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
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
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 agreeand I agree it does not necessarily
follow that in the vast majority of cases that is what happenscan
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
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
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 concernsand
I hear this second-handthat 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: SorryI 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.
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
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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