack down on the large-scale illicit supply
of illegal fuel by those laundering mixing or smuggling fuel;
— to bear down on commercial fraud where businesses
use illegal fuel as part of their business activities;
— to maintain visible deterrence against private
misuse of rebated fuels through increased challenge activity;
— to maximise the intelligence available to target
officers as effectively as possible using both internal and external
data, information and intelligence;
— to use the full array of sanctions at our disposal
when we detect those engaged in the illicit supply chain or commercial
scale misuse—including vehicle seizure, duty assessments,
and prosecution in such mix as is necessary to recover lost revenues
and prevent fraud recurring.
53. In Northern Ireland there is cross-border smuggling
as well as rebated fuels fraud. In addition to implementing the
UK Oils Strategy, Customs also deployed increased resources into
Northern Ireland (from 25 officers in April 2000 up to up to 160
in January 2001) and led a multi-agency approach through the Organised
Crime Task Force (OCTF) to maximise the impact of Government intervention
in the whole road fuel sector.
IMPACT OF
STRATEGY ON
LEVELS OF
OILS FRAUD
AND ON
COMPLIANCE
54. As a result of Customs' strategic approach the level
of diesel fraud on the British mainland has reduced by almost
one third between 2000 and 2002, and deliveries of legitimate
road fuel into Northern Ireland were up 7% in 2002—the second
successive annual increase following five years of decline.
55. This has been achieved by increases in the pressure
Customs exert on oils fraudsters, as shown in the table below.
In particular Customs have increased:
— the number of vehicles challenged from around
17,000 in 2001-02 to nearly 30,000 in 2002-03—up 80%;
— the number of detections from around 3,500 in
2001-02 to 4,000 in 2002-03—up 18%;
— the average value of each detection from £2,483
in 2001-02 to £3,337 in 2002-2003—up 34%;
— the number of laundering plants from 38 in 2001-02
to 46 in 2002-03—up 21%; and
— the value of assessments raised from £8.3
million in 2001-02 to £13.2 million in 2002-03—up 59%.
| 2000-01 | 2001-02
| 2002-03 |
| Vehicles | |
| |
| Vehicles challenged | 20,861
| 16,313 | 29,302 |
| Vehicles detected | 2,295 |
3,342 | 3,956 |
| Laundering plants |
| | |
| Total disrupted | 20 | 38
| 46 |
| Great Britain | 3 | 30
| 25 |
| Northern Ireland | 17 | 8
| 21 |
| Gangs disrupted | |
| |
| Total disrupted | 7 | 19
| 14 |
| Great Britain | 5 | 12
| 13 |
| Northern Ireland | 2 | 7
| 1 |
| Assessments | £6.1 million
| £8.3 million | £13.2 million
|
| Prosecution figures (Great Britain)
| | | |
| Total | 4 | 8
| 7 |
| Number convictions | 4 |
9 | 8 |
| Average sentence | 21 months
| 14 months | 14 months |
| Confiscation orders | £143,000
| £660,000 | £374,000
|
| Prosecution figures (Northern Ireland)
| | | |
| Total | 5 | 8
| 3 |
| Number convictions | 5 |
15 | 3 |
| Average sentence | 3 months
| 16 months | 8 months |
| Confiscation orders | Nil |
Nil | £250,000 |
| | |
|
COMPLIANCE COSTS
56. Prior to introducing the UK Oils Strategy, and as
part of our regulatory impact assessment, Customs consulted with
the trade about the costs of the RDCO scheme. Responses to the
consultations were varied, with little detail provided regarding
the costs likely to be incurred as a result of implementing the
proposals, and—where respondents did try to estimate the
additional costs—considerable variation between their estimates.
57. For the RDCO scheme estimates of set-up costs ranged
from £15,000 to £400,000 with estimates of ongoing costs
ranging from £3,000 to £60,000 pa. Estimated costs of
the tied oils scheme were much less (maximums of £5,000 set-up
costs and £6,000 pa ongoing costs).
58. The variety of estimated costs from affected businesses
(and the relatively small number of estimates offered) made it
difficult to quantify the overall impact on businesses accurately.
However, Customs' own analysis indicated that costs were likely
to fall towards the bottom of the range for tied oils. Costs may
therefore be less in practice than those estimated, and we have
just started a post implementation review of the RDCO scheme looking
at compliance costs for registered distributors. We will be inviting
the major trade bodies to contribute to this review.
59. In addition, Customs exercised a "light-touch
period" in the first year of the RDCO scheme with an emphasis
on educating and helping the trade comply with their obligations.
In May 2004 a Business Needs Survey was conducted across a representative
sample of the RDCO population. The response from the trade indicated
they welcomed this approach with visits by Customs being well
received by almost all those surveyed.
TACKLING ALCOHOL
FRAUD
60. The joint PSA for HM Revenue and Customs for the
period 2005-06 to 2007-08 includes a target to reduce spirits
fraud by half by 2007-08.
MEASURING THE
ALCOHOL GAP
Spirits
61. Spirits consumption is estimated by combining on-licence
consumption from the Family Expenditure Survey (FES) with off-licence
consumption from the National Food Survey (NFS).[30]
The raw data are smoothed in order to reveal the underlying trends.
62. Household surveys are typically characterised by
under-reporting for alcohol consumption. In order to overcome
this, Customs assume that in 1992 there was minimal smuggling
and cross-border shopping and that overall consumption in that
year was equal to UK duty paid consumption and legitimate duty
free purchases.[31] This
assumption was informed by the expert opinion of those involved
in assuring the alcohol regime at the time. This produces a baseline
for consumption, and estimates for later years are produced by
applying the trend in consumption observed from the surveys.
63. UK duty paid consumption is taken directly from Customs'
clearance data, which records the volumes of spirits upon which
duty has been paid.
64. EU duty paid cross-border shopping is estimated using
the International Passenger Survey (IPS). The expenditure for
spirits is converted into volumes using French prices.
65. Our latest published estimates covering the year
2001-02 were published in December 2003. Updated estimates, including
for 2002-03, will be published alongside this year's Pre-Budget
Report. The latest figures will also provide a range, in accordance
with the National Audit Office's recommendations concerning the
uncertainty inherent in using survey data to estimate alcohol
consumption.
66. The published results produce a trend and scale of
fraud that are disputed by the industry. They have proposed an
alternative methodology. Extensive discussions have been held
between the trade and Customs on this point, and in March the
National Audit Office (NAO) produced a memorandum for the Public
Accounts Committee that examined both methodologies and offered
the view that "there is uncertainty inherent in basing an
estimate of spirits consumption on survey data" but also
that "both methods were seen by professional statisticians
as equally acceptable".[32]
The NAO also highlighted that the methodologies differed critically
in the choice of survey used to estimate the level of spirits
consumption. As part of this process the NAO welcomed the offer
of the Office for National Statistics to examine the datasets
used, and provide a view on the most appropriate, and revisit
one element of the NAO work on confidence intervals to describe
the uncertainty in the estimates. The outcome of this review has
not yet been published.
67. In addition the memorandum highlighted the uncertainty
involved in using survey data to estimate consumption of alcohol,
and the consequent effect on the uncertainty in the fraud estimates.
This led the PAC to ask Customs to publish an indication of this
uncertainty alongside estimates of levels of fraud. This will
be done in the report due to be published alongside the next Pre-Budget
Report.
Beer and Wine
68. "Measuring indirect tax fraud"[33]
highlighted the difficulties associated with using a top-down
gap analysis to produce estimates of the scale of the illicit
market in beer and wine. Over and above cross-Channel passenger
smuggling (which represents only a proportion of revenue losses
and has previously been estimated using a bespoke survey) it has
not been possible to estimate the overall size of this fraud using
our established gap methodology. A comparison of UK duty paid
consumption with estimates of total consumption does not generate
meaningful results. One reason for this could be that we are measuring
something relatively small within a large market.
69. We continue to explore alternative methods to estimate
the overall scale of beer and wine fraud. Although a robust quantification
of the problem is not yet possible, the available operational
evidence gives no clear indication that revenue losses resulting
from beer or wine fraud are as substantial as those from spirits.
EU HOLDING AND
MOVEMENT SYSTEM
70. Alcohol fraud occurs through exploitation of the
EU Holding and Movement System, a trade facilitation system of
considerable benefit to the UK alcohol industry. This allows for
the movement of products under duty suspension. When duty suspended
goods are removed to an approved excise warehouse within the EU,
the movement must be underwritten by a guarantee, valid throughout
the EU, to safeguard the potential amount of excise duty payable.
This is supported by an Accompanying Administrative Document (AAD)
for movements to other member states, or a form W8 for movements
to other warehouses within the UK, which provides documentary
evidence to support movement guarantees and is required to be
produced for audit by Customs or when a vehicle carrying a consignment
of alcohol is stopped en-route. The movement of alcohol under
duty suspension facilitates the legitimate trade by avoiding the
need for fiscal controls at frontiers, and the vast majority of
these movements arrive safely.
NATURE OF
ALCOHOL FRAUD
71. Most spirits fraud is perpetrated through the diversion
onto the UK market of product which is being moved under duty
suspension ostensibly between excise approved warehouses, often
involving traders in different Member States of the EU. This can
happen on import or export. Consignments of spirits, on which
no tax has been paid, are obtained and diverted by fraudsters
who cover their tracks with forged or duplicated paperwork. This
illicit spirit is then sold mainly through licensed outlets at
full (or close to) normal retail price. Neither the consumer,
nor the honest trader, can distinguish illicit from licit goods.
72. Inward diversion occurs when duty suspended product
is imported, ostensibly for a UK warehouse, but is diverted en-route
and placed on the UK market without duty payment; outward diversion
occurs when product described as destined for exportation never
in fact leaves the country and is diverted onto the UK market.
There are also other types of fraud including misdescription,
duty paid in another EU Member State, unaccompanied (deep-sea)
freight etc but these account for a small proportion of the total
tax losses.
73. Recent detected frauds have included one case where
11 lorry loads of spirits were apparently despatched from a UK
warehouse to Italy. We now know that none left the UK and they
were instead sold on without payment of duty through the illicit
market. Although the UK warehouse held receipted paperwork from
Italy this was all forged. The same warehouse sent a further 19
loads to Greece, which we suspect were also diverted under cover
of false receipts—although checks are still on-going. In
total we estimate that £2.25 million of revenue would have
been lost from that single fraud had it gone undetected.
OUR STRATEGIC
APPROACH TO
ALCOHOL FRAUD
UP TO
2004
74. In recent years Customs has taken a number of steps
to improve our capacity to prevent and detect alcohol fraud. These
have included implementing the vast majority of the recommendations
made by the Roques report into excise diversion fraud, and increasing
operational activity both inland and at the frontier.
75. Nevertheless we are aware that the EU system for
the holding and movement of excise goods—which is designed
to allow the free movement of such goods within the EU and to
ensure duty is not payable until those goods are actually placed
on the market—will continue to provide opportunities for
fraud. In effect, fraudsters exploit a system that is designed
to aid the honest trade.
76. Customs has taken a number of important tactical
steps to improve capacity to prevent and detect alcohol fraud.
These include:
— In April 2001 a specialist "discreditation"
team was set up at Dover to support local frontier detection staff
to identify alcohol loads intended for diversion. In April 2002
this team was expanded to take on a national role, becoming the
National Discreditation Team;
— In July 2001 a tough HGV seizure policy was introduced,
targeting those hauliers who play a key role in diversion fraud;
— In 2001 237 additional Holding & Movement
(H&M) assurance officers were deployed to control and manage
those traders involved in dealing with duty suspended and duty
paid excise goods;
— In 2001 263 additional frontier detection staff
were deployed at channel ports specifically to tackle cross-channel
passenger smuggling;
— In 2002 further additional staff were placed in
the Regional Excise Assurance & Compliance Teams (REACT);
and
— In April 2004 the Customs specialist alcohol intelligence
team was expanded, increasing the team to 11 staff.
IMPACT OF
APPROACH
77. Customs' activity targeting alcohol fraud has yielded
the following results:
PROSECUTIONS
| Prosecutions | Spirits Successful
| Unsuccessful | *Mixed Excise Successful
| Unsuccessful | Total |
| *2001-02 | 7 | 2
| 91 | 8 | 108 |
| 2002-03 | 21 | 3
| 34 | 28 | 86 |
| | |
| | |
*Mixed cases include mixed alcohol or alcohol with other excise
goods.
GANGS DISRUPTED
| 2000-01 | 2001-02
| 2002-03 |
| Gangs Disrupted | 5 | 2
| 24* |
| | |
|
*Gangs disrupted figure for 2002-03 reflects the outcome of
one major criminal investigation "Fulcrum".
78. Customs' efforts to tackle cross-Channel passenger
smuggling (one element of overall alcohol fraud) have proved highly
effective—in 2001 revenue losses from cross-Channel smuggling
were down 76%, with cross-Channel passenger smuggling of beer
almost eliminated and cross-Channel passenger smuggling of wine
and spirits halved. In 2002 there was a further reduction of 22%,
reducing alcohol cross-channel smuggling by 90% in two years.
79. Customs have worked closely with the trade to identify
ways that they could help in combating alcohol fraud. The Joint
Spirits Fraud Task Force was set up in May 2002 to provide a forum
for these discussions. Progress has been positive but unfortunately,
given the opportunities for fraud inherent in the EU Holding and
Movement system, it was always going to be difficult, via essentially
voluntary co-operation, successfully to combat the systematic
attack by organised criminal gangs seeking huge profits.
STRATEGIC DEVELOPMENT
80. Customs monitors performance against all our strategies
and we seek to adjust and enhance our approach both in anticipation
of and in response to changing patterns of behaviour as the fraudsters
react to our efforts. In the case of alcohol it became evident
that a tactical approach to combating fraud would have only limited
effectiveness whilst the environment in which the fraud took place
assisted the fraudster by minimising the risks of being caught.
Therefore Customs' tactical initiatives to tackle fraud have been
introduced alongside an extensive period of discussion with the
industry aimed at developing strategic measures that would be
effective against this large scale and highly organised criminal
activity.
81. Customs Alcohol Strategy to date has centred on the
most effective operational tactics available to us in identifying
and tackling the fraudsters responsible for alcohol fraud and
in stemming the revenue losses. A common strength of both the
oils and tobacco strategies is the partnership of incisive operational
activity with supporting legislative change. Introducing measures
through legislation that narrow the scope for fraudsters to exploit
weaknesses in the system is key in maximising operational effectiveness.
The Chancellor's announcement in December 2003 that he would introduce
tax stamps on spirits from 2006 presents us, for the first time
with the opportunity to broaden our strategic approach and to
be optimistic that our efforts to significantly reduce spirits
fraud will be successful.
82. The fundamental principles of the strategy are to:
— Make it as difficult as possible for a fraudster
to deal with—and hide amongst—the legitimate trade,
at all points along the supply chain;
— Make it easier for Customs, the trade and the
public, to identify and trace illicit product; and
— Substantially drive up the costs—and thereby
significantly reduce the profits—of being involved with
spirits fraud.
83. We are supporting this work by:
— increasing our alcohol intelligence resources
by some 30%
— improving information and analysis systems;
— increasing our detection resource by almost 10%
in order to enforce the tax stamps regime;
— deploying more staff to prosecute tax stamps offences;
and
— increasing assurance staff to combat any fraudsters
who attempt to continue to operate within the Holding and Movements
system.
TAX STAMPS
84. In 2002 Customs undertook a comprehensive consultation
on the Roques report recommendation to implement a tax stamps
system for spirits. The consultation established that tax stamps
would have the advantage of allowing enforcement staff, the trade,
and the public, to distinguish between legitimate and illicit
spirits at the point of retail sale. The presence of a tax stamp
would prevent the distribution of unstamped spirits at full market
value and would increase the risks taken by anyone dealing in
illicit spirits. The impact on fraud would be significant. However,
the Government decided not to proceed with tax stamps at that
time but asked Customs to work with the industry to tackle fraud
and to explore alternative means of making progress in reducing
the illicit market share. This work focused on the Joint Spirits
Fraud Task force and an examination of how fraud could be stemmed
through the strengthening of the existing regulatory framework.
85. In the summer of 2003 the Government consulted on
a wide range of alternative options for reducing the opportunities
available to commit fraud through the framework for holding and
moving alcohol in duty suspension. Responses indicated that, while
some of the measures would be acceptable to the industry and would
have a small further impact in reducing fraud, the most significant
proposals—radically to restrict the circumstances in which
alcohol could be moved and sold in duty suspension—would
not deliver an anti-fraud benefit that was proportionate to its
compliance cost to the industry. The Government therefore concluded
that tax stamps were the only way to combat spirits fraud effectively—both
today and in the future.
86. In the 2003 Pre-Budget Report the Government announced
the intention to implement tax stamps, but gave industry a final
opportunity to put forward an alternative measure that would be
as effective in tackling spirits fraud. The trade's alternative
proposals took the form of a package of proposed new controls
on the alcohol supply chain, but it was concluded that the proposals
would be significantly less effective in tackling fraud than tax
stamps. The Chancellor therefore confirmed at Budget 2004 that
tax stamps would be implemented early in 2006-07 and that primary
legislation would be passed in the Finance Bill 2004.
87. The spirits industry estimated the compliance costs
of tax stamps to be around £54 million annually with an additional
£23 million set up costs in the first year. Recognising the
potential impact of compliance costs on the industry, the Government
announced a number of measures to offset and mitigate these costs.
These were:
— A freeze on duty on spirits for the remainder
of this Parliament;
— A £3 million capital grant to offset trade
capital investment, eg in tax stamping equipment;
— Agreement that Government would meet the ongoing
costs of printing and distribution of tax stamps, and;
— Subject to further detailed consideration and
discussion with the trade, seek to operate a system requiring
no advance payment for tax stamps in order to minimise adverse
cash flow impact.
88. Since Budget 2004, Customs have worked collaboratively
with the industry, through the co-chaired Joint Alcohol and Tobacco
Consultation Group (JATCG) to explore alternatives to advance
payment for tax stamps that strike a balance between reduced compliance
costs and revenue protection. Detailed discussions have also taken
place on a number of other issues including: the product scope
of the tax stamps regime, and the physical design of the stamp.
On this last issue, industry representatives made proposals to
incorporate tax stamps within the back labels of spirits bottles,
which they argued would reduce compliance costs significantly.
In response to this, provisions were included in the Finance Act
2004 to allow that form of stamp if ministers judge that it is
appropriate. During this extensive consultation process, industry
representatives have had regular meetings with officials from
Customs and HM Treasury and have also had several meetings with
the Economic Secretary to the Treasury, most recently on 2 November.
REGULATORY CHANGE
89. In addition to tax stamps, the Government announced
at PBR 2003 a number of regulatory changes that would strengthen
the Holding and Movement system. These came out of Government
consultations with the alcohol industry in the summer of 2003.
The Government committed to introducing four of the proposed measures
during 2004, following further discussion with the trade. These
include changes to the regulations governing producers, warehousekeepers
and owners of duty suspended alcohol, requirements for notification
of cash transactions and advance payments, and a scheme for recognising
transporters with good compliance histories.
90. Customs continue to work closely with the industry
to prepare for implementation of these regulatory changes to support
the wider alcohol strategy. Detailed discussion papers have been
issued and Customs are in the process of analysing these responses.
November 2004
28
Measuring Indirect Tax Fraud, Pre-Budget Report 2001. Back
29
In fact this is the figure for cigarette smuggling only in 2002-03-a
further £580 million was lost due to the smuggling of hand
rolled tobacco. Back
30
Since 2001-02 FES and NFS have been combined into EFS (Expenditure
and Food Survey) but ONS and DEFRA are still responsible for publishing
the FES and NFS equivalent data respectively. Back
31
Intra-EU duty free purchases are included. Intra-EU duty-free
was abolished in June 1999. Back
32
Estimating the level of spirits fraud, memorandum by Comptroller
and Auditor General, March 2004. Back
33
Measuring Indirect Tax Fraud, Pre-Budget Report 2001. Back
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