The administration and effectiveness of HM Revenue and Customs

Written evidence submitted by the Federation of Wholesale Distributors

This submission from the Federation of Wholesale Distributors (FWD) is in response to the Treasury Select Committee’s Inquiry into ‘The Administration and Effectiveness of HMRC’.

Summary

· The FWD is concerned about the proposed budgetary and staffing reductions at HM Revenue and Customs (HMRC) and the impact this will have on HMRC’s capacity to tackle alcohol fraud. In turn this will negatively impact on the Government’s aims to deliver on tax compliance and its efficiency in revenue collection.

· Alcohol fraud occurs where illegitimate wholesalers sell alcohol where the duty and VAT has not been paid. HM Revenue and Customs (HMRC) estimate that this fraud is costing the Exchequer over £550m per annum on lost duty and VAT from beer alone. The revenue loss for all types of alcohol is estimated as being over £1bn per annum in lost duty and VAT. Given the scale of alcohol fraud, HMRC should treat this as a priority area for action. The FWD is calling on the Government to clampdown on alcohol fraud which is leading to a significant loss of revenue to the Exchequer and is having a detrimental impact on legitimate wholesalers.

· It is evident that HMRC investigation officers are already stretched to their full capacity. Given this, any reduction in funding or staffing levels in this area is likely to be counter-productive since it will have a significant, and negative, impact on the ability of the Department to combat alcohol fraud.

Background

Alcohol fraud is a significant and growing problem in the UK. This fraud occurs where illegitimate or fraudulent wholesalers sell alcohol where the duty and VAT has not been paid. Such traders are often selling this alcohol openly at prices where it is clear that the Duty and VAT has not been paid.

HMRC measure the loss of revenue for alcohol fraud in the beer market. In its recent publication Measuring Tax Gaps 2010, the Government set out that this fraud was costing the Exchequer up to £550m in 2008-9 in lost duty and VAT for beer alone. HMRC have not yet developed a mechanism for estimating the tax gap in wine fraud. It is estimated, however, that the annual loss of revenue to the Exchequer for all types of alcohol fraud is likely to be over £1bn. In addition to this fraud costing the Exchequer much needed tax receipts this illicit trade is also undercutting prices and having a severe impact on the economic viability of legitimate traders. Some FWD members are reporting losses up to 40% on alcohol sales such is the scale of the fraud, and their businesses are subsequently being threatened with closure.

There are also wider costs associated with the fraud since it is likely that the proceeds are being used to fund serious organised crime. There are also impacts on public health as people are able to buy excessively cheap alcohol as the duty has not been paid.

Types of alcohol fraud

Alcohol fraud occurs in a number of ways and is a significant problem at the wholesale point of the supply chain.

Alcohol is manufactured then either sold direct to retailers or is sold via wholesalers for onward sale to retail outlets. The majority of wholesalers are legitimate traders who are paying duties and taxes correctly. However, there are growing numbers of fraudulent wholesales who are adopting methods to avoid paying the duty and VAT that is due. These illicit traders are then able to sell cut price alcohol or sell the alcohol at full price but reap greater profits through the non payment of duty and tax and substantially undercut legitimate wholesalers.

The two main types of the fraud are known as diversion and drawback. In diversion fraud, illegitimate wholesalers export alcohol under duty suspension claiming that it is for sale on the near continent. This alcohol is then diverted back onto the UK market with no duty being paid. In some instances, the goods are said to have been exported but never actually leave the country in the first place.

Drawback fraud occurs where fraudulent wholesalers export alcohol to the near continent. They then claim the duty directly back from the UK Government through the drawback duty regime claiming that the duty has been paid in another country when no duty has been paid and then divert the product back to the UK market. Alternatively, fraudsters are exporting goods abroad, for example to France, where there is a much lower rate of duty paid on the goods but the products are then immediately diverted onto the UK market without payment of the higher UK duty.

The FWD is calling for the Government to clampdown on all types of alcohol fraud but has become particularly concerned at the scale of drawback fraud in recent months. There is clear evidence of the widespread abuse of the drawback duty regime. Fraudsters are claiming millions of Pounds in recovered duty fraudulently from the UK Government. The evidence for this fraud is borne out in HMRC’s own estimates. Whilst they estimate that the legitimate market for beer on the continent is 75m litres per annum, 450m litres is currently being exported. This indicates that 375m litres is being exported fraudulently and the Government is being defrauded of duty on this amount since the only commercial reason for such a large drawback trade to the near continent is to feed the fraud.

Actions to clampdown on the fraud

In 2009, the previous Government closed the Warehousing for Export Scheme which was a tax regime being exploited by alcohol fraudsters. Following the end of this scheme there was a reported dip in the sale of fraudulent alcohol but since this time fraudsters have moved to use other mechanisms and the fraud has continued to increase. The previous Government also published an ‘Alcohol Fraud Strategy’ in 2010, issued new powers for HMRC to tackle the fraud and launched a communications campaign to warn fraudsters and alert legitimate traders to the fraud.

This Government has, to date, said little on its strategy to tackle alcohol fraud but promised £900 million in the Spending Review to tackle tax avoidance, evasion, fraud and debt. In particular the additional resources were made available for the prevention of tobacco and alcohol fraud. This funding allocation is however, conditional on HMRC first delivering savings and efficiencies.

Whilst we welcomed the Government’s potential increase in funding for this area, the FWD are nonetheless keen to ensure that tackling alcohol fraud continues to be treated as a high priority.

In addition, from our discussions with HMRC and anecdotal reports from wholesalers, it is evident that HMRC investigation officers are already stretched to their full capacity. Given this, any reduction in funding or staffing levels in this area is likely to be counter-productive since it will have a significant, and negative, impact on the ability of the department to combat the fraud and collect significant sums of money for the UK Exchequer.

Recommended Policy Responses

A wealth of anecdotal evidence on the growth of alcohol fraud has been passed by the FWD to HMRC but, to date, the Department has not provided a proportionate response to the scale of the problem. To ensure an adequate response to this challenge and reduce the loss of Exchequer revenue in this area, the FWD is urging the Government to undertake the following policy responses as a matter of urgency:

1. HMRC should clamp down on the widespread abuse of the ‘drawback’ regime and urgently review the drawback regime to ensure that ‘at-risk’ goods are being exported correctly and thorough checks are carried out before any duty is repaid.

2. HMRC should take a more robust approach to tackling alcohol fraud. They should use new powers to clamp down on those involved in alcohol fraud throughout the supply chain. Disruption of the supply chain and the seizing of goods can be a very effective way of stopping the fraud. The scale of resources needed to seize goods and harass those engaged in fraud should easily be proportionate to the revenue benefits.  

3. HMRC should explore putting measures in place to track the movement of all ‘at risk’ alcoholic goods from or within the UK. According to HMRC there is a massive over-supply of beer under ‘duty suspense’ to the near continent, which cannot be for legitimate sale on the continent. Given the beer product types at risk are not numerous, it should be possible for HMRC to "keep tabs" both on where and to whom the brewers supply to in the EU and all UK supplies of duty-suspended goods to third parties in bonded warehouses.  

November 2010