Examination of Witnesses (Questions 219
- 239)
TUESDAY 6 FEBRUARY 2007
RT HON
DAWN PRIMAROLO
MP, MR MIKE
ELAND AND
MR RICHARD
BROWN
Q219 Chairman:
Minister, if I may formally welcome you to this inquiry and thank
you very much for coming to help us. May I also formally welcome
the rest of the audience. I am always pleased to have an audience.
You know the rules, Minister. All this is being recorded and you
and your officials will receive a copy of the transcript and have
an opportunity to comment on it. That being said, we have sent
you a lot of questions, some of which are based on previous evidence
given by your officials. Do you want us to start by asking the
questions or would you, or either of your officials, like to make
an opening statement?
Dawn Primarolo: Thank you very much. I did have
a short opening statement but, to be perfectly frank, I think
the Committee is quite well appraised of the challenge we face
and you are aware of the steps we have taken. It is probably best
if I just introduce the two officials who are sitting alongside
me and then I will be happy, between the three of us, to answer
as many of your questions as we are able to today and, if not
today, in writing subsequently. Can I introduce Richard Brown,
Head of International Indirect Tax in Her Majesty's Treasury,
and Mike Eland, the Director General of Law Enforcement in Her
Majesty's Revenue and Customs.
Q220 Chairman:
May I start off with the first question. One of the things we
are having difficulty getting a handle on is do you think that
missing trader fraud is a bigger problem in the United Kingdom
than in other European countries or are we better at detecting
and measuring it?
Dawn Primarolo: It is inconceivable that other
Member States are not the subject of this type of fraud as well.
We know, for instance, that both Germany and Austria have been
very vocal about their losses. Germany has said something like
3.5 billion EUR as an estimate and they are pushing for a full
reverse charge. If we look at Spain, we have seen reported recently
arrests in connection with a 300 million EUR carousel fraud. France
has been subject to press reports as well about fraud in the region
of 2 billion EUR. I think the position is that the UK identified
this as a potential threat and therefore has been trying to quantify
and publish statistics on the potential loss to fraud whereas
other Member States, at the current time, do not choose to go
down that route. Certainly in my discussions with European colleagues,
finance ministers generally, particularly in the larger economics,
were worried about the potential here because it is exploitation
of the rules as opposed to clever interpretation or re-interpretation
of the rules; it is outright theft.
Q221 Chairman:
In talking to people we find it a little surprising that other
countries do not actually publish the scale of their losses as
we do. The last publication was in the autumn statement. Has anybody
any view as to why other countries are not being as vocal about
it as we are?
Dawn Primarolo: I am afraid I cannot answer
why other Member States have not chosen to publish the figures
in the same way. I think it is probably true to say, and Richard
can correct me if I get this wrong, the UK started looking at
the issue of the tax gap in VAT some considerable time ago. You
may recall there was a big drop in our forecast against actual
receipts back in 1996. There have been different times when forecasted
receipts and what we actually received did not match, and following
various inquiries, the last one being the Roques Report, the UK
has been much more concerned to actually look at whether there
is a tax gap, how large it is and what causes it. Therefore, that
has informed not only our domestic policy but our response to
things like unfair tax competition to try to understand what is
going on there. I can only take an educated guess at that. I know
other Member States are very defensive with regard to what is
the scale of their loss. In some Member States it will be much
harder because of the way it is constructed. In Germany, for instance,
it is much more difficult to try and put a specific figure and
measure on it.
Q222 Chairman:
While we were in Brussels we talked to the Eurocanet people, which
is a collaborative project between finance and anti-fraud agencies
in EU Member States. We wondered why the United Kingdom had, by
Eurocanet's account, stopped participating in what they were trying
to do.
Dawn Primarolo: This is quite a technical issue
around the issue of third pillar and exchange of taxpayer information
with competent authorities. I might ask Richard to supplement
my answer. When Eurocanet started, the UK was one of five Member
States participating, although the project was initially set up
to look for missing traders which is slightly different to what
we are pursuing, although complementary, to the question of missing
money, fraud. Information was being exchanged and the nature of
this information is often taxpayer information. The Commission
subsequently decided they wanted to have an external partner,
OLAF, who are not covered by our gateways or by the regulations
to exchange taxpayer information. It was data that was being exchanged.
It is not quite in this area because what we need to look at is
who is committing the fraud, how they are committing the fraud,
how we collect the evidence, how we prosecute and how we do that
across different authorities. Eurocanet was never intended to
do that. It may be useful in missing traders but not specifically
on the fraud.
Mr Brown: One thing I would like to add to what
the Minister said on this point is essentially Eurocanet, when
it was set up, was a pilot study which was aimed at trying to
identify missing or defaulting traders. It is fair to say that
having participated in the experiment the HMRC took the view that
they had better means available to them than the approach being
taken by Eurocanet to identify missing traders more quickly. That
was one of the main reasons why they took the view they were not
going to continue with the exchange of information aspect of the
project which was actually quite resource intensive as far as
HMRC were concerned. In addition, there was Eurocanet's concern
about the involvement of OLAF because of our real concerns about
giving out confidential taxpayer-related information to third
parties who are, in our view, not legally covered by the gateways.
Q223 Chairman:
It started out as a police operation in some sense, the Eurocanet;
it was about finding some of these missing traders.
Mr Eland: That was how it initially started
but it has moved on since into this other territory. There are
the legal problems to which Richard has referred and also the
costs of providing the information which has an opportunity cost
when we have to divert effort from elsewhere. We are focusing
our attention on identifying missing traders through using the
information systems that we have and also third party information
systems in the UK which we feel is a much more effective way of
identifying traders in this area.
Q224 Chairman:
We were slightly puzzled having met Eurocanet. I think you have
given me the answer to the question whether this fraud is a concerted
and sophisticated attack but perhaps not. Do you believe that
this fraud is a concerted and sophisticated attack on the VAT
system by organised crime or is it an opportunity that has been
exploited by casual fraudsters?
Dawn Primarolo: Carousel fraud is an outright
attack on the system. It is highly sophisticated, well informed,
relies on very long chains. The whole series of frauds exploit
an understanding of how we would have to collect evidence and
follow the chain through. There would be casual, in the sense
of one-off, repayment fraud which we are dealing with, and we
would acknowledge that in that area it might be somebody who just
gives it a go to claim back a lot of VAT and puts in fraudulent
forms, but the carousel, which is the issue here, is most definitely
organised. We will come back to it in the later questions but,
for instance, the weekend before last I was in Dubai with regard
to actions there in pursuing revenue which has been stolen and
connections with criminal cases. It is quite clear that these
are organised criminal gangs and all of the Department's intelligence
indicates that.
Q225 Lord Blackwell:
I wonder if we could explore a bit more this question of information
exchange and cross-border liaison and whether more could be done.
Commissioner Kovacs told us that against the background of 35
million traders in intra-community trading there had been only
26,000 information exchanges between Member States and that that
exchange of information is very slow in occurring. I guess the
question we are interested in is whether better information exchange,
recognising the difficulties you mentioned about protecting taxpayer
information, would help tackle this fraud problem. What is currently
going on to share information? Do you think there is more opportunity
to develop that? In particular we understand there is a cross-border
conference on the 23 February so what is it that you would expect
to come out of that?
Dawn Primarolo: I will try and unpack all the
questions and if I miss one please correct me. If we deal, firstly,
with the question of whether the information exchange, at the
present time, needs to be improved and speeded up, then the answer
is yes. The United Kingdom is at the forefront of trying to press
and improve, using this as our experience, the types of information
and the speed at which it is exchanged. Clearly there are resource
constraints on all Member States and there is an issue there.
We currently exchange, both on criminal and civil, intelligence
and information to identify fraudsters verifying returns, but
we do need to do more. If we move on to the question you asked
about the conference in February, which is again a UK initiative,
across Europe not all tax departments have the investigation and
enforcement abilities that HMRC have. There are very particular
questions when it comes to exchange of this type of information
as well. Sometimes, because of a separation between law enforcement
and tax authorities, we may not be dealing directly with what
would be recognised as our opposite numbers in Europe. Also those
authorities may not necessarily have the powers or the remits
to undertake investigations for tax fraud. What we need to explore,
following on from your question, is not just about whether we
are exchanging relevant information in a speedy way, although
that is very important, but also about making sure that we are
able to exchange, particularly on an evidence-base, information
coming back to the UK or flowing from the UK for prosecutions
of cases elsewhere in Europe. We are very seized of that issue
because we are needing to communicate with quite a range of authorities
at the moment. What we are looking to try and get agreement to
establish is, firstly, some sort of auditing to give us a base
line. If we cannot do it individually, is there some way we might
know the scale of the problem across the European Union? Secondly,
there is the whole question of coordination, how we share that
information and share it properly if we, or another Member State,
are to have a successful prosecution. We do need to have further
debate on exchange of evidence. The exchange of information and
the mutual exchanges at the moment are not really facilitating
that type of work—I will be tactful—as well as it
should to enable cases, which are highly complex and spread across
a number of Member States, to be prosecuted in any one. The answer
is yes, but we need to put new points on the table. This question
of evidence is crucial and I think the base line of the auditing
as well.
Q226 Lord Blackwell:
In getting the evidence and getting the information flows, are
there legal barriers between the different States in terms of
the way the laws interpret this, which have to be solved first
or is it just a question of co-operation and willpower?
Dawn Primarolo: We believe the legal framework
permits this but I am sure you will appreciate that other Member
States, who might be concerned with regard to exchange, need to
explore that more. For instance, on the 21 February conference
what we are hoping to do, because we have been discussing outside
the European Union with the Dubai authorities and we now have
a Memorandum of Understanding with them about the flow of evidence
which is much more complicated coming from quite different legal
systems, is to demonstrate how this can be achieved and then try
and explore within Europe. You will have seen reported, the Dutch
authorities actually took action within their remit, on which
we jointly worked with them, so they would be prosecuted in the
Netherlands. There is quite a lot of discussion between the attorney
generals about how that is facilitated.
Q227 Chairman:
Just a supplementary on that, are we talking about getting the
police of one country to give evidence in the courts of another?
Dawn Primarolo: I think not. It is about collection
of evidence. I might need some support because I am not a lawyer.
As I understand it, it is about actually having the evidence,
how the evidence is collected and then transmitted.
Mr Eland: Exactly that. There will be occasions
where we will ask the authorities of another country to ask some
questions or to find out information, and obviously where that
is concerned with a criminal investigation you have to ensure
it fully follows rules of evidence and is properly gathered so
it is then usable in the UK courts. It is making sure that process
is properly followed through. In some cases it is simply just
getting information about a company or something, it does not
involve any intrusive powers, and that can simply be obtained
in the normal way through the mutual assistance arrangements.
There is usually little problem with that, it is more the criminal
evidence that we have to be very careful about.
Q228 Chairman:
That is one of the things making life difficult in prosecuting
people who have committed crimes against the United Kingdom with
that system.
Mr Eland: We have some very good operational
relationships with a number of countries. They have assisted us
in operations and we have done joint operations with them. We
did a large scale operation just before Christmas which involved
four other Member States all working simultaneously to carry out
the operation. What we want to do through this conference is to
share that practice and try and leverage it across a wider span
of countries.
Q229 Lord Inglewood:
What I would like to do is ask a few questions about the administrative
approach to tackling the problem. I would like to break them down
to bite sizes and if you could give me bite size responses we
can move on. The starting point must be the recognition that an
enormous amount of public money, figures have been bandied about
of £2.5 billion, going walkabout and therefore it follows
that whatever is being done now is not working successfully to
deal with the problem. Is that fair?
Dawn Primarolo: I do not think it is fair. I
agree with you the scale of the challenge of revenue that we believe
was subject to fraud in the VAT system. What I would say to you
is the arrangements we have in place now, or the evidence we have
from trade statistics, show us that our current administrative
arrangements are having a downward pressure to the point where
it is now miniscule. There are reasons for how we came to be at
the point we were before we changed our administrative response
which is to do with legal cases. I fear I have gone on too long.
I can tell you why I think our administrative practices work now
and I have a view about how we came to be in a position where
we needed to change our administrative patterns.
Q230 Lord Inglewood:
The key point that emerges from that reply is you are saying to
the Committee, by virtue of the recent changes in your administrative
practices, you have, to use the word I use with a bit of care,
cracked the problem?
Dawn Primarolo: The current manifestation of
this type of carousel fraud is being held in check by our current
administrative arrangements. The challenge to the system will
be whether our preparations and our risk assessments hold if it
mutates and whether our early warning systems are in place. We
are deploying huge amounts of resources to keep this administratively
in check.
Q231 Lord Inglewood:
When you say you have it in check, does that mean you think the
extent of the fraud through the existing mechanisms employed by
fraudsters is likely to decline?
Dawn Primarolo: Certainly the indications from
the trade figures, ONS figures, indicate there has been an absolutely
massive drop.[2]
I cannot trip those off my tongue but we could send a note to
the Committee demonstrating how effective and showing the amount
of revenue that is now protected as opposed to vulnerable.
Q232 Lord Inglewood:
We have had evidence given to us that the administrative measures
you are taking are such that, for example, it is said that the
approach frequently adopted by HMRC is that it is better that
innocent people do not receive money they are entitled to than
fraudsters get away with things. The effect of this is to be extremely
damaging on the commercial viability of honest traders carrying
out trade, which is, after all, very important for the national
well being. What, if any, thoughts do you have about that?
Dawn Primarolo: I would rebut that suggestion.
In all the Department is doing, and that will come out in subsequent
questions and the difficulty in dealing with this issue, we are
constantly reflecting that the vast majority of businesses, and
the huge amounts of VAT flowing in and out of the Department,
are discharging their obligations absolutely correctly and we
want to do nothing to undermine those. We have an obligation to
defend the revenue as well so we have to look at a balance. If
we look at the numbers of registrations we are looking more closely
at, you can still see that 95 per cent are going through on time
or in under 25 days. There is a difficult balance to strike there
between protecting the revenue and trying to deal with the organised
crime and facilitating business and making sure they are not damaged.
I am not complacent about it. I think we have the balance right
but the Department constantly reviews it in terms of how many
companies we might have that were investigated to a greater degree
and turned out did not require it. That information is fed back
into the system to help with the risk assessment. The figures
do not indicate there is a wholesale assault, or even an unreasonable
assumption, placed against legitimate business. In fact, if anything,
we probably erred on the side of trying to protect legitimate
business and still facilitate that and take more pressure than
we should on the revenue.
Q233 Lord Inglewood:
We have had evidence given to us, admittedly some of it hearsay,
that there are individual businesses that are owed millions of
pounds worth of VAT and that the delay is going to have the effect
of putting them out of business. Of course you are right that
you have to look after the interests of the taxpayer but, put
it this way, it is rather bad luck if you happen to be one of
the people who is put out of business.
Dawn Primarolo: We are not just randomly selecting
businesses from the VAT returns. The Department has a risk assessment.
The whole point is, on the face of it, it may be perfectly legitimate
but the Department has a series of risk assessments that would
then require, for instance, a registration to be looked at more
closely. I agree there is a balance here between operation and
facilitating business. If we look in the period April to December
2006, out of 284,000 requests for registration 3,543, to be precise,
required closer scrutiny, a third of that number were rejected,
1,000 of the applications were registered but with conditions
because we were still concerned, and the rest, so there is a proportion
there, were registered but were in the longer time period.[3]
If you set that across all registrations, it is a small number
and the challenge to the Department is to analyse how that small
number which should not have been there got there and how we can
refine the risk assessment to make sure we are not catching them
subsequently. That is the best we can do.
Q234 Lord Inglewood:
I agree that the challenge to the Department is to get it right.
We have had some evidence from Hassan Khan & Co, solicitors,
who are, I suspect, quite well known protagonists to the HMRC
lawyers. Their letter concludes that the administrative approach,
quite apart from any economic damage it might impose on the country,
will almost certainly lead to problems in the courts. Their evidence
concludes on that count: "It will also almost certainly in
due course result in very significant damages claims against the
United Kingdom for failure to adhere to basic accepted principles
of Community law." My concern is that in order for your administrative
approach to work properly, you are going to find the only way
you can do it is by consistent breaches of national and European
law and, therefore, you are between a rock and a hard place.
Dawn Primarolo: We are not breaching law. We
might come on to the various ECJ cases—I will not do that
now but we can come back to that—which quite clearly indicate
the question of "knew", "should have knowledge"
or "could have had knowledge". I refute what is being
said. It is certainly true that this group of people who are seeking
to steal tax money are very litigious and put us under considerable
pressure. The test will be in the courts should there be a legal
challenge. Mike possibly has some figures which would give you
an indication of where we are with regard to verification. Can
I make it absolutely clear that we are not breaching any European
directives, rules or laws in any way. We are absolutely fairly
and squarely right in the mainstream. We can come back to that.
Mr Eland: We are pursuing a policy which is
really dictated by the recent European Court cases which say that
repayments can be refused if the trader should have known about
the fraud or did, in fact, know about the fraud. What we are doing
with this verification campaign is to look at a whole range of
suspect payments and investigate them against that test. There
have been applications to the High Court for judicial review of
this process to test precisely whether it is legitimate following
those court rulings and whether it is proportionate and reasonable.
Of the 14 applications for judicial review that have been heard,
we have won in every single case. 11 of those 14 have been heard.
It has been upheld in each of those cases that what we are doing
is reasonable and proportionate and can continue. Three are still
outstanding. This process has been subject to judicial scrutiny
and has been upheld.
Q235 Lord Inglewood:
If I could conclude by saying it seems what you are saying to
us is it is your view that my basic proposition, which I put to
you for your comments, that you cannot administratively deal with
this problem other than by breaking the law, is not true and you
feel you are, (a) dealing with the problem administratively and,
(b) not breaking the law.
Dawn Primarolo: Precisely.
Q236 Chairman:
May I just pick up on this. Were I to set up a business dealing
in mobile phones and gain a VAT registration and then find myself
trading, down the line, with a villain, is there guidance what
HMRC's considers a reasonable amount of due diligence to have
done in order to ensure that you cannot be seen to be knowingly
dealing with criminal persons?
Dawn Primarolo: Can I say that given how MTIC
fraud is perpetrated, given the vast amounts of money, and given
it is not connected actually with economic activity, it seems
to me inconceivable that a trader could be in one of these supply
chains and think that it was totally innocent. The court cases
in the ECJ, FTI, Bond House and Kittel, all
return to a similar theme, and this was the question of knowing,
or having reasonable grounds to know, that it was a fraudulent
activity. Given that goods rarely move, in fact there are not
any goods in many cases, HMRC would clearly supply advice, within
the remit that they can, if a trader came to us and was concerned
and indicated they were concerned and worried about their supply
chain. I do stress when we talk about circular transactions 54
times through I do not know how many countries inside and outside
the European Union, and sometimes in goods that are not even available
on the market, it is a bit difficult to comprehend that they could
not have known, although the Department's job is to get the evidence
according to the law to demonstrate that. I am a little surprised.
In the industry where there is the greatest amount of attempted
fraud, mobile phones and computer chips, they have remained silent
because clearly all the legitimate businesses in that sector,
which is the vast majority, have also something to gain by making
sure that we squeeze this out of the system. If you suddenly decide
you want to put in an application to refund £100 million
in VAT and you have not actually done anything for it, chances
are it is not a legitimate transaction.
Chairman: We do hope to talk to one of
the biggest mobile phone companies to see if we can get a little
closer to this.
Q237 Lord Kerr of Kinlochard:
I want to make sure I understand your answer to the first set
of questions asked a moment ago. The questions were about the
scale of the problem. In your two memoranda of evidence you have
given us numbers on the scale of the problem: in 2004-05, £1-1.19
billion; 2005-06, £2-3 billion, so a rising trend even though
the numbers are broad brush. Am I right in thinking that in answer
to Lord Inglewood's first set of questions you said you thought
the problem was now cracked? Can I assume therefore that the numbers
for 2006-07, when complete in six weeks time, will show the trend
reversed?
Dawn Primarolo: I was not saying it is cracked
on the basis of qualification, and it depends where it mutates
next if it does, but in terms of this particular carousel fraud
with the mobile phones and the computer chips, the evidence we
have at the moment, particularly through the ONS figures and our
own operational evidence, is that there has been a huge downward
pressure on that particular type of fraud and the potential losses
to the Department and to the taxpayer are considerably reduced.
Within the bounds of what I am able to release at this time, because
we are not going to do a commentary on it, it is at this point
in time that I will ask my officials to provide a note to the
Committee indicating where we believe we are. If we look at the
ONS figures on trade and their estimates, which are done on a
monthly basis, they show absolutely massive changes have taken
place. The challenge will be what happens next and whether we
can keep pace with it.
Lord Kerr of Kinlochard: A note would
be extremely helpful.
Q238 Lord Inglewood:
You rightly refer to a caveat: unless this mutates. Is there any
evidence in the figures you have of a mutation actually taking
place as of now?
Dawn Primarolo: As of now there is no evidence.[4]
The challenge is to make sure that the risk assessment ensures
that should there be a change we immediately respond to it.
Q239 Lord Blackwell:
I want to quickly follow up the point you made to the Lord Chairman
about innocent parties and your point you thought it was inconceivable
people did not know they were involved. One of the questions raised
is not people who are found to be guilty but people whose VAT
rebate may be delayed while investigation is going on and that
delay could cause problems. Do you have any view or estimate of
what the scale of numbers or money is involved in legitimate innocent
traders who may have their VAT rebate delayed as a result of the
administrative process?
Dawn Primarolo: I do not believe we have those
figures because the numbers that we are talking about, in terms
of the number of traders, is so small. Nonetheless, it is an important
point if they should not have been in the process. That is the
difficult balance that the department has to strike. Although
there have been assertions and anecdotal evidence, we do not have
any evidence at the present time that a legitimate company has
gone out of business as a result of our verification. In all honesty,
I could not put my hand on my heart and say it might not happen
because that is always going to be a difficulty.
2 Note by Witness: As stated in the supplementary
memorandum, the ONS uses trade data supplied by HMRC to make adjustments
to the UK's Balance of Payments statistics, to reflect missing
or unreported trade as a result of MTIC carousel frauds. Back
3
Note by Witness: On further examination, the figures for
the period were 207,000 requests for registration, 8,923 required
closer scrutiny, 3,543 were rejected and another 1,818 applications
were registered with conditions because we were still concerned. Back
4
Note by Witness: The vast majority of all identified MTIC
fraud has consistently been perpetrated using mobile phones and
computer chips. There is no evidence of widespread mutation into
other goods at this time, although a wide range of other goods
have been and continue to be used. This is regularly reviewed
by HMRC. Back
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