Select Committee on Public Accounts Fifteenth Report


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


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 6 December 2005