Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80-99)


22 NOVEMBER 2006

  Q80  Mr Gauke: Why is it that the UK seems to be most heavily hit of all the EU countries by this particular fraud?

  Mr Eland: I am not sure I would totally accept that we are the most heavily hit. We have done a lot to attempt to measure and quantify this area and we have perhaps been more open about the levels of fraud than some other countries. I do not think we have been particularly targeted. There is nothing particularly in our system or the way it operates that would make us more vulnerable than other countries. I think it is probably more that we have been more open about it.

  Q81  Mr Gauke: Can I just ask about the VAT gap, ie, the difference between the total theoretical VAT liability and the amount actually collected? The figure for 2004-05 of the VAT gap was 13.5%. The NAO has speculated, if you like, that there may be a higher than forecast VAT gap for 2005-06. Where do we stand on that? Do we have a better idea?

  Mr Eland: There will be the latest progress report against that published as part of the PBR next month, so I do not think I can really anticipate that.

  Q82  Mr Gauke: Can I move on to excise duties? Looking at duties on tobacco, in your spring departmental report you were unable to make an assessment against 2002 targets for duties on tobacco. Are you able to shed any light on how you are doing in that area?

  Mr Eland: Again, we will be publishing the latest figures next month. I think this Committee spent some time looking at this area a year or two ago and knows some of the problems. We have made tremendous progress in getting the illegal market down from 23% to 16%. It is proving stubborn to get it down below that because there have been the sorts of shifts in behaviour that we talked about earlier, so that, for example, in the tobacco area smugglers have switched from getting exported UK product from tobacco manufacturers, where we worked with the tobacco manufacturers and managed to close down a lot of that, to counterfeit tobacco sourced from China and eastern Europe and so we have to change our methodologies to tackle that. We have launched a new strategy to deal with that and we have built up more intelligence resource in China. We are working very closely with the Chinese authorities and we are waiting to see what dividends that pays.

  Q83  Mr Gauke: Could I turn to the judgment we are expecting tomorrow with regard to duties on cigarettes and alcohol, where the Advocate General has said that the duty payable should be that in the state from which the goods are ordered, so you can order over the internet from a low duty EU country and pay the duty there. Given that our duties are as a rule higher than in a lot of other countries how concerned are you about that because that potentially could just rip a hole through that whole area of revenue, could it not?

  Mr Gray: We are obviously waiting with great anticipation for tomorrow's judgment and, as you say, the Advocate General's opinion was in one direction but it does not follow as night follows day that the Court's finding will be in the same way. We have in advance of tomorrow been anticipating how we can handle the different scenarios that can emerge and obviously we do have operational plans in place depending which way the judgment goes. Yes, it is going to be a significant challenge for us were the Court to agree with the Advocate General but we do not know that that is the case yet.

  Q84  Mr Gauke: Assuming for one moment that the Court does agree—and I agree it does not necessarily follow that in the vast majority of cases that is what happens—can you give us some indication as to how you and the Government will respond to this judgment?

  Mr Gray: Obviously, we need to respond in a way which respects the judgment. If it goes with the Advocate General's opinion then the key issue is how in that new regime we assess whether the alcohol is genuinely for home use, so we are looking at ways in which in that new situation we would refine our operational techniques to try to make sure we were getting as satisfied as we could be about that without doing it in a way which was clearly offending the spirit of the judgment.

  Q85  Mr Gauke: But potentially you could have very little room for manoeuvre, could you not? Obviously, it depends upon the judgment but if it is as the Advocate General has advocated—

  Mr Gray: We are clearly going to be faced with a difficult and more challenging situation than we have today, yes.

  Q86  Mr Gauke: That is a very different matter. If I may turn to enforcement, there is a concern that is raised from time to time that the HMRC is aggressive in its methods and that perhaps the Customs ethos is prevailing over the gentler Inland Revenue ethos. I do not know whether that is correct or not. How do you respond to those comments?

  Mr Gray: I do not recognise that there is a black and white split, if you like, between the approach within Customs and that within Revenue. One of the things I learned as I joined the organisation before the merger happened was that both organisations were already diverse in their approaches. We are seeking to strike a difficult balance here. We are charged with ensuring appropriate compliance with the tax systems and the Customs regime and other things that we administer. As you know, we are still going through the process of consultation on the formal legislative powers structure that there should be for the new department going forward. Equally, we are looking in all the operational planning that Mike and his colleagues are doing on the compliance side to make sure we are getting the right balance of vigour and rigour, if I can put it like that, without tipping over into an overly aggressive approach. As you may know, on Friday of last week the Chancellor published a review which David Varney had led of our links with large business, which obviously covers only part of the territory, but some of the principles that were emerging from that review about us looking to move to greater openness and transparency about the way in which we do our work and deal with our customers are at the heart of how we get to the right balance in our operational response.

  Q87  Mr Gauke: Do you have concerns—and I hear this second-hand—that businesses, in addition to concerns about tax levels and tax complexity, also feel that the relationship with HMRC has perhaps deteriorated in recent years and is making the UK a less attractive environment for business?

  Mr Gray: Depending, frankly, on who I talk to I hear rather different stories. Talking to some areas of big business and other business I get reactions that say the mood seems to have moved in an adverse direction. Elsewhere I pick up stories of people saying, "Actually, we do think you have got into a better position". Inevitably with such a large dispersed organisation, in getting the kind of standard level of response and tuning things to the right level it would be amazing if we got everybody to exactly the same point. I do not think overall that I pick up a point of view from big business or elsewhere that says things have moved drastically in the wrong direction. I also face the challenge that there is a bit of, "They would say that, wouldn't they?" syndrome which we need to be aware of. I do not want to rely too much on that because it is very easy in running a business like this to say that it is all the customers' fault and perception. Nonetheless, thee are some quite fine judgments one needs to reach about this.

  Q88  Mr Gauke: Finally, can I touch upon the Deutsche Morgan Grenfell case with regard to the relevant time period for claims in relation to mistakes of European law matters? How big an issue is this because I am seeing quotes of £10 billion overall of litigation claims? Is this a major concern? I know that the Government has said that in respect of this particular case, and the cases which are very tightly related to it, they are looking at a figure of £300 million. What is your estimate of the scale of litigation that we may see as a consequence of this House of Lords judgment?

  Mr Gray: I cannot give you precise figures but the orders of magnitude you talked about there are certainly the potential direction.

  Q89  Mr Gauke: The £10 billion as an overall figure is a realistic one?

  Mr Gray: Sorry—I thought you were talking about the £300 million.

  Q90  Mr Gauke: There is the £10 billion which has been reported, which is everything, if you like, but the Government answer to my question about what the cost would be of this judgment was £300 million, although I think that is quite tightly related to this particular case and litigation very similar to it.

  Mr Gray: Yes. I think a great deal depends on how subsequent case law develops itself and what, if any, the legislative response is to that. The £10 billion I think is people letting their imaginations run quite a long way in terms of, "If that has happened the following things could happen", and I think frankly it is unrealistic at this point to try and put a precise estimate on it. It is clearly a very significant issue.

  Q91  Mr Gauke: Are there other major group litigation cases going on against HMRC that will be affected by this judgment?

  Mr Gray: I have not got that information in my head I do not know if either of my colleagues have but if we may we can let you have a note to respond to that.

  Mr Gauke: I would be grateful.[3]

  Q92 Mr Love: Can I take us back to tobacco smuggling? You mentioned earlier that while you had gone down from 23% to 16% it had stuck there, yet if you look at hand rolled tobacco the figure is 70%. Why is it so extraordinarily high for hand rolled tobacco?

  Mr Eland: I think it is because it has got a very different methodology from normal cigarette smuggling. Whereas most cigarette smuggling is planned and organised in large consignments coming in in containers and so on and we can get an intelligence handle on it, a lot of the hand rolling tobacco smuggling has been much more opportunistic in terms of lorry drivers being persuaded to take on consignments at very short notice. It is very difficult for us to pick up that sort of thing through conventional risk and intelligence methodology.

  Q93  Mr Love: You do not think it has got anything to do with the price differential?

  Mr Eland: In terms of price differential most smugglers try to obtain their tobacco totally free of any tax and then bring it into our market. If we have high rates that can obviously create a market for illegal product but it is not a direct relationship of that sort. It is the tax-free product they are after and that is what they obtain.

  Q94  Mr Love: We seem to have a PSA target for everything in the Treasury these days and, without me wishing to suggest one to you, you seem to have targets for all the other smuggling areas but not a target in this area. Why is that? Have you not given this as much priority as you have given other types of smuggling?

  Mr Eland: We have sought to develop a new hand rolling tobacco strategy which was launched in March this year. Because of some of the difficulties that I have talked about we have not gone straight into setting a target but we do see this as one of our key areas to tackle.

  Q95  Mr Love: I was lobbied by the tobacco industry in relation to this some weeks ago. What they said to me was that if you adjusted the price in relation to hand rolled tobacco you could increase the amount that would be covered by duty, in other words you could increase the amount of duty paid without necessarily increasing the consumption of tobacco. Have you done any research in this area as to what the likely impact would be?

  Mr Eland: As a normal course of events, when the Treasury conduct their periodic duty level research in relation to the Budget they always look at things like the impact of smuggling and so on. It is a natural regular review type of process.

  Q96  Mr Love: You mentioned earlier on that there had been a shift from bringing European manufacturers' tobacco into the country to counterfeit tobacco, mainly from China, I think you suggested. Is that as a result of the memorandum of understanding and is that memorandum working in the way that you intended it to work?

  Mr Eland: It is not as a result of the memorandum of understanding as such. It is as a result of the fact that working with the tobacco manufacturers we have succeeded in reducing one source of supply for the smugglers, which was exported UK manufactured tobacco, and therefore obviously the fraudsters have been driven into looking for other sources of supply, so they are connected in that way. Clearly that does not mean we should relent in trying to dry up the exported sources of tobacco; otherwise they just switch back, so we have to tackle both of those fronts.

  Q97  Mr Love: Just to show you that this Committee can ask questions in exactly the opposite direction, someone said you were too aggressive but I am going to ask you whether you are aggressive enough, particularly in relation to Philip Morris International, where this Committee when it carried out its previous study suggested that we ought to bring them under the umbrella either through the EU or through a memorandum. Why is Philip Morris treated differently and when are you going to be aggressive with Philip Morris?

  Mr Eland: What we have done there is that in response to that Committee report we have now introduced a legal framework. One of the concerns of the Committee was that we were relying too much on memoranda of understanding with tobacco manufacturers, which are entirely voluntary, so we have introduced a legal framework that does have sanctions and penalties. In relation to Philip Morris, they have a very small percentage of our market which has actually reduced over the last few years, so what we have been doing is concentrating on the areas of real big concern. It is not that we are being soft on them. We are just trying to follow a sensible risk-based approach.

  Q98  Mr Love: One of the things you have done recently to show that you are being tough on the issue is when there was an announcement in the Budget about £5 million fines.

  Mr Eland: Yes.

  Q99  Mr Love: Yet the memorandum of understanding, as we understand it, has within it the ability to fine. What is the difference and why do we need to fine? Was that just an exercise to show that you were being tough?

  Mr Eland: No, it was not. It was to put in place a properly constituted legal framework and sanctions that could be enforced. The memorandum of understanding did not allow us to enforce any sanctions. They were agreements between two parties. We want to use it as a reserve sanction. We prefer to get what we want through voluntary co-operation but if we cannot get what we want through that then we have these new powers and sanctions that we can use.

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