Select Committee on Treasury Minutes of Evidence


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.


1   See Ev 137 Back


 
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