Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 2 FEBRUARY 2005
HM CUSTOMS &
EXCISE
Q40 Mr Simon: Sorry, what does that
mean? Why has everybody else got infinite IT capacity but you
have a set amount?
Mr Varney: I think everyone has
a set amount in some way. We have a budget and we have manpower
and resources; and we have a number of system changes we wish
to make in a year, and we have to prioritise those for where we
put the resources.
Q41 Mr Simon: So it is a resource
constraint.
Mr Varney: Yes.
Q42 Mr Simon: If the Government were
to allocate more money to you for computers, this would not be
happening.
Mr Varney: I would have another
level of resource constraint. This budget may still be resource
constrained. I do not think the Government could allocate enough
money to do everything that we wanted to do on an IT basis. The
demand would expand to exceed the supply.
Q43 Mr Simon: Is there a technical
constraint or is it only a resource restraint?
Mr Varney: No, it is a resource
constraint. It is a question of priorities. We were at the early
stage of a strategy that was in a sense world leading and leading
edge. As Mike has described, we have used a lot of the information
we have got in order to progress the strategy. As we have got
more experience of it, we will then have proposals for what IT
system changes we want to make, and they will go through the process
of asking: is this a priority as against the wider priorities
of HMRC?
Mr Gray: Can I add a bit of context
on this because your original question was on how much we focus
on risk within a trade sector, and it is a dimension of overall
risk that we are keen to put more weight on. If we go back a few
years, that was not seen in the overall picture of risks as being
perhaps of such potential significance as we now see it. What
we are looking to do is shift resources in that way and part of
the IT issue is to be able to make the adaptations to our systems
so that we can make better use of information most of which is
already sitting within our systems. How can we join it up more
effectively to shine the light, as you want us to do, on trade
sectors.
Q44 Mr Simon: Can I just be clear,
going back to the initial remarks: are you saying that if an enterprise
files a VAT return which is significantly at variance with what
an intelligent model would expect from industry comparators, that
what you described as the consistent and successful tests that
you currently effectively manually do, the validity and credibility
checks, would be bound to pick that up, or would be very likely
to pick that up?
Mr Eland: They are not manual
checks; they are computer checks built in and the parameters set
within the system. The question is the degree of sophistication.
We cannot do a sophisticated analysis of whether a company is
performing as you would expect a company of that size to do within
a trade sector. We do not have the—
Q45 Mr Simon: That is what I am asking
you about. I am asking about what you can do.
Mr Eland: We cannot do that sophisticated
analysis, but we can look at the pattern of that person's return
and spot deviances from it, and so we can do a certain amount
of this, but not all of that.
Q46 Mr Simon: I was not asking you
about whether you could compare a person's return with their previous
term; I was asking you about industry comparators. You said that
you can do that, and that is done very successfully, but now you
are saying you cannot do it at all! I do not understand. Can you
do that, or not?
Mr Eland: We cannot do sophisticated
comparisons to what a company of a particular size within a—
Q47 Mr Simon: Can you do it in an
unsophisticated way?
Mr Eland: We can do some crude
sorts of checks, yes.
Q48 Mr Simon: Is that done, as I
said, manually?
Mr Eland: No, they are done by
building in parameters into the computer system.
Mr Simon: I have to say, I do not feel
greatly more informed now than when we started, and, in all humility,
I am not stupid, so it cannot just be me! Thank you anyway.
Chairman: Perhaps you could try and inform
Mr Allan now!
Q49 Mr Allan: I want to go back to
oil and the point that Mr Williams raised about the regulatory
impact assessment. Paragraph 2.20 tells us that you put forward
a regulatory impact system when asked to set a scheme up, saying
there would be 1,200 traders registered, and it turns out that
you now have 4,700. Is that a major failure, Mr Eland—and
I address that to you because you were responsible at the time,
I assume? From Parliament's point of view, we make regulatory
impact assessments and make decisions on the basis of them. Do
you think it is a major failure that you did so badly and get
that one wrong?
Mr Eland: We clearly did misunderstand
one particular part of the scheme, yes. We did not realise that
particular groups that were subsequently identified should be
in at the outset. We started with the most immediate groups that
we knew would be involved and talked to the trade associations
that those groups are represented by, to get a feel for the sector.
This was a new sector that we had not had any dealings with initially
before.
Q50 Mr Allan: You had not had any
dealings with it before, admittedly, but you were responsible
for collecting the duty—
Mr Eland: No, and this is the
point. We collect the duty at the top point in the chain, but
this is bringing in people further down the chain who are in the
distribution network and who are being brought in to the scheme
to enable us to build up an intelligence picture of the distribution
network. The duty is paid at an earlier point.
Q51 Mr Allan: But you have always
been responsible for enforcement against people in the chain.
That is not a new responsibility, is it, if this is where the
fraud is happening?
Mr Eland: We have always been
responsible for tackling fraud but that can occur at any level
of the chain. Our understanding of the industry was very much
focused at the top point.
Q52 Mr Allan: Where do you think
the fraud occurs? Do you think it occurs at the top point or down—
Mr Eland: No, we believe it occurs,
obviously, at lower levels.
Q53 Mr Allan: And those are the levels
you did not understand.
Mr Eland: This is part of building
up the picture. The fraud is a recent phenomenon, and as we have
developed our means of tackling it so we have tried to improve
our understanding of the industry and distribution networks, and
to bring the next level down into some sort of regulatory control.
Mr Gray: An important point here
is that although clearly the absolute numbers proved to be very
much higher because of these types of activity, the main category
we missed was activities where fuel distribution is in most cases
a smaller and secondary part of the business activity. Okay, we
should have spotted that more clearly earlier on. In terms of
assessing the overall risk right through the distribution network,
the issue we are now looking to focus on, having understood better
the nature of the distribution network, is our understanding of
where the risk lies. Part of the post implementation review of
this exercise will be to look at these large numbers of small
secondary suppliers to see if they represent a risk, and whether
we are adding excessive burdens to them.
Q54 Mr Allan: Where are you in the
assessment now? You have registered 4,700 dealers. To what extent
are the dealers complicit in the fraud, and how many of them are
doing it? You must have some kind of working assumption to understand
who you are talking about as doing the fraud. This is 6%, 850
million a year—big sums of money, and you must have some
idea who is doing it.
Mr Gray: My sense is that the
greater part is in the larger operators rather than in these small
secondary areas. I hesitate to offer a firm opinion on that, because
this is work in progress as we gather this information and try
to assess whether there is significant risk in these large numbers
of smaller operators.
Mr Varney: I used to work in the
oil industry and I used to be responsible for an oil company in
the UK. It is not in the interests of the big oil companies for
this market to exist with a large amount of fraud because basically
it is tax-free diesel competing against taxed diesel. Whilst it
is unfortunate that we did not get the numbers, it is also a reflection
of the state of knowledge in the industry about what was going
on.
Q55 Mr Allan: That is what is making
me nervous. You are trying to police something and you do not
even know what it is you are trying to police. That is what it
sounds like.
Mr Gray: Even after consultation
with trade bodies we did not unearth the scale of the numbers.
Mr Varney: There are lots of bits
where we are combating fraud or serious evasion, where we start
with knowing there is a problem but we are not quite sure how
big it is or what the nature of it is. If you look at missing
trader intra-community, we have quite a lot of knowledge which
we have built up. We tend not to share it because we do not want
people taking advantage of that knowledge to do more mischief.
Particularly in these new approaches, we are learning about the
scale of the problem. We start with something we think is right,
and it turns out not to be correct, and in this case we under-estimated
the complexity of the industry.
Q56 Mr Allan: Mr Varney, if we now
have registered all the dealers, is it your target that 100% of
the dealers that you have registered should not be involved in
fraud; in other words, is it realistic to assume that if you have
registered somebody and you are policing them properly, there
should be no fraud taking place at that level?
Mr Varney: One of the penalties
of having a registered dealer scheme is that if they are not complying
with their responsibilities, they can be de-registered.
Q57 Mr Allan: Have you de-registered
any so far?
Mr Varney: Not so far. In regard
to the Inland Revenue, let me say again with regard to Customs
& Excise: the dilemma, when we introduced the new approach
is to try in the first year or so to get as much understanding
of the new approach so we give priority to explaining and persuading,
and then we move to harder enforcement. You see that we have started
to step up our enforcement activities.[3]
Mr Eland: Although we have not
de-registered anybody, we have prevented people becoming registered.
About 40 or 50 people have been refused because they have criminal
records or whatever, and so we are able to stop people coming
in, and we have this sanction for non-compliance, as the Chairman
has explained.
Q58 Mr Allan: In paragraph 2.27 we
are told that the institute body, the Federation of Petroleum
Suppliers, pointed to cultural differences whereby traders appeared
to be more comfortable supplying data in hard copy, and they say
that they have systems for submitting returns electronically but
choose not to use them. Are you being a soft touch here? Can they
really stand up and say, "we do not like doing it electronically
and therefore we will keep using the system that is a real pain
and less enforceable"? That is okay, is it, and we can leave
them? There are cultural differences, and it is an extraordinary—
Mr Eland: Mr Chairman, we are
trying to bring in a new scheme with a degree of soft touch because
the great majority of these people are legitimate businesses.
We do not want to put excessive cost on them, and we have been
trying to do that in a sensible and sympathetic manner. Clearly,
this is something we are not just going to stop at; we are talking
to businesses and to the trade associations. We want to get voluntary
agreement that it should be submitted electronically.
Q59 Mr Allan: You are seeking for
electronic filing of VAT returns.
Mr Varney: Yes.
3 Note by witness: Up to the end of 2004 four
traders have had their registration revoked due to the risk they
pose to the revenue. Back
| 
