Public AccountsWritten evidence from HM Revenue and Customs

Q63 Chris Heaton-Harris: Can you tell me something about your relationship with OLAF?

HMRC engages with OLAF at both an operational and a strategic level. However, OLAF do not currently have competence to initiate their own criminal investigations within Member States. This defines the possible avenues of cooperation with OLAF.

At an operational level, HMRC already has established strong relationships with Law Enforcement agencies in other Member States, EUROPOL and OLAF, through its network of Fiscal Crime Liaison Officers (FCLOs), who primarily work on a bi-lateral basis. The NAO has recognised the effectiveness of this approach in their report, which is delivering real results for the UK

HMRC also recognises the role that OLAF has played in tackling cigarette smuggling, notably on the over-supply of genuine product, and cooperates with them on matters of mutual interest in this sphere.

HMRC has access and influence in most of the key priority countries where we assess we need support in our own investigations. The NAO report reflects this and we are considering further investment to strengthen the network and its flexibility to respond ever more effectively to shifts and changes in the threat. Our preferred partners overseas are those customs authorities with criminal justice powers, police agencies, other law enforcement and intelligence agencies. Many of these agencies have no co-operation with OLAF overseas.

Q66 Chris Heaton-Harris: How did you spend the £3.5 million you got from the Hercule II programme?

Both HMRC and UK Border Force have accessed grants under the Hercule II programme, which have been for a combination of technical assistance and training, however the amounts are small. This money has funded the provision of scanners at key postal hubs for Border Force and the training has taken the form of joint overseas operations targeting containers of illicit cigarettes. This has served to both exchange best practice with overseas authorities and strengthen key relationships.

Just under 94% of the €3.5 million awarded to the UK under Hercules II was spent on contracts concluded directly between the Commission and companies or institutions located in the UK for the provision of IT-support. The IT-support consists of (access to) databases that contain relevant information, for example on ship movements or company data. The information in these databases is made available to national and regional authorities in the Member States. Neither HMRC nor Border Force were directly engaged in these programmes. Over the last two years, HMRC has been awarded only €11,000 under Hercule II.

Q73 Chris Heaton-Harris: The European Commission published on 7 June this year a new strategy to combat cigarette smuggling. What input did we have into that?

The EU strategy for tackling cigarette smuggling, covers a range of measures to further tackle the illicit tobacco trade. HMRC had informal discussions with the Commission ahead of publication as part of our regular engagement with OLAF and made a number of general observations and specific comments on the strategy, in the context of the UK illicit market.

The strategy will be negotiated over the coming months and we will be working closely with the EU Commission and member states on the detail of these proposals to ensure that the actions complement and add value to our UK strategy.

The proposed strategy emphasises the importance of signing and implementing the Illicit Trade Protocol to the Framework Convention on Tobacco Control. HMRC has been heavily involved in the negotiations to develop an effective Protocol. The UK supports the Protocol and we are working towards the UK signing it later in 2013. Many of its requirements, such as registration of tobacco manufacturers, have been in place in the UK for many years and we are working towards full implementation of the other requirements.

The strategy is subject to Parliamentary scrutiny procedures and we have prepared an Explanatory Memorandum to brief Parliament on the Commission’s proposals and their implications.

Q115 Mr Bacon: Do you think that there is a comparable situation now, in which you see much more co-operation from most of the manufacturers than from others, or are they all being equally co-operative?

Our approach to the largest businesses is to invest in direct engagement with them so that we have in-depth knowledge of their business model, business and tax issues, appetite for risk in tax planning, and internal governance. Our Customer Relationship Managers (CRMs) are experienced tax professionals, trained to the highest levels of tax compliance, who lead teams of our most highly skilled specialists to man mark these complex and high-risk customers.

In addition, for the tobacco companies, we have appointed a dedicated Tobacco Supply Chain Manager.

Of the four main UK-based tobacco companies, (for the purpose of this paper referred to as: “W”, “X”, “Y” and “Z”):

Our supply chain activity is targeted primarily towards UK-sensitive brands of hand-rolling tobacco where we can have the biggest impact. “W” doesn’t sell any HRT in the UK and has a relatively small share of the UK cigarette market. HMRC engagement on SC controls has therefore been limited to a small number of occasions, where cooperation has been good.

Of the remaining three, two (“X” and “Y”) have well organised Anti-Illicit teams containing senior company personnel with whom HMRC are engaged. “Z” similarly has an organised Anti-Illicit Team but it has a poorer recent record of engagement with HMRC. We have raised our concerns about this with senior personnel, and are closely monitoring their response.

A key component in supporting an effective supply chain policy and responding constructively to HMRC challenges about tobacco seizures is “Track & Trace” technology. “X” has had a system in place for some years. “Y” plans to bring in their system in July 2013, as a result of HMRC pressure. “Z” has not notified us of any firm implementation plans to address specific UK concerns, though it has a legally binding commitment to introduce track and trace technology in the EU Cooperation Agreement.

HMRC notifies the tobacco companies of all seizures of their product above specified quantities (=>50kg hand-rolling tobacco and => 100,000 cigarette sticks). Responses vary. “X” is proactive and promptly provides investigative reports. “Y”’s responses have improved in recent months but there is still considerable room for improvement. “Z” is very slow in responding and provides very little useful information. We have raised this issue at senior level in the company.

In 2010, following evidence provided by an HMRC investigation, all three companies reduced hand-rolling tobacco supplies to Luxembourg. “X” continues to curtail supplies when there is clear evidence to support action. “Y” and “Z” do not reduce supplies unless there is specific evidence of outlets involved in selling excess quantities. “Y” maintains it is not legally allowed to reduce supplies because of EU competition laws.

Under the supply chain legislation all the tobacco companies are required to have an effective “supply chain policy”. These are currently being audited by specialists in our Large Business Service to establish whether statutory obligations are being met.

Under the SC legislation tobacco manufacturers are required to consider the level of legitimate demand for their products in each market supplied. On request, “X” and “Y” have provided assessments of legitimate demand for UK-sensitive brands of hand-rolling tobacco supplied to specified high-risk markets of Belgium and Luxembourg. Our analysts have assessed the industry estimates and do not consider them to be realistic. “Z” has not yet provided HMRC with a BeLux market assessment for their hand-rolling tobacco product.

8 July 2013

Prepared 8th October 2013