Examination of Witnesses (Questions 380-399)
JOHN HEALEY
MP AND
MR PAUL
GERRARD
2 FEBRUARY 2005
Q380 Chairman: When are we expecting
an answer?
John Healey: I cannot tell you,
I am afraid, because the ONS operates in a relatively independent
way.
Q381 Chairman: Do you expect it to be
before the Budget?
John Healey: I am not in a position
to tell, I am afraid. It is their judgment, when they feel the
work is completed and when and how they want to publish it.
Q382 Mr Heathcoat-Amory: As well as the
£3 billion that the Treasury is losing from fraud and smuggling,
there is also the legitimate activity of cross-border shopping,
whereby people simply buy in the lower-taxed jurisdiction in France,
and so on. Do you have any estimate of what that is costing the
Exchequer, in addition to what is lost through illegal activity?
John Healey: Yes, we do. We have
estimates of the legitimate cross-border shopping for tobacco
and for alcohol. We have an estimate for oils in Great Britain
but not in Northern Ireland.
Q383 Mr Heathcoat-Amory: Can you tell
us what they are?
John Healey: Which ones are you
interested in?
Q384 Mr Heathcoat-Amory: Let us start
with tobacco and alcohol.
John Healey: For tobacco, the
current level in our judgment of cross-border shopping is £1.2
billion, set alongside the illicit share of the market—in
other words the smuggled cigarette market—which we put at
£1.9 billion. In other words, there is a total, if you like,
of non-UK duty paid for tobacco of just over £3 billion.
Q385 Mr Heathcoat-Amory: And on alcohol?
John Healey: Paul, have you got
the figures for alcohol?
Mr Gerrard: I am afraid I have
not got the figures with me but I can write a note.
John Healey: We can provide those
figures for you.[1]
Q386 Mr Heathcoat-Amory: We are therefore
talking about another huge revenue loss, which is really created
by the duty gap. Can I put it to you that as well as being tough
on the crime of smuggling we ought to, at least, look at the cause
of the crime, which is the relentless increase in British duties
against those on the continent? We are paying a heavy penalty
for actually widening the gap and adding to the problem. Does
the Treasury have a tax policy here to at least hold the problem
even if it cannot dramatically reduce it?
John Healey: Let me take the example
of tobacco, and the Government does have a clear tax policy in
relation to tobacco; it is actually the same one that was pursued
by the previous government, which is that we see a role for the
high pricing of tobacco as a way of helping to reduce consumption
and to discourage people from starting to smoke. That has been
a significant factor in the overall reduction in the numbers of
people that smoke in this country over the last 20 years or so.
Every government takes a judgment about the balance of taxation
across the range to produce the revenues required for public expenditure
and investment, but if I may say to you, I think the most significant
factor in cross-border shopping, which was the point you started
on, Mr Heathcoat-Amory, is that since 1993, with the introduction
of the single market, the right to cross-border shop—in
other words, bring back excise goods, tobacco, fags, booze, in
as great a quantity as one wants for personal use—is
part of the fundamental rights for citizens within the European
Union single market. The high level of cross-border shopping that
makes up a significant component of the non-UK duty paid figures
that I have cited to the Committee is a direct result of the single
market and is something that we, as a Government, as I think the
government that you were a part of, strongly support.
Q387 Mr Heathcoat-Amory: You have not
quite answered my question. You have an incentive to put duty
up for revenue purposes and there is a health dimension, certainly,
for smoking. But that policy adds to the smuggling problem, and
I put it to you that we are therefore fighting a problem with
one hand tied behind our back; unless you do have a conscious
policy of acknowledging that the problem is getting worse, and
that perhaps should at least counter the traditional Treasury
itch to put all taxes up wherever possible.
John Healey: If I may say so,
I think the situation is a good deal more complex than that. If
you look at oils, for instance, Belgium has a significantly lower
fuel duty rate than the UK but it has a serious problem with oils
fraud. If you look at tobacco, the real problem with the scale
of tobacco smuggling is not tobacco that comes in from other European
Union states, the majority of the tobacco that we seize comes
in without any duty paid in any jurisdiction from outside the
European Union; it comes up in bulk. Therefore, relative duty
rates between the UK and France or Belgium or Spain are actually
beside the point in terms of the incentives and the operation
of these smuggling gangs.
Q388 Mr Heathcoat-Amory: Yes, but the
huge profits to be made are a function of the very high duty rate
in this country. Therefore, you are setting up an economic incentive
for a crime and you do not seem to acknowledge this in your tax
policy—or perhaps you do?
John Healey: We do; we take into
account, as we make the annual judgments about duty rates, the
factor of smuggling, the potential impact on smuggling. We did
so, indeed, in the Budget last year and the Pre-Budget Report
last year when we said we would raise the duty rate on red diesel,
for instance, by 1p a litre in order to start to reduce the gap
between the main fuel duty rates for road fuels and red diesel—to
some extent part of the bigger strategy, but, nevertheless, a
step towards reducing the potential profits of the smugglers.
So we do take these factors into account and we take them into
account each year when we decide on the duty levels in the Budget.
Q389 Mr Heathcoat-Amory: Can I ask you
for more about your estimates, particularly on spirits? The National
Audit Office have examined the estimates made by Customs &
Excise and also made by The Scotch Whisky Association, and in
both cases the NAO calculate that the true range of possibilities
is enormous. For instance, the true range of Customs estimates
should be, for the year 2001-02, between £330 million at
the low end and over £1 billion at the high end. So we really
have not quantified the problem with any precision. What further
work is going on about this and when can we have it?
John Healey: The most important
work that is going on the Chairman referred to earlier on, which
is the work that the Office of National Statistics are doing.
You are right, the National Audit office, when it had a look at
this area, stressed, I think, three things. First of all, that
this is inherently difficult territory to get an accurate and
reliable figure on. It is the scale of the illicit market, and
by its nature that is difficult to do. So it concluded, therefore,
that any estimates had a significant degree of uncertainty. The
second thing it said was that both the methodology that Customs
had established and the one used by the trade are reasonable.
The third thing it said, as you have indicated, was that because
of the degree of uncertainty the respective methodologies should
both express the assessment of the level of fraud and illicit
market as a range. Further work is rightly (and this is welcome
from my point of view) being done by the Office of National Statistics.
It is doing it independently and we are co-operating as fully
as we can to give them whatever data and assistance is going to
be useful, but that is the ONS's work; the nature of its relationship
with government is significantly of independence. How it does
its work and when it reports is, as I said to your Chairman earlier
on, Mr Heathcoat-Amory, a matter for them, and I simply do not
know.
Q390 Mr Heathcoat-Amory: Do we not need
this in time for the Budget? Again, some very important decisions
are going to be made by the Chancellor about these revenue limits.
Again, we are sort of struggling in the dark, are we not? We do
not even know the extent of the problem, let alone how to deal
with it.
John Healey: Well, I would welcome
it as soon as the ONS is able to feel it has concluded its work
satisfactorily. Even though there is a difference in the methodology
that the industry and we would use, there is no dispute about
the fact there is a significant problem with spirits fraud. There
is no difference between us in the commitment on the need to tackle
it, and indeed as a Committee you heard the industry (in particular,
the Scotch Whisky Association) making that point to you.
Q391 Mr Walter: In 2002, if we look at
the spirits fraud for a second, Customs undertook a consultation
on the whole question of tax stamps. However, the Government decided
not to proceed with that but asked Customs to work with the industry.
In the 2003 Pre-Budget Report you announced you were going to
introduce tax stamps. Can you just explain to the Committee why
you changed your mind?
John Healey: In short, we had
another look at the position. The figures based on our methodology
suggested that this was perhaps a more significant problem than
we had anticipated before. We had had a number of operational
exercises—Customs operations—which had underlined
the fact that there were some very serious and significant criminal
gangs at work on this, and we finally took the view that the progress
that had been made in discussions with the trade following the
previous decision simply were not getting us to the point where
we could confidently say we could put a package of measures in
place to deal with this fraud without using a form of tax stamps
at the centre of it. So it was a combination of, frankly, a lack
of progress in discussions with the industry from the previous
time we had considered it, a greater concern about the scale and
significance of the fraud and a judgment that we could do this
in a way which meant we could introduce tax stamps system which
could bear down on fraud in the way that we needed to do but,
also, we could introduce it in a way that minimised the burden
of compliance on the industry, which is indeed exactly what we
are trying to do at the moment.
Q392 Mr Walter: So it was the scale that
persuaded you that you should go ahead with this?
John Healey: I think I have been
very clear: it was also the fact that nearly 18 months of discussions
with the industry, frankly, failed to produce anything significant
by way of other measures that would give us a convincing set of
measures which would tackle the fraud.
Q393 Mr Walter: The scale of the problem
is not as great as it was, because when the Chancellor confirmed
in the 2004 Budget that he thought that the losses from spirits
fraud were £600 million a year (and the Chairman mentioned
these figures earlier on) that figure was then revised down to
£450 million and your latest estimate is that it has fallen
to £250 million. So, the scale of the problem is not as great
as you thought it was. Therefore, is it still necessary to go
down this route of imposing tax stamps?
John Healey: Yes. In my judgment,
a scale of fraud which is costing the Exchequer £450 million
on the revised figures in 2001-02 and, on the revised figures,
was 14% of the market is significant and needs to be tackled.
In my view, a level of fraud which is still at 7% needs to be
tackled, and I think that would be, as I tried to explain earlier,
the view of the industry, and I think you heard that from the
industry themselves when they gave evidence. What I indicated
earlier on is that what we see in the drop between 2001-02 and
2002-03 is the impact of a number of actions that Customs took
during that year. It simply does not remove the fact that we have
a significant spirits fraud problem. To give you an example, Mr
Walter, within the last few days we have had within Customs intelligence
which shows that in the last few weeks there have been 84 consignments
of spirits worth £10 million of tax evaded to the UK
Exchequer currently bound from one European Union state to the
other, diverted into the UK without tax paid and with false documentation.
Now, you have got organised gangs, but that is one organisation,
one operation in the last few weeks—intelligence that has
come to us only in the last few days. When you have a scale of
systematic fraud in the spirits field of that nature, I say to
you it would be irresponsible of us, as a Government, not to take
action to deal with that and I think it would be unfair on those
legitimate businesses that do pay their tax to have their own
products and their markets undermined in that way, which is, in
the end, why the industry is so strongly with us on the commitment
to tackle fraud. They do not like tax stamps but they accept it
and they now believe, as you have heard as a Committee, that these
can be introduced as a result of the detailed discussions we have
had with them in a way that will work, and they can be introduced
in a way which makes the costs that are imposed on industry proportionate
to the problem that we face.
Q394 Mr Walter: I will come back to the
mechanics of the implementation, in a moment, but I just wanted
to look at the scale of this and just question your priorities
here. We are now talking about spirits fraud of £250 million
(a figure that has been revised down quite considerably) but we
have got hand rolling tobacco smuggling with revenue losses of
£750 million, which is three times as much. Have you got
the priority right here in spending all this time looking at spirits?
John Healey: I would say to you
yes, on two accounts. First of all, we moved first and strongest
on tobacco because the scale was much greater. Secondly, I would
suggest, Mr Walter, if you look at the tobacco strategy that was
put in place three years ago, that brought an investment of £209
million into the tobacco strategy, an extra 1,000 Customs officers
to deal with the tobacco problem, 14 X-ray scanners introduced
as part of the new technology at the frontiers to help us deal
with this and, if you like, a schedule and scale of response and
investment in tobacco which, I think, is in proportion to the
fact that the fraud and the gap we faced on tobacco was, as you
say, significantly greater than alcohol. We are now turning our
attention seriously to alcohol. We need to do that, but it was
certainly right that we tried to tackle tobacco as our first priority
and we have actually put a good deal more resources, more investment
and more effort into tobacco than to date we have on alcohol.
That does not, in my view, remove the conclusion that we have
to do more on alcohol, and that is precisely what we are developing
with the industry at the moment.
Q395 Mr Walter: You are not going to
have tax stamps on tobacco?
John Healey: We are not going
to have tax stamps on tobacco, but one of the measures that we
did introduce several years ago was a fiscal mark, and that has
been helpful as part of a quite wide range of measures as part
of the tobacco strategy. That played its part. With alcohol, the
nature of what we face is different, the industry is different,
and with tax stamps at the centre of a strategy and a number of
other things alongside it I am confident that we are going to
be able to continue to reduce the scale of the illicit market
in spirits, and continue to reduce therefore the scale of the
tax gap and revenue losses to the public purse.
Q396 Angela Eagle: When we visited the
Customs officials in Hungary and the Czech Republic to look at
their tax stamp system, they believed that the strip stamps across
the top of the bottle were good and that they provided an assurance
that the bottle had not been tampered with and the contents were
actually genuine as well as representing proof of duty paid. Yet
you have announced that you are going to settle for tax stamps
in the back label of the bottle after the industry lobbied Treasury.
Can you explain why this change is acceptable and why you think
the Hungarians and Czechs are quite happy with strip stamps and
yet you have abandoned that idea?
John Healey: I might ask Paul
Gerrard, as Head of our Customs Tax Strategy, to come in on this
in a moment with some of the more operational assessments. I think
it matters less where the tax stamp is placed on the bottle and
more on two things: one, the nature of the design and the security
features that are incorporated in them and, secondly, the difficulty
with which it can be forged or applied to illicit products. I
understand the views that the Hungarians and the Czechs might
take, but I find it quite curious, to be honest, because I think
it is more difficult to forge a stamp that is part and parcel
of a label, because what you need to do is not just forge the
tax stamp, you have got to be able to forge the label and you
have got to find the right product in order to apply it. My assessment
of that would be that to place the tax stamp on the back label
is probably less susceptible to counterfeiting and those sorts
of problem than a strip stamp per se. I do not know whether Paul
Gerrard wants to add to that.
Mr Gerrard: I think that is right,
because what tax stamps mean is that the fraudster has to have
a supply of marked products otherwise it stands out as being non-tax
paid. If the mark is integrated into the back label then in order
to make it appear to be marked the whole bottling process has
to change, whereas if you have a stamp that goes over the top
that can be applied at any point in the supply chain, including
when the retailer puts it on the shelf and can literally put the
strip over the top. From my perspective, as a law enforcement
officer, I would say that the integration of the label in the
bottling process is a better anti-fraud measure than a strip over
the top. I have not discussed it with the Hungarians or the Czechs
so I do not know what the reasoning is for that, so I could not
answer.
Q397 Angela Eagle: Is it not easier to
steam labels off and counterfeit the stamp? How happy are you
with the level of security?
Mr Gerrard: You can perfectly
well do that but it is much longer, and if you have 10,000 bottles
to steam off the labels the bottles and put on a pre-printed,
fraudulent version it is that much more difficult than applying
the strips over the top with some glue.
Q398 Chairman: If it is optional to either
put it on the back of the bottle or a strip stamp it is going
to be very confusing for consumers to know whether their bottle
has been tampered with or not.
Mr Gerrard: I do not think the
final decision has been made on the final make-up of the scheme,
but it is one of the issues about loose stamps that will be applied
over the top. There will need to be some control over those and
to be clear to the consumer what they are looking at. I think
the key is the nature of the design of the stamps so that they
can recognise that as being tax paid.
Q399 Mr Walter: I wanted to come back
on this whole question of the design. The Committee went up to
Scotland earlier this week for a meeting with the Scotch Whisky
Association and others there. There were a number of problems
that they raised with us. You have suggested that the stamp may
incorporate a hologram and that there should be just one printer
who would be responsible for producing that stamp/hologram. Is
that correct?
John Healey: Back in Budget 2004
we suggested, as our starting point, that is what could be possible.
We were concerned to make sure that the design of the tax stamp
incorporated sufficiently strong security features and that it
was difficult to reproduce and to forge. Part of the discussions
we are having with the industry at the moment is looking at the
practicalities of what sensible security and design features may
be incorporated into the stamp and, also, given that, what are
the sensible arrangements for having those printed. The industry,
as they may have told the Committee, have recently suggested to
us that their own system of security printers could handle the
sort of arrangements that we are looking to put in place, so we
are looking very hard at that at the moment. As Paul Gerrard said
earlier on, we have not made a final decision on that, but it
is something we are discussing very closely with the industry.
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