24. Supplementary written evidence from
HM Revenue & Customs
Thank you for your letter of 30 March requesting
further information following the evidence session on 22 March.
Set out below are responses to the questions
you asked in your letter and those areas where we promised in
our evidence session to provide further information.
What use does HMRC make of information from personal
taxation regimes and investigations in combating organised crime?
Does S20 of CRCA place a significant restriction on the flow of
information between HMRC and the CAB in the Republic?
HMRC recognise the importance of providing other
law enforcement agencies with information and intelligence that
is needed for the prevention and detection of crime. The Commissioners
of Revenue and Customs Act 2005 also recognises this in the provisions
which otherwise impose a duty of confidentiality on us. S19 of
the Act specifically allows us to disclose information for the
purpose of criminal investigations or proceedings for matters
where we have functions (for example in a case being prosecuted
jointly between HMRC and a police force). S20 of the Act provides
that the Commissioners may direct that information may be disclosed
where it is the public interest to do so and it is for the purposes
of the prevention and detection of crime. S19 of the Anti Terrorism
Crime & Security Act also provides a legal gateway for HMRC
to disclose information to law enforcement agencies where they
are considering commencing a criminal investigation or criminal
proceedings.
HMRC is therefore ready, willing and able to
provide other law enforcement agencies with information needed
for the prevention and detection of crime and that includes information
from former Inland Revenue systems. We work closely with PSNI
and have arrangements with them to provide information that they
need and we can and do bring relevant information to the table
in joint working situations.
The question recognises, and Mr Toon said in
his response to Mr Grogan (Q353) that there have been some difficulties
in getting information to the CAB following the commencement of
CRCA. This is because the public interest provisions in CRCA are
drawn very tightly and may prevent us from disclosing information
where another agency is conducting an investigation with a view
to civil as opposed to criminal proceedings.
HMRC values its relationship with CAB and is
presently seeking advice on the application of CRCA in respect
of civil cases involving the recovery of assets obtained through
criminal conduct. It is possible that we will need to regulate
to close any gap that does exist.
What assessment has HMRC made of the IMC's recommendations
to introduce a licensing regime for petrol retailers which would
enable the closure of businesses that have engaged in the illicit
fuel trade, and would this model be applicable to other sectors,
such as the licensed trade or construction industry?
The licensing of fuel retail sites throughout
the UK is the responsibility of other agencies within Government.
However, HMRC believe that a more effective, up-to-date and robust
licensing regime would provide a number of additional benefits
in tackling illicit oil supply. Most importantly, it would provide:
— comprehensive and auditable records
of deliveries, stock and sales which would allow HMRC to be more
effective in identifying illegal fuel itself because HMRC could:
— carry out complete reconciliations
and identify either off-record deliveries;
— "follow" individual
deliveries through records to establish their duty-status and
the supplier; and
— apply sanctions such as fines,
duty assessments and prosecutions based on documentary evidence
in the records;
— opportunities when HMRC identify
activity which contravenes the conditions of their petroleum licence,
alongside illegal fuel supplies, to inform this contravention
to the Licensing Authority who could take action.
In terms of the licensing of fuel retail sites
we note the recent announcement by the Northern Ireland Office
of the consultation on this subject at the end of April 2006.
The different nature of sectors in industry
means that there will be different solutions for tackling revenue
loss and it is, therefore, difficult to apply a single model across
such diverse sectors. However, where licensing regimes take into
account involvement in illegal trade as one of the factors which
can decide the granting of such licences, then such a model provides
another potential intervention for HMRC when they detect illicit
activity.
What has been the impact of the Registered Dealers
in Controlled Oils Scheme (RDCO) in Northern Ireland? Could it
be more effective?
The RDCO scheme was introduced in 2003 as an
integral part of the UK Oils Strategy (which had been launched
the previous year in 2002) and was designed to make the supply
chain for rebated diesel fuels—marked gas oil (red diesel)
and marked kerosene—more transparent and controllable. The
key elements of the RDCO scheme are that:
— any individual or business selling
red diesel or kerosene must be authorised by HM Revenue and Customs;
— continued authorisation by HM Revenue
and Customs is dependent upon compliance with two key elements
of the scheme:
— making monthly returns of how
much and, with certain de minimis limits, to whom they
have sold red diesel and kerosene has been sold; and
— taking reasonable steps to ensure
that they do not sell red diesel or kerosene to those who do not
have a legitimate need.
The UK Oils Strategy is a multi-faceted strategy
and includes not just regulatory control but also operational
measures. It is, therefore, very difficult to assess the specific
contribution of any one element such as the RDCO scheme. However,
since the introduction of the UK Oils Strategy:
— the GB illicit diesel market has
reduced from 6% in 2001, before the strategy's reduction, to 4%
in 2004—a reduction of 33%;
— the revenue loss in the diesel sector
in Northern Ireland as a result of both shopping and fraud has
reduced from 58% of the market in 2002 to 42% in 2004—a
reduction of 28%.
Our assessment, based on a range of information
and intelligence sources, is that the RDCO scheme has made a critical
contribution to the reduction in diesel fraud levels, including
the fraud element of the losses in Northern Ireland, because it
has made it much harder to source red diesel and kerosene as the
supply chain has become more transparent and the RDCO population
as a whole is much harder to exploit.
However, the RDCO scheme is still a relatively
young regime; it only went live in April 2003. As HMRC understands
better the risk that individual RDCOs pose and as RDCOs themselves
understand ever better the requirements of the regime, we expect
to be able to target more precisely those RDCOs who pose the greatest
risk. This ability to target risk more effectively using the appropriate
sanctions to either ensure compliance or remove those unwilling
to be compliant from the scheme will further impact on the ability
of criminality to source red diesel and kerosene.
What additional measures could HMRC propose to
help enforcement agencies tackle organised crime?
HMRC's experience from its strategies to tackle,
as examples, cigarette, oils, and VAT MTIC fraud is that tackling
organised crime needs an approach which looks at all aspects of
the illicit activity in an "end-to-end" way using all
the interventions, both civil and criminal, available to frustrate,
disrupt, prevent and stop organised criminal attacks on the tax
regimes.
Moreover, our experience in Northern Ireland
and overseas is that co-operation outside organisational and national
boundaries allows law enforcement to tackle organised criminality
far more effectively. Certainly, our experience in tackling VAT
MTIC fraud, cigarette smuggling and oils fraud illustrates this.
Is there scope for oils companies to use or develop
tracers or markers that could be added to rebated fuel which would
be more difficult to remove through laundering? Is there scope
for oil companies to use technology to mark their authentic delivery
vehicles that would help in identifying tankers using fake livery?
HMRC have an ongoing programme of examining
marker technology in order to counter the problem of laundering
by making the statutory markers more resilient. In addition, we
also examine continually testing technology which will allow us
to be ever more precise in identifying illegal fuel. What scope
the oil companies have to use or to develop their own markers
in addition to those statutory markers is clearly a matter for
the oil companies.
The situation as regards tanker liveries is
less clear. The legitimate oil distribution industry has changed
over recent years, with more third party hauliers being used to
deliver oil; these can be in plain, white tankers which may only
carry a small placard saying who they are on hire to. Moreover,
there has always been interchange between different oil companies
which could see a marked tanker from one company delivering oil
to a franchised station of a different company.
HMRC do detect cloned vehicles engaged in oils
fraud but it is a rare occurrence and, of course, cloned vehicles
can be utilised in other frauds outside oils.
The Committee recently heard that pre-1993 protection
money was clawed back as a legitimate tax deduction; since that
time it has no longer been the case. What effect has this change
since 1993 had and in particular what kind of impact has this
had? How much was being tax deducted in the first place? What
effect has it had on businesses and on the people who are carrying
out the extortion? Have they changed the levels that they would
seek to extort from businesses because it was a taxable expense
and now it is not? (Question 332)
Businesses may deduct from their operating profits
any business costs incurred before any liability to Income or
Corporation tax is calculated. Before 1993, the legality of a
payment was not a factor in deciding whether expenditure could
be deducted in computing the profits of a trade. The only test
was whether expenditure is incurred wholly and exclusively for
the purposes of the trade. It was possible that a payment such
as protection money paid by a trader to protect his business (but
not his own person or his family) would have qualified for a deduction
for tax purposes.
In relation to expenditure incurred after 10
June 1993, Section 577A of the Income and Corporation Taxes Act
1988 (now for income tax purposes, Section 55 Income Tax (Trading
and Other Income) Act 2005) denies tax relief for payments the
making of which constitutes a criminal offence.
This change was made to ensure that those guilty
of certain criminal offences are not indirectly subsidised through
the tax system ie payments tainted with criminality should not
be allowed a tax deduction. The change was not focussed wholly
on protection rackets in Northern Ireland.
HMRC have no information on the impact of that
change on business.
Northern Ireland Results—oils and cigarettes
(Question 349)
The table below sets out the volume of cigarettes
and HRT in Northern Ireland seized in 2004-05, the most recent
year for which details have been published. However, as explained
in evidence this does not equate to the number of cigarettes seized
which were intended for the Northern Ireland market as interventions
made elsewhere in the UK and internationally would have had an
impact on the illicit tobacco market in Northern Ireland.
| 2004-05 |
| Cigarettes seized | 19.7m sticks
|
| HRT seized | 1,121 kilos |
| |
The table below sets out operational outputs in the oils
sector for Northern Ireland in 2004-05, the most recent year for
which details have been published.
| | 2004-05 |
| Vehicles Challenged | 19,007
|
| Vehicles Detected on Illegal Fuel | 891
|
| Laundering Plants Broken Up | 18
|
| Gangs Dismantled/Disrupted | 5
|
| Fuel Seized | 1.78m litres |
| |
Results for 2005-06 will be published as part of HM Revenue
and Customs Annual Report for 2005-06.
Paul Gerrard
Deputy Head of Enforcement
30 April 2006
| 
