1 CUSTOMS' STRATEGY FOR TACKLING
OILS FRAUD
1. In 2003 Customs estimated that they lost excise
revenue totalling £1,250 million due from fuel duties (largely
petrol and diesel) as a result of fraud and smuggling and legitimate
cross-border shopping in Great Britain.[10]
Most of these losses arose from the illicit use of diesel, where
fraudsters use rebated fuel oil for use in road vehicles. Losses
attributable to oils fraud are estimated by Customs in absolute
terms and as a percentage of the total market. But the data they
need to produce these estimates are only available 8 months after
the end of the calendar year to which they relate.[11]
2. Customs first estimated these revenue losses in
Great Britain in 1999 and put the total loss at £700 million.
The estimated amount increased for 2000 and has since shown a
small reduction (Figure 1).[12]
Figure 1: Estimated Losses from Diesel Fraud
3. Customs calculate an estimated 'tax gap' for duty
payable on hydrocarbon oils. The calculation is based on annual
consumption data which show the quantity of refined fuel which
is released on to the UK market, and legitimate deliveries of
fuel made to filling stations. Customs use this data to work out
the total revenues that should be collected, and from this subtract
the total receipts. After an adjustment in respect of legitimate
cross-border shopping, Customs are able to produce an estimate
of total losses due to fraud and smuggling.
4. Using the 'tax gap' methodology to estimate fraud
provides a good macro view of oils fraud. But the breakdown of
fraud into its component parts is not so well understood. Customs
believe there are three main areas of fraud: the improper use
of rebated red diesel in road vehicles (usually heating oil or
diesel provided for agricultural use) by mixing it with ordinary
duty-paid diesel; laundering rebated diesel to remove the marker
dyes that it contains; and most commonly, the diversion of rebated
diesel intended for agricultural use to road vehicles required
to use duty-paid diesel. Customs have not, however, been able
to break down the revenue losses between smuggling and diversion
and cannot, therefore, provide an accurate picture of the risks
posed by diesel smuggling, or the scale of the smuggling problem.[13]
5. Intelligence underpins Customs' approach to dealing
with diesel fraud, and informs the deployment and targeting of
resources. Customs disseminate best practice guidance and lessons
learned to all staff to improve the standard of work across the
United Kingdom.[14] Customs
have management information available which describes not only
the overall amount of intelligence material produced by region
('quantity'), but also the ratio of successful hits resulting
from this information ('quality'). In identifying and disseminating
best practice, it is important that both elements are fully considered.[15]
6. Customs have not yet agreed with the trade a mechanism
for encouraging more traders to file electronically the returns
required under the Registered Dealers Scheme, or set a deadline
for the adoption of full electronic submission. The Federation
of Petroleum Suppliers has explained that its members prefer to
submit hard copies of the information required. But Customs need
more staff to process such information.[16]
Customs have applied considerable pressure on VAT registered traders
to use electronic lodgement as a way of delivering efficiency
gains. Similar pressure on registered oils dealers leading to
improved take up of electronic submission would also contribute
towards these efficiency targets through the reduction in staff
resources needed to process and input returns.[17]
7. Customs' Regulatory Impact Assessment for the
introduction of the Registered Dealers Scheme was based on an
imperfect understanding of the industry and its associated risks.
The assessment was flawed, with a consequent risk that Customs
failed to consider properly the Scheme's impact on traders. They
estimated that some 1,200 traders would be required to register
under the Scheme, but in practice nearly four times as many have
registered.[18]
8. The outcome of prosecutions is an indicator of
the effectiveness of Customs' Strategy in tackling oils fraud.
Customs focus their prosecution activity where they believe it
will be most effective. The number of convictions has increased,
with 21 in 2003-04 for perpetrators of oils fraud, compared to
11 in 2002-03, but this still seems a very low number for the
level of fraud that is taking place.[19]
The average length of sentence for oils fraud has increased from
11½ months in 2002-03 to 15 months in 2003-04. Customs' prosecution
strategy aims to publicise penalties and punishments to provide
a deterrent effect for other potential fraudsters.
10 HM Customs and Excise: Annual Report and Accounts
2003-04 (HC 119, 2004-05), p145, Appendix B Back
11
ibid, para 2.52 Back
12
C&AG's Report, para 2.2 Back
13
Qq 104, 138 Back
14
C&AG's Report, para 2.49 Back
15
Qq 15, 18, 24 Back
16
C&AG's Report, para 2.27 Back
17
Qq 4, 58-59 Back
18
Qq 28, 49, 55 Back
19
C&AG's Report, para 2.50 Back
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