Annex 1
BACKGROUND TO THE DEVELOPMENT OF THE OFFICIAL
ESTIMATES OF FRAUD
1. The level of outward fraud in the mid-1990s
is undisputed. Some cases, none involving producers, became notorious
for the huge revenue losses involved. They have been independently
investigated, including by the Treasury Sub-committee's 1999-2000
enquiry into HM Customs and Excise, which foreshadowed the situation
now. A difficulty was that the scale of losses from the frauds
of the 1990s had not been accurately estimated. Our evidence[57]
called for "a much fuller, more accurate and open Government
assessment of the scale and costs of the problems of smuggling
and fraud".[58]
The Committee recommended "that Customs and Excise, working
with the relevant industries, formulates estimates of the revenue
lost as a result of all forms of alcohol smuggling".[59]
2. After the Committee's report, the further
independent investigation by John Roques also placed "great
emphasis on the need for the development of reliable estimates
of revenue leakage and for the publication of such estimates .
. . Measurements of leakage should be the key measures of the
effectiveness of the Department, and the key driver of requests
for additional resources".[60]
3. John Roques was shown[61]
in August 2000 a tentative new model for estimating fraud by the
Customs Analysis Division, based on trying to estimate total spirits
consumption using data from the Family Expenditure Survey (FES)
and the National Food Survey (NFS). It was the precursor of the
model on which the recent official estimates are also based, but
in his report of July 2001, he noted that "none of the
estimates produced to date has been made public, due to the belief
by the Department that they are insufficiently robust".[62]
4. Mr Roques also made his own assessment,
but using only "a very simplistic approach . . . intended
as a reasonableness check of the estimates already made".
Interestingly this implied that fraud fell during 1999-2000,
but he concluded that this was a mistake. He assumed that the
high level of duty-paid spirits clearances in 1999-2000 was "explained
by the Millennium celebrations", and therefore instead
extrapolated his results for 1998-99 to "estimate the
current level of spirits revenue losses to be in the range of
£500 million to £1,030 million per annum".[63]
He did not know that clearances for the following year, 2000-01,
would again rise significantly above the 1999-2000 figures, which
were not therefore an aberration.
5. PBR01 included the first official estimates
of losses from spirits fraud and smuggling, for the period 1999-2000.
This enshrined the methodology which John Roques had tentatively
been shown the preceding summer. FES (on-trade) and NFS (off-trade)
data are grossed up to estimate total UK spirits consumption.
From this, estimates of legitimate consumption (principally the
clearance figures) are deducted to give an estimate of the revenue
gap—a technique known as gap analysis.
6. The Treasury was so concerned at the
alleged losses (£450 million, including both excise and VAT—or
circa 15% of the total market) that, among other things, it launched
a consultation about the possible introduction of tax stamps,
believing them the right response. This had been one of many recommendations
made by John Roques, but not one to which he attached priority.
7. Following representations from the industry[64]
the government decided in the 2002 Budget not to proceed with
tax stamps at that time. One of many areas of concern raised by
the Association was the new estimate of the illicit market. It
was inconsistent with other evidence showing that fraud had begun
to fall in 1999-2000.
8. In PBR02, estimated losses for 1999-2000
were revised upwards to £500 million, and new estimates for
2000-01 were published—also £500 million. The Treasury
began consultations, continuing through 2003, on a package of
seven possible regulatory approaches to tackle the apparent levels
of fraud. The Association participated in a pan-industry response[65]
by the Joint Alcohol and Tobacco Consultation Group (JATCG). An
even stronger case was made in this October 2003 submission that
there were deficiencies in the fraud estimates. They were inconsistent
with the healthy recovery in revenue receipts which continued
during 2000-01. The figures also implied such a growth in consumption
since 1992-93 at odds with the experience of all in the market
that spirits trends had been flat.
57 http://www.publications.parliament.uk/pa/cm199899/cmselect/cmtreasy/885/9111016.htm
(written);http://www.publications.parliament.uk/pa/cm199899/cmselect/cmtreasy/885/9111017.htm
and http://www.publications.parliament.uk/pa/cm199899/cmselect/cmtreasy/885/9111018.htm
(oral). Back
58
SWA written evidence, para 13. Back
59
Treasury Committee, 1999-2000, 2nd Report (HC 53), para.51. Back
60
Roques Report, July 2001, s.5.1. Back
61
s. 5.3.2.2. Back
62
s.4.1. Back
63
s.5.4.3. Back
64
"Tax Stamping of Spirits", SWA, February 2002. Back
65
JATCG response, October 2003. Back
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