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Session 2005 - 06
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Standing Committee Debates

Third Standing Committee on Delegated Legislation

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The Committee consisted of the following Members:

Chairman: John Bercow

†Afriyie, Adam (Windsor) (Con)
†Brown, Mr. Nicholas (Newcastle upon Tyne, East and Wallsend) (Lab)
†Cable, Dr. Vincent (Twickenham) (LD)
†Clapham, Mr. Michael (Barnsley, West and Penistone) (Lab)
†Cohen, Harry (Leyton and Wanstead) (Lab)
†Dunne, Mr. Philip (Ludlow) (Con)
†Goodman, Mr. Paul (Wycombe) (Con)
Green, Damian (Ashford) (Con)
†Healey, John (Financial Secretary to the Treasury)
†Kramer, Susan (Richmond Park) (LD)
†Mahmood, Mr. Khalid (Birmingham, Perry Barr) (Lab)
†Mudie, Mr. George (Leeds, East) (Lab)
†Pound, Stephen (Ealing, North) (Lab)
†Robinson, Mr. Geoffrey (Coventry, North-West) (Lab)
Selous, Andrew (South-West Bedfordshire) (Con)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
†Wright, David (Telford) (Lab)
Glenn McKee, Geoffrey Farrar, Committee Clerks

† attended the Committee

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Monday 9 January 2006

[John Bercow in the Chair]

Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils etc.) (Amendment)
Order 2005

4.30 pm

The Financial Secretary to the Treasury (John Healey): I beg to move,

    That the Committee has considered the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils etc.) (Amendment) Order 2005 (S.I. 2005, No. 3330).

Welcome to the Chair, Mr. Bercow. We have served together on many Committees, particularly in the early days after we were both elected in 1997, but this is the first time that I have had the pleasure of serving under your chairmanship. May I also welcome the hon. Member for Wycombe (Mr. Goodman)? This is his first duty as a shadow Treasury Minister, and I look forward to the debates ahead. I also welcome the hon. Member for Twickenham (Dr. Cable). It is good that he can join us; he has had a very busy few days. Above all, I welcome my hon. Friends, whose interest in this subject I very much appreciate.

The order gives effect to the decision of my right hon. Friend the Chancellor, announced in his pre-Budget report on 5 December, to narrow the duty differential between rebated oils and the main road fuel oils by 1.22p per litre. That is achieved by increasing the effective duty rate for rebated oils by that amount, and by the Chancellor’s decision to continue the freeze on the main road fuels until the 2006 Budget.

The change affects four oil types: rebated gas oil, which is better known as red diesel; fuel oil; kerosene that is used as motor fuel; and light oil that is used as furnace fuel. Some members of the Committee will remember that the rise of 1.22p per litre was originally legislated for in the Finance Act that followed the 2005 Budget, to give effect to that rise and to an inflation-only increase in duty on the main road fuels from 1 September 2005.

The Committee will recall, however, that as a result of the continuing high risk of price volatility, we decided in July 2005 not to go ahead with the planned increases in duty, which we announced in the Budget, on 1 September, but to review the position in the pre-Budget report.

The Finance Act had already given legal effect to the duty rates announced in the 2005 Budget, so we made the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils etc.) Order 2005 in July 2005 to freeze the increases. The order that we are debating this afternoon amends the July 2005 order by deleting
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the references that that order made to increases in the rebate payable on the four types of oil affected by that order.

The effective rates of duty change as follows: duty on red diesel and kerosene used as motor fuel rises from 5.22p per litre to 6.44p per litre, and duty on fuel oil and light oil used as furnace oil rises from 4.82p per litre to 6.04p per litre. The order therefore implements the changes in duty rates for rebated oils that the Chancellor announced early last year in his annual Budget. Those changes are set out in the Finance Act and were originally envisaged as coming into force on 1 September 2005.

The order took effect from midnight on 5 December after the pre-Budget report. Incidentally, the delay in implementing the 1.22p per litre rise from 1 September to 5 December cost the Exchequer about £20 million. It is also worth emphasising to the Committee the fact that the duty differential between the rebated fuels that we are considering and the main road fuels is still more than 40p per litre.

As the pre-Budget report made clear, this measure will support the oils strategy by reducing the duty differential between main road fuel rates and those for rebated oils, and therefore by reducing the fraudulent misuse of rebated fuels as road fuel, too. This comprehensive oils fraud strategy, which the measure supports, came into force in September 2002, with the objectives of reducing the illicit oils market in England, Scotland and Wales by March 2006 and continuing to tackle fraud in the Northern Ireland road fuel sector.

The objective of the oils strategy launched in 2002 was to reduce the market share of illicit fuel to 2 per cent. by this March, so the strategy involves not only the new control regimes for rebated fuels that are in place, but more Revenue and Customs officers working with the trade to identify fraudsters and stop their criminal activities. Real inroads have been made in the past three years. In 2001, oils fraud on the British mainland alone cost the Exchequer £700 million—6 per cent. of the British diesel market. In 2004, that figure fell to 4 per cent. In addition, the legitimate delivery of fuel in Northern Ireland, always a good indicator of the fraud there, has risen in each of the past four years after five consecutive years of decline.

While both the Budget 2005 and the PBR 2005 set out the 1.22p per litre increase in the rebated fuel duty rates that we are considering, the decision on main road fuel rates differed. The Budget introduced the standard inflation duty increase from 1 September and the PBR confirmed the continuation for the rest of this financial year of the freeze announced in July due to the continuing volatility of prices.

Harry Cohen (Leyton and Wanstead) (Lab): I did not get the gist of what the Financial Secretary said about Northern Ireland. Can he clarify whether fraud has got worse or better there? Is there more fraud or less?

John Healey: Northern Ireland is a case apart, as my hon. Friend, who takes a close interest in a range of such matters, knows. In this case, because of the long
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land border with the Irish Republic, it is impossible to distinguish, as we can on the mainland, between legitimate cross-border consumer purchases and illegitimate, fraudulent fuel. Legal, duty-paid deliveries of fuel in Northern Ireland have increased every year for the past four years. That is our best indicator that fraud and criminal activity connected with oil are coming under control and that the legitimate market is growing.

Mr. Paul Goodman (Wycombe) (Con): To clear the matter up, let me quote what the Financial Secretary said just over a year ago about the situation in Northern Ireland, which was that

    “it is almost impossible to isolate reliable estimates of the scale of fraud”.—[Official Report, First Standing Committee on Delegated Legislation, 20 December 2004; c. 9.]

That is still the case, is it not?

John Healey: It is, and in Northern Ireland the difficulty that one always has in trying to get accurate assessments of what is in the legal market and what is illicit activity is compounded by the fact that we do not have the data to enable us to distinguish between what is traded across the border and what is either smuggled or fraudulently misused.

The essential point now is that narrowing the duty differential will help our efforts to tackle serious oils fraud, though in the context of the Budget, with main road fuels set to rise with inflation—by 1.22p per litre—the Chancellor announced that maintaining the differential rather than narrowing it struck the best balance between our concerns over fuels fraud and the impact on industries using rebated oils.

It might interest the Committee that Her Majesty’s Revenue and Customs analysis suggests that even a small narrowing of the differential, such as 1.22p per litre, can reduce serious fraudsters’ profits by 6 to 12 per cent., depending on the laundering methods used.

In developing measures to support our drive against fraud, we consider the full range of economic, social and environmental impacts, including those on legitimate oils users. The National Farmers Union and other sectional interests have suggested that they may face significant additional costs due to the measure. Sectors other than agriculture have raised similar concerns. Those considerations are important, and we must weigh them in the round, but many groups and industries use rebated oils. Agriculture probably uses only 8 to 10 per cent. of all red diesel consumed in the UK, and it would be hard to apply such measures selectively to particular sectors.

We estimate that the increase before us will be spread across a range of sectors. On balance, taking all those factors into account, we concluded in the PBR that there remained a case for increasing the effective rates of duty on rebated fuels to support the oils strategy and to embed the progress being made.

However, we also took the decision in the PBR to increase by the same amount—1.22p per litre—the duty on fuel oil and light oil used as furnace fuel, in line with the position we originally envisaged in the Finance Act and announced in the Budget. Although such fuel is not generally used in motor vehicles, and is
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therefore generally not subject to the same fraud risk as red diesel, in view of the significant polluting characteristics of the fuel, it would have been at odds with our environmental policy to introduce the increase for other rebated oils without increasing heavy fuel oil duty by the same amount.

In summary, the increase is relatively modest and merely implements the increases in rebated oils duty that were announced in the 2005 Budget. For red diesel, the increase will support measures being pursued under the oils strategy to clamp down on and reduce oils fraud. For fuel oil and light oil used as furnace fuel, the duty increase is justified because it reflects the environmentally damaging effects of such fuel. I commend the order to the Committee.

4.42 pm

Mr. Goodman: It is a new experience and, needless to say, a great pleasure to see you in the Chair, Mr. Bercow. It is a new experience also for me to be dealing with Treasury business on behalf of the official Opposition. I greatly appreciate the Financial Secretary’s kind words of welcome, and I look forward to engaging constructively with him on this statutory instrument and, doubtless, on others.

As I said, I am new to Treasury business, but I am not so new as to fail to note that we are essentially considering a tax increase, although the Financial Secretary did not put it that way. He set out a predominant reason for the increase—not to raise revenue for the Treasury, but to combat fraud—and also offered a subsidiary, environmental reason for the rise in duty on furnace fuel. He explained that, as part of the UK oils fraud strategy, Ministers decided in the PBR to increase by 1.22p per litre the effective rate of duty on some rebated oils, including red diesel, further to reduce the price differential between those and other oils, thereby reducing the incentive to commit fraud.

The Committee will note also that the Treasury has concluded that the statutory instrument before us has

    “no impact on . . . business, charities or voluntary bodies.”

The Treasury came to the same conclusion previously, when we considered the corresponding statutory instrument, which the Financial Secretary, who was then the Economic Secretary, presented. I want briefly to question the Financial Secretary about these two claims: first, that the rise is essential mainly to combat fraud; and secondly, that there is no knock-on effect on business.

When we considered the previous measure, the Financial Secretary explained, as he has this time, that the Government have a target of reducing the illicit market in England, Scotland and Wales to no more than 2 per cent. of the total by March this year. Will he confirm that the Government are on course to hit that target? I am not sure whether he used the same figures today, but last time, in giving detailed figures on fraud reduction, he said that Freud, I mean fraud—I must have Liberal Democrats on my mind in the form of Clement Freud—in the diesel sector had been reduced

    “by more than a quarter, from 8 per cent. in 2000 to 6 per cent. in 2003”,

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and that the total value of oil fraud detected had increased

    “from £8.3 million in 2001-02 to £11.5 million in 2003-04.”—[Official Report, First Standing Committee on Delegated Legislation, 20 December 2004, c. 4.]

Can the Financial Secretary confirm that the Treasury will hit the target? On the latest measurement available, did that category of fraud fall further last year and, if so, by how much? What is his latest estimate of the increase in the value of oil fraud detected since his base year of 2001?

If there has been further progress, will the Financial Secretary tell us—this is a key question—what analysis the Treasury has undertaken of the contribution made to fraud reduction by narrowing the differential and what estimate it has made of what the order will contribute to any further fraud reduction? To put it more plainly, to what degree has any reduction in fraud been the result of measures that the Financial Secretary announced to beef up fraud detection—such as the recruitment of more inspectors—and to what degree has it been, or will it be, the result of the narrowing in the differential that the Government are carrying out over time and have put before us today?

I greatly welcome what the Financial Secretary said about further good news from Northern Ireland this year. As the Committee knows, fuel fraud in Northern Ireland is a serious business. He reported three years of progress last year; I think that he was able to report a fourth this year.

As the Financial Secretary knows, any increase approved today will have an effect on farmers. He referred to the NFU. The NFU argued in a policy paper, which I believe was produced before the increase that we are considering had been published, that

    “any further restrictions on the use of red diesel would seriously increase costs within the agricultural industry.”

What is his estimate of the cost to farmers of the proposed increase and what is his analysis of the effect that the narrowing of the differential has had over time on British agriculture? Did he consult the NFU about his view that a regulatory impact assessment was not necessary and what was its response if he did?

When considering the previous statutory instrument, the Financial Secretary said in reply to a question—I think from the Liberal Democrats—about the environmental effect of rebated oils that the Government were examining ways to encourage a lower sulphur content in rebated oil:

    “We are in the middle of quite detailed discussions with industry about the steps that we could take to do just that.”—[Official Report, First Standing Committee on Delegated Legislation, 20 December 2004, c. 9.]

Will he give us a progress report?

Finally, I think the Financial Secretary said that the increase will, in effect, raise about £70 million for the Treasury. Although the reason given to us for the increase is that it is necessary to curb fraud and to bring about beneficial environmental effects, there is a suspicion that there is another reason for it: the Chancellor’s need to raise revenue to reduce the £151
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billion that he intends to borrow over the next five years—£17 billion more than was estimated before the pre-Budget report. The Financial Secretary’s answers may help to reduce those suspicions or to increase them. I look forward to his reply.

4.49 pm

Dr. Vincent Cable (Twickenham) (LD): I welcome you to the Chair, Mr. Bercow. We all feel your sense of frustration that you cannot ask Ministers lots of questions, but I am sure that you will be an admirable Chair for the discussion.

The Financial Secretary was frank about the fact that there is a dilemma. There are two objectives: maintaining support for agriculture and for other users of rebated fuels through the rebate process, and the avoidance of fraud. On balance, he has probably got things right, but I share some concerns that the hon. Member for Wycombe has raised. If this had been an entirely tax-neutral reform, it would have been more plausible for the Government to argue that it essentially concerns combating fraud.

There are two broad approaches to the fraud problem, and the Financial Secretary referred to both. One is to reduce the economic incentive, and the order makes a small move in that direction. I am not sure how the information about profits from illegal dealing has come about. The Financial Secretary’s estimates seem to be rather high given that there is a very small change, but none the less the logic is right. The second approach is to act on enforcement.

It might be useful to have a more detailed picture of what is happening in the combating of fraud. The latest estimate was of £850 million in 2003, so it might be helpful to have some more recent figures. Will the Financial Secretary update us on how the Government are responding to the Public Accounts Committee report on the matter? It made several comments, which, although not highly critical of what the Government were doing, raised some questions about it. For example, the point was made that the Government originally estimated that there would be 1,200 registered dealers under the scheme. It turned out that there were four times as many. Clearly, there is an enormous gap between the information that Customs had and the reality, and it has had to increase the scale of its operation considerably.

The Public Accounts Committee raised the point that there were serious gaps in the availability of information, and it might help us to understand how the war against fraud is going if there were more than simply annual reports. That Committee made such a recommendation, and I am interested to know whether it has been followed through. The basic logic of what the Government are doing in reducing the incentive to commit fraud is sensible. I recognise the rather marginal difficulties that it might pose to users, but none the less I broadly support the action being taken.

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4.52 pm

Mr. Philip Dunne (Ludlow) (Con): I, too, welcome your presence in the Chair, Mr. Bercow. I ought to declare an interest that is not in my entry in the Register of Members’ Interests: I am involved in farming and am therefore a consumer of red diesel. On behalf of the farming industry, I would like to make one or two observations about the order.

A regulatory impact assessment does not appear to have been undertaken. I note that the Financial Secretary said that he took into account the concerns of business users, but I refer him to paragraph 8.1 of the explanatory memorandum, which says of the order that

    “it has no impact on business, charities or voluntary bodies.”

I would be grateful if he clarified that apparent inconsistency.

My hon. Friend the Member for Wycombe referred to the NFU, which has estimated the cost of the proposed change to British agriculture. I calculate that the order will mean a 23.4 per cent. increase in duty—a large increase in taxation. I recognise that it is a smaller proportion in respect of the increase in the cost of a litre of fuel, but it is a significant increase for the farming community, which consumes, according to the NFU, 2,500 million litres of fuel. Not all of that fuel is used in engines; some is used to generate electricity, and that would not be subject to the increase in duty.

The NFU estimates that the increase in duty will cost British agriculture some £20 million, and given the intense pressure on farming profits, of which the Financial Secretary will be aware, this is not an appropriate time to add to the burdens of one of the most hard-pressed strategic industries in this country. I would be grateful if he commented on what assessment has been made of the impact on the agriculture industry.

The pleasure boat industry has been in touch with me, which is a little surprising given that I represent a seat with a relatively small amount of river traffic, to argue that increased costs should not be imposed on it. The changes may have more impact in Richmond Park, where I believe there is a boating lake, and in constituencies closer to the coast. It would be interesting to know whether a regulatory impact assessment has been undertaken in relation to that industry.

4.54 pm

John Healey: Good points have been made, and I thank hon. Members for contributing to the debate.

Let me first address the points raised by the hon. Member for Wycombe. The order will help with, although not on its own deal with, the problem of oils fraud. That is its principal purpose and justification. By the by, it will help to raise revenues. In the Budget, we confirmed a 1.22p per litre increase on rebated fuels; in a full year, we shall raise £75 million from that.

Our principal concern, however, is not as the hon. Gentleman suggested, and he might do well to look at the cost of some other decisions made by the
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Chancellor in the pre-Budget report. He might be interested to compare the £75 million with the cost to the Exchequer and the public purse of not increasing the main road fuel duty rate, even by the rate of inflation—the normal indexation that one would expect from taxes. That would cost more than £600 million, which would need to be found elsewhere. I hope that that helps to nail any suspicion that the hon. Gentleman might have that the principal purpose of the measure is to raise revenue.

Secondly, the hon. Gentleman asked about the targets in the oil strategy. There is a target to reduce the illicit oil market to 2 per cent. of the total by March 2006 and we are on track to hit it. I am sure he has studied the annual estimates of fraud on the excise regimes, which we provide alongside the pre-Budget report. The latest was published on 5 December. We expect that, by the time of the 2007 pre-Budget report, we will have the data from the necessary sources and that the analysis to provide confirmation will have been done. All our indications are that we are on track to hit the target of 2 per cent. by this year.

As I said, the latest measurements are set out in the estimate of excise frauds published alongside the pre-Budget report. I say to the hon. Member for Twickenham, who raised the point, that we do that annually because, in the example of rebated fuels and some other excise figures, for instance, some data on which we depend come from surveys that may be taken only at regular intervals or annually—that is the case for one of the main components of the calculations and modelling that we undertake to estimate the fraud and illicit activity in the oil sector.

I say in direct response to the hon. Member for Wycombe that the latest figures were published alongside the pre-Budget report in December. The assessment for 2004, the latest available, shows that the scale of the fraud was 4 per cent., down from the 2003 figure of 5 per cent.

The hon. Gentleman then asked a question that, in all honesty, I cannot answer. He asked what is the impact on fraud of reducing the discount—the duty differential—between the main road fuels and the rebated fuel. As I said earlier, analysing and estimating the scale of fraud generally is a relatively inexact science. Very often, it is not really possible to isolate the impact of individual measures. As I said, the measure that we are considering will help, but as part of the wider package that forms the oils strategy.

On the question of farmers, the hon. Gentleman may or may not have read it, but, understandably, the National Farmers Union response to this particular part of the pre-Budget report was one of disappointment. Reasonably, the NFU saw an increase in costs for farmers. However, the hon. Gentleman did not mention that, overall, the reaction to the pre-Budget report was more mixed. The NFU of course welcomed the continuing freeze on the main road fuel duty rates—farmers use road fuels, like the rest of us—and also gave a cautious welcome, as one of the main advocates of the system, to further
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measures to support the development of the biofuels market and, ultimately, biofuels production in the UK.

It might help the hon. Members for Wycombe and for Ludlow (Mr. Dunne) to know that regulatory impact assessments are carried out essentially to calculate increases in the cost of administering changes to legislation. We do not produce RIAs for changes in duty rates. RIAs try to assess in advance the impact on the administration of any policy or significant taxation change, not the impact of any duty decisions or changes.

The hon. Member for Ludlow made it clear that he was speaking for farmers and talked about the duty on red diesel. I remind him that, as a Committee, we should consider not only the duty rate on red diesel, but the duty rate on red diesel compared with that on main road fuels. I remind him that that discount remains at more than 40p per litre. He may be interested to know that at least 11 other members of the European Union—although such comparisons are difficult to make directly—have a duty rate for rebated fuels that is significantly higher than our discounted duty rate, even after today’s consideration of this order.

I welcome the fact that the hon. Member for Twickenham feels that, on balance, the Government have the decision right. He is right that the duty discount is simply a trade facilitation measure. It dates from the point at which the hydrocarbon fuel duty was introduced in 1928 and benefits the sectors to which the right to use rebated fuels applies. He mentioned the PAC and some constructive comments that it made on
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our excise fraud regimes in general. The introduction of the registered dealers in oils scheme was a difficult period, but the scheme is now well settled in and his point about the extent of its coverage underlines its likely effectiveness and its impact on fraud levels.

Finally, I return to the point made by the hon. Member for Ludlow about pleasure craft. I have had quite a bit of contact with hon. Members and with organisations representing pleasure craft users. The main concern of pleasure craft owners and users is not the decision in the pre-Budget report and the marginal increase in the rebated fuel duty rate, but the fact that the UK has a derogation under the European energy products directive that allows private boat users to use rebated fuel.

That derogation runs to the end of 2006, and we confirmed in the pre-Budget report that we are minded to apply to the European Commission to have it extended. We are gathering the evidence that we need to judge whether we have a case and, if we do, to make the strongest possible case to the Commission for an extension. That is probably the main focus of concern, and if the hon. Gentleman were to go back and talk to his constituents, I suspect that they would press him on that issue rather than on the order.

I hope that I have dealt with the points raised by hon. Members and that members of the Committee will give the order their approval.

Question put and agreed to.


    That the Committee has considered the Excise Duties (Surcharges or Rebates) (Hydrocarbon Oils etc.) (Amendment) Order 2005 (S.I. 2005, No. 3330).

Committee rose at four minutes past Five o’clock.


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