8. Written evidence from HM Revenue
and Customs
1. The Government is committed to tackling
tax fraud in order to protect the revenue required for investment
in public services, to protect legitimate business from being
undermined by dishonest competition and to protect society from
organised crime.
2. This memorandum provides information
on the role and responsibilities of HM Revenue and Customs (paragraphs
3-5), the threat posed by organised crime to those responsibilities
in Northern Ireland (paragraphs 6-9), more detail on HM Revenue
and Customs priorities in Northern Ireland—oils fraud (paragraphs
11-18) and tobacco smuggling (paragraphs 19-30)—and HM Revenue
and Customs" role in the Organised Crime Task Force (paragraphs
31-33).
HM REVENUE AND
CUSTOMS
3. HM Revenue and Customs was established
on 18 April 2005 through the merger of HM Customs and Excise and
the Inland Revenue.
4. The new department is responsible for
collecting the bulk of tax revenue as well as paying tax credits
and child benefit, and strengthening the UK's frontiers. As a
result, HM Revenue and Customs manage:
— Income, Corporation, Capital Gains,
Inheritance, Insurance Premium, Stamp, Land and Petroleum Revenue
Taxes;
— Environmental taxes: climate change
and aggregates levy and landfill tax;
— Customs Duties and frontier protection;
— Child Benefit and the Child Trust
Fund;
— Enforcement of the National Minimum
Wage; and
— Recovery of Student Loan repayments.
5. The aim of HM Revenue and Customs is
to administer the tax and customs control systems fairly and efficiently
and make it as easy as possible for individuals and businesses
to understand and comply with their obligations and receive their
tax credit and other entitlements. Our mission is to provide an
increasingly efficient and high quality service that:
— helps people and businesses understand
and meet their tax obligations and understand and receive their
entitlements;
— strengthens frontier protection;
and
— tackles those who do not comply.
THREATS TO
THE UK TAX
SYSTEM FROM
ORGANISED CRIME
IN NORTHERN
IRELAND
6. From a United Kingdom perspective, it
is clear from our everyday work that a number of the regimes,
which we are responsible for are subject to concerted attack by
organised criminality; in particular:
— the principal excise regimes—tobacco,
alcohol and road fuels; and
— value added tax (VAT) through Missing
Trader fraud (MTIC).
7. We also believe that many serious and
organised criminals do not comply with their direct tax obligations
and, as a consequence, do not pay the right amount of direct tax.
HM Revenue and Customs is continuing to work with others in law
enforcement to tackle serious offences, including direct tax evasion.
For example, this has already resulted in several cases of criminal
prosecution for tax evasion in Northern Ireland, in which the
former Inland Revenue worked with the Police Service of Northern
Ireland and others, in cases in which tax evasion was suspected
of being linked to other serious offences.
8. In Northern Ireland specifically, the
most serious attacks on the tax regimes involve cigarette smuggling
and road fuels fraud; set out below are further details of the
nature and size of these threats, HM Revenue and Customs' approach
to tackling these threats and the impact to date on them. It is
clear, however, from our operational activity and intelligence
that Northern Ireland-based criminality are important players
in the illegal oils and cigarettes market throughout the United
Kingdom. Their activity and influence extend beyond supplying
illegal markets in Northern Ireland and encompasses involvement
in such criminal activity throughout the United Kingdom.
9. It is important to note that since 2000,
HM Revenue and Customs (then HM Customs and Excise) have taken
a new strategic approach to tackling indirect tax fraud. This
strategic approach has five 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. The latest estimates of
indirect tax losses, and the methodologies behind them, were published
as part of the Pre-Budget report in December 2005 in the "Measuring
Indirect Tax Losses" document;
— 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.
10. Finally, the creation of HM Revenue
and Customs provides an opportunity in tackling organised criminality,
as in other areas, to work in a co-ordinated way across direct
and indirect taxes, pooling the information, expertise and resources
available across HM Revenue and Customs to gain the maximum impact
against those who engage in serious criminal activity.
Oils Fraud
11. The nature of oils fraud in Northern
Ireland centres around two specific kinds of fraud—rebated
fuels fraud and road fuel smuggling—but both are driven
principally by organised criminality.
12. Rebated fuels—red diesel and kerosene—along
with oils used of industrial processes known as "tied oils"
can be used in road fuel frauds in three ways:
— 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.
13. In Great Britain, rebated fuels fraud
is the single, biggest threat in terms of oils fraud. Unlike the
rest of Great Britain, in Northern Ireland road fuel smuggling
is also present in significant volumes; that is the smuggling
of road fuel duty paid in another member state, in this case the
Republic of Ireland, into Northern Ireland.
14. Finally, it is important to note that
while we believe the majority of illicit fuel is not sold through
legitimate filling stations in Great Britain, our latest assessment
is that a very significant proportion of the illicit fuel sold
in Northern Ireland is sold through retail filling stations.
15. At present, we cannot identify the amount
of revenue lost from oils fraud in Northern Ireland. However,
we can successfully estimate the amount of revenue lost from all
forms of oils fraud and cross-border shopping. Our latest estimates
are set out in the table below:
| 2000 | 2001
| 2002 | 2003 |
2004 |
Diesel Revenue | £230m
| £215m | £210m |
£220m | £180m |
| Diesel Market Share | 62% |
58% | 55% | 52% |
42% |
| Petrol Revenue | £90m |
£75m | £75m | £85m
| £65m |
| Petrol Market Share | 23% |
20% | 20% | 23% |
18% |
| | |
| | |
16. Customs have had in place since 2000 a developing
strategy to tackle oils fraud. This strategy is based on three
initiatives:
— beginning in 2000, increasing the number of officers
engaged in tackling oils fraud from 25 to over 160; this level
of resource has been maintained since 2001;
— implementing in Northern Ireland, as elsewhere,
the UK Oils strategy which is principally focused on tackling
rebated fuels fraud which includes the introduction of a regulatory
regime to control the sale of rebated fuels, the creation of a
new central intelligence unit to direct all operational activity,
additional funding for new investigation, control, testing and
intelligence officers to tackle oils fraud and a hard-hitting
publicity campaign to highlight the risks of illegal fuel use;
and
— leading multi-agency working in the road fuels
sector, working with other agencies under the umbrella of the
Organised Crime Task Force to maximise the impact of Government
intervention in the whole road fuel sector.
17. This strategy has led us to some specific operational
tactics to tackle oils fraud, In particular, we have targeted
the organised crime groups behind oils fraud and between April
2000 and March 2004 we have dismantled 13 criminal organisations
in Northern Ireland engaged in oils fraud, broken up 65 laundering
and mixing plants in Northern Ireland and seized over 8 million
litres of illegal fuel. HM Revenue and Customs' latest operational
results will be published shortly as part of the 2004/2005 Annual
Report.
18. The strategy HM Revenue and Customs have developed
and put into place since 2000 has resulted in a reducing share
of the Northern Ireland market which is not UK-duty paid; a reduction
of 22% and 32% for petrol and diesel respectively. It is also
worth noting that between 1996 and 2000 the volume of legitimate
road fuel declined steeply year on year by around 36% in total.
However, following the introduction of HM Revenue and Customs'
strategy in 2000 we have seen this downward trend reversed year
on year with volumes now up 28% in 2004 compared to 2000.
Cigarette Smuggling
19. 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.
20. 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.
21. When HM Revenue and 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 2003-04 54% of seized cigarettes were counterfeit compared
to 15% in 2001-02.
22. The table below sets out HM Revenue and Customs'
latest estimates of the size of the illicit cigarette market in
the United Kingdom as a whole, including Northern Ireland. It
is not possible to identify the size of the illicit market in
Northern Ireland, or any particular region of the United Kingdom,
separately.
| 2000-01 | 2001-02
| 2002-03 | 2003-04
|
| Revenue Loss | £2.7bn |
£2.5bn | £2.0bn | £2.2bn
|
| Illicit Market Share | 21% |
20% | 15% | 16%
|
| | |
| |
23. The Government launched its Tackling Tobacco Smuggling
strategy in March 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.
24. 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.
25. The strategy launched in March 2000 included an increase
in the number of officers deployed to tackle cigarette smuggling
by almost 1000 in the UK and overseas, the introduction of a national
network of x-ray scanners, working closely with tobacco manufacturers
to suppress the availability of UK manufactured cigarettes to
smugglers abroad and the new legislative measures which introduced
"UK Duty Paid" fiscal marks on tobacco products to help
prevent, detect and deter the handling, distribution, sale and
purchase of smuggled tobacco.
26. The strategy has been developed and refreshed since
its launch in March 2000 both in anticipation of and in response
to changing patterns of behaviour as the fraudsters react to our
efforts. Most recently the Government has announced in the Pre-Budget
Report a number of initiatives to enhance the strategy to tackle
tobacco smuggling including:
— agreeing improved Memoranda of Understanding with
UK tobacco manufacturers to restrict the availability of cigarettes
to smugglers, and to tackle the problem of counterfeit material,
including consultation on options for introducing covert markings
for the UK tobacco retail market;
— consulting with the industry on complementary
legislation to be introduced in Finance Bill 2006, aimed at preventing
organised criminal gangs from exploiting weaknesses in supply
chains for tobacco products;
— deploying 200 staff specifically to tackle the
smuggling of hand-rolling tobacco; and
— reviewing operational activities to deliver maximum
impact against the growing threat from counterfeit tobacco products
smuggling.
27. 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 the Tackling Tobacco Smuggling strategy we have managed
to slow, stabilise and reverse the growth in tobacco smuggling,
reducing the illicit cigarette market share to 16% in 2003-04,
against a target of 20%; see the table below.
| 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 | 15 | 16 |
n/a | n/a |
| | |
| | | |
28. The illicit cigarette market in Northern Ireland
has the same characteristics as in the rest of the United Kingdom.
Moreover, it is important to note that, in common with Great Britain,
seizures made in Northern Ireland are not necessarily destined
for the Northern Ireland market.
29. Our activity in Northern Ireland, as in the rest
of the United Kingdom, has been focused on strategic aims and
operational tactics. The examples below illustrate some of the
particular operations we have run in Northern Ireland highlighting
the nature and seriousness of the criminality involved:
— in November 2005, HM Revenue and Customs officers
detected 2.94 million Superkings cigarettes on board a refrigerated
trailer within the confines of Belfast Port attempting to board
a ferry to Stranraer. The driver claimed he was taking the consignment
of "vegetables" to Manchester. This particular consignment
had originated in Belgium and upon entry to the Port of Rosslare
transited through the Republic of Ireland before being detected
in Belfast. The driver was arrested and charged by HM Revenue
and Customs and is awaiting trial.
— in November 2005 the Police Service of Northern
Ireland and HM Revenue and Customs detected some 15.4 million
mixed brand cigarettes in one site in North Armagh. Evidence seized
at the site indicates the source of the cigarettes is Spain. Three
men were arrested at the scene, all three were charged. One of
these individuals was granted bail with substantial sureties required
and the other two are presently remanded in custody.
30. As these illustrations demonstrate, serious and organised
criminality are behind cigarette smuggling and our response must
utilise all the tools available to HM Revenue and Customs.
The Organised Crime Task Force
31. All of our work in Northern Ireland to tackle organised
criminality attacking the tax regimes we are responsible for,
especially those attacks on our priority areas of cigarette smuggling
and oils fraud, is done as part of the multi-agency approach championed
by the Organised Crime Task Force.
32. HM Revenue and Customs is a central element of the
Organised Crime Task Force and is fully committed to ensuring
that law enforcement agencies work together. HM Revenue and Customs
have seen how through a multi-agency approach of sharing information,
supporting activity of others and working together in joint operations,
we can make a greater impact on the problems that we face.
33. In particular, our multi-agency work on oils fraud,
where we work very closely with a range of Government agencies,
gives us clear evidence of the additional success such an approach
brings.
HM Revenue and Customs
December 2005
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