Examination of Witnesses (Questions 374-379)
JOHN HEALEY
MP AND
MR PAUL
GERRARD
2 FEBRUARY 2005
Q374 Chairman: Welcome back to the Sub-committee,
Minister. In your memorandum to us you say you are committed to
tackling tax fraud in order to protect the revenue you need for
public services, to protect legitimate businesses and to protect
us from organised crime. Are you succeeding?
John Healey: Yes, we are making
progress. The gap, if you look across the excise regimes, is still
quite significant, which is why we attach such importance to the
investments we are making and the strategies we are putting in
place. However, if you look across the regimes you will see that
instead of a rising trend we now have a falling trend, whether
that is in alcohol, oils or tobacco, and if we consider what would
be the situation if we had not put the strategies in place we
would be seeing cigarette fraud, last year, at a level of 36%
of the total market instead of 15% , and we would have seen fraudulent
oils at 9% instead of 6%, which means that over the last few years
we have safeguarded at least £3 billion of the public purse.
Q375 Chairman: Your figures show that
the revenues actually evaded through both tobacco smuggling and
spirits fraud are running at almost £3 billion a year. Is
that satisfactory?
John Healey: It is not satisfactory.
It is still significant, as I explained, but on the other hand
if we had not put the action and investment in place which we
have done over the last few years the situation would be significantly
worse. We have still got a lot more to do, which is why we have
set, from government, Customs & Excise and the successor body
some quite tough public service agreement targets to reduce these
levels of fraud still further, but if we had not taken this action
on tobacco and on oils two or three years ago we would have been
faced with not just a shortfall or a gap which we reported at
PBR in December of around £3.5 billion but a gap of almost
£7 billion.
Q376 Chairman: Why do you claim the situation
is getting better and that you are reducing fraud when, if you
look at hand rolling tobacco, losses have increased by £170
million to some £750 million and in diesel oil fraud there
has been an increase in fraud of £200 million to £850
million? That means it is getting worse, not better.
John Healey: If you separate the
two there: on diesel, if you look at the situation in 2000 when
we started our work on this, the size of the illicit market was
8%; since then we have cut it by a quarter to 6%. So, on diesel,
it is not getting worse and we do expect it to start getting better
quite significantly because most of the major parts of the anti-oils
fraud strategy we put in place we put in place during the course
of 2002 and, of course, the figures we have been able to publish
in the PBR in December were the levels of fraud for 2002-03. On
hand rolling tobacco, I think the situation is more worrying.
There is certainly a concern there. If you look at the total consumption
and pattern of the market, we have an increased consumption—we
have a bigger market, if you like, particularly as there has been
a general shift in smoking habits downgrading from premium brands—what
you see in the latest figures we have been able to publish, with
hand rolling tobacco, is that the illicit size of the market is
very significant, but it is a smaller share of that bigger market.
That means that the revenue loss is actually up, so the revenue
loss, you will see in the latest figures, is up £70 million
but the share of the illicit hand rolling tobacco market is down
6%. Now, we are dealing here with what is a very well-entrenched
and long-established illicit market in hand rolling tobacco. The
Pre-Budget Report explained that we are doing further work
on this as we try and untangle the differences with hand rolling
tobacco smuggling and bootlegging from cigarettes. We are considering,
at the moment, within the Treasury and within Customs, a range
of different things that we might put in place. I hope we will
be able to confirm a fresh focus on hand rolling tobacco within
the overall tobacco strategy fairly soon.
Q377 Chairman: You say it has dropped
6% but that is since the year 2000, and your own figures show
increases in each of the last three years: 52%, 53% and now 57%.
That means nearly six cigarettes in every 10 are illicit. Is that
acceptable?
John Healey: It is not acceptable.
It is a very significant level of illicit activity with hand rolling
tobacco. It is down since we introduced the tobacco strategy in
the year 2000, which is why I make the point that there is a 6%
drop. Nevertheless, because more people are smoking more hand
rolling tobacco the scale of revenue lost to the public purse
has gone up, and it has gone up by £70 million.
Q378 Chairman: Finally, from me, on spirits
fraud, when you started on the spirits fraud route with the tax
stamp, you said the fraud was £600 million, then you thought
it was £450 million and your latest estimate is that fraud
is actually £250 million. How credible is this, when you
keep revising the figure down so dramatically? Are you just guessing?
John Healey: No. The calculations
and estimates we published in December are based on the methodology
that we have put in place over the last three years and published
the details of. I think, to understand the set of figures we were
able to publish in December alongside the Pre-Budget Report, it
is important to understand that two things were happening: first
of all, there was a revision of some of the back series—in
other words the previous year's numbers—and that was based
on changes that the ONS and Defra made to the data that came out
of the expenditure and food survey. That is the first thing. The
second thing is the figures also carried the latest year that
we were able to make our assessments for, 2002-03, for which we
had not made an estimate before. The drop from 14% to 7% starts
to show the impact of a number of the actions that we were taking
in the year 2002-03 starting to have an effect. I think there
is a combination of two things in those latest figures: there
are, partly, revisions of data on the surveys that we use, and,
secondly, there are, I think, the first signs of an impact of
some of the measures we took a couple of years ago to try and
deal with spirits fraud.
Q379 Chairman: As I understand it, you
have asked the ONS to sort of referee where we have got to and
what the actual figure is. When are we expecting their final pronouncement?
John Healey: The ONS are studying
the methodology that we use in Customs and that the trade use.
They have done so as a response to the National Audit Office's
report.
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