Examination of Witnesses (Questions 240
- 259)
TUESDAY 6 FEBRUARY 2007
RT HON
DAWN PRIMAROLO
MP, MR MIKE
ELAND AND
MR RICHARD
BROWN
Q240 Lord Blackwell:
On the information you have, you believe it is minimal?
Dawn Primarolo: That is what I currently understand,
yes. That is information that has come to me. These are so highly
complex and, because of the evidence we need, the investigation
is so difficult that the Department is still erring on the side
of saying we may suspect it but we just cannot seem to get to
the evidence at a speed that would be reasonable. I am not saying
that is not being refunded to some people we suspect, but we cannot
get the evidence in time or enough evidence to deny payment.
Q241 Lord Steinberg:
I was pleased to hear you say you believe you will massively change
the figures, the current quotes of a loss of £2.75 billion
to £3.5 billion in answer to Lord Kerr's question. I would
be very interested in seeing that figure coming down. Can I also
mention OLAF? The number of investigations that OLAF do are considerable
but the number of prosecutions resulting from their investigations
are very few. I am hoping you are not tying yourself too closely
to what investigations they are doing. Can I be a bit more specific?
We are aware that some carousel traders have been using banks
in the Netherlands Antilles, and the First Curaçao International
Bank is one of the ones we believe you are investigating. Can
you tell me if you are investigating any other banks? Could you
also tell me about the flow of money and the criminal activity
and what way you are dealing with that? Can I then come on to
the second part and say that the fraudsters currently seem to
be using mobile phones as their area of "expertise";
are you prepared for a change in their tactics into other types
of goods and maybe services? Would you expect the Department to
be one step behind or up with events to counteract these particular
frauds?
Dawn Primarolo: The first set of questions is
around investigating. The Government and Department are investigating
and discussing all possible opportunities and collaboration, within
our legal constraints, to pursue a European-wide solution to this
particular type of fraud. We are using at the moment our own administrative
resources which are very resource intensive. It is a big challenge
to the Department for all the reasons you have identified. It
would be sensible to find those European solutions, and we might
come back to that. The issue around evidence, around legal ability
to share certain types of information, you will be aware, because
Her Majesty's Revenue and Customs Act went through the Lords as
well, that we are under, rightly so, strict conditions on when
we share taxpayer information, who the competent authorities are
and, even with taxation treaties, exchange of information and
under what conditions. Within those limits we are looking to see
across Europe how can we co-operate and we are trying to force
the pace. On the question of the First Curaçao International
Bank, I need to be very careful what I say here because the cases
are live cases. This was a joint operation with the Dutch authorities.
It is public knowledge that thousands of accounts in the First
Curaçao International Bank were frozen in connection with
MTIC fraud and those cases are being pursued. I am not really
able to divulge very much information on that. What I would say
is the reason that I was in Dubai the weekend before last was
because of the flows of revenue there and the co-operation that
we are developing with the Dubai authorities. I do not think we
have submitted a note to you on what has happened with the Dubai
authorities and where we currently are in understanding and working
with them but I think we can certainly provide that. That is the
main focus. It is outside the European Community and we are following
the flow of resources now from this Bank. You could ask further
questions but I have been heavily advised I need to be very careful.
I could reflect on this particular example and check with our
lawyers whether there is anything more we might be able to tell
you. With regard to the mutation and will we be one step behind
or one step ahead, what I can say is that we have the risk assessments
in place. We are in discussions with our European partners about
where they believe the risks are and we have the ability now to
respond far more quickly than we have before. One of the issues
when you talked about figures in the Pre-Budget Report was partly
there were two sets of figures that were published this time.
One was in a continuum with the original way we calculated which
gave us a much lower figure, but our extensive activity in pursuing
this money has also given us more information which has enabled
us to refine our understanding and we changed the calculation,
hence the figure that you see now as the £2-3 billion impact
on VAT receipts. I do not like to talk in terms of being one step
ahead or one step behind, I would rather say we are doing everything
we possibly can to have the assessments in place within the rules,
within the realms of not impinging heavily on legitimate business.
We believe we are in the best place we could be.
Q242 Lord Steinberg:
Can you help a little more without divulging too much? I understand
your difficulty. Can you tell me how many prosecutions are pending
in relation to your own department? Can you tell me how many other
banks you are investigating?
Dawn Primarolo: We are not investigating banks.
We were in a joint operation with the Dutch, tracing revenue flows
that then went somewhere else and resulted in the freezing of
the accounts. We pursue the fraud itself through the chains. Once
we are reasonably clear that it is a fraudulent chain with the
evidence then we want to find out where the money is going. We
are not investigating banks.
Q243 Lord Steinberg:
Can I rephrase that slightly and say that the chain you follow
of the fraud, does that lead certain banks to come up in relation
to the fraud?
Dawn Primarolo: At the moment we are pursuing
directly the accounts that were frozen from the First Curaçao
International Bank and there are at present accounts in Dubai.
That is as far as I can go.
Mr Eland: It is the accounts we are following
not the banks.
Dawn Primarolo: We cannot name them.
Q244 Lord Steinberg:
I am not asking you to name them but the trail does lead you presumably
to involve other banks.
Dawn Primarolo: The trail leads us to accounts
that are in various places, yes.
Q245 Chairman:
Can I take a supplementary while we are discussing enforcement
prosecution. Do you work with the Serious Organised Crime Agency?
Dawn Primarolo: Yes, very closely.
Q246 Chairman:
That is one of the things they are doing these days.
Dawn Primarolo: Indeed. They work in parallel
with the supply of information, intelligence and helping us refine
our risk assessment. Because it is about organised international
crime gangs, obviously they are tracking and doing work in that
area and information which assists us in pursuing stolen revenues.
Quite a lot of the officers were part of the HMRC before and those
very close relationships have been maintained, as you would expect
them to be. They have expertise that we need to perform this.
Q247 Chairman:
We have not heard an enormous amount about what SOCA are actually
doing so I am glad to have traced a bit of it.
Dawn Primarolo: A very good job they are doing
too.
Q248 Lord Cobbold:
You are giving us very much the impression that you have a big
problem more or less under control, you are beginning to win,
but it still seems to be, standing back, you are still nibbling
at the edge and the whole problem of this fraud and VAT system
in Europe is easily moved to other countries and other products.
Do you think this is a fair comment? Do you think there is a necessity
to see a complete look at the VAT system and, if so, what would
be the best solutions that could be achieved?
Dawn Primarolo: What I want to convey to the
Committee is that our current administrative arrangements are
a severe downward pressure on the potential loss. In that sense
it is good we are not losing the volumes of revenue but they could
still be a significant amount. There are questions raised rightly
about how the VAT system works across the European Union. As I
said at the beginning, this is not some clever re-interpretation
with tax planning of the rules; it is outright theft. Yes, there
are a number of things that need to be considered and some Member
States have put different proposals on the table. Austria and
Germany want a full reverse charge. France is absolutely hostile
to that proposition because it converts VAT to, in effect, a sales
tax. If you can talk about the beauty of the VAT system, it is
its fractional nature and so it is reducing the risk. If you can
only collect the money at the last point, then you have some trouble.
That is one area.
Q249 Lord Cobbold:
You may reduce the risk but it is very open to fraud.
Dawn Primarolo: In our view, and what we are
saying strongly to our German colleagues, it is actually in danger
of increasing fraud because if you collect it at the last point
these can be notoriously difficult points at which to extract
all of the tax. That is one issue on the table. Other issues are
greater control of cross-border trade which bring with it its
own problems. Coming back to the point about how the system works
to facilitate business, actually business likes the system we
have now. The downside is we have this carousel fraud in it. It
is a significant amount of money but a tiny number of perpetrators.
The question of whether we would look at zero transfers again,
whether the European Union needs to revisit whether or not we
allow zero transfer between Member States, these are all possibles
but they all bring with them other dreadful challenges and problems
in terms of operation in a single market or actually how it would
operate and the burdens on business. We prefer the combination
of pressures that we are using, administrative, better exchange
of information and, in particular, to improve information around
evidence and support for that to be more timely. We do think there
needs to be a small amount of tidying up of the rules but we in
the United Kingdom take the view that substantial overhaul is
not a sensible way to proceed. We will swap one set of problems
for another and potentially damage business in the process.
Q250 Lord Cobbold:
You do not agree with the German proposal either?
Dawn Primarolo: No, we are not sympathetic.
We see the German proposal is that Member States could have a
full reverse charge on an optional basis. Clearly not every Member
State does that and that brings in challenges. It is a huge challenge
to the tax administration in terms of how we go about collecting
tax and at what point we collect it. The Germans also said they
want the full reverse charge accompanied by very substantial regulations
and controls on how the system operates. We take the view that
would undermine legitimate business and is not the right way to
proceed because there are other things we could do as Europeans
to deal with this issue. They say you do not have to worry about
mutation, but you have to worry about a highly complex system
that is very difficult for business to cope with. We do not know
what it will do in terms of a single market and it would hugely
increase the compliance costs for tax administrations in trying
to get the money and possibly lead to lower resources being collected
because of the vulnerability of the end point.
Q251 Lord Cobbold:
Is there a European impetus at all to move to the next stage which
would be less open to fraud?
Dawn Primarolo: Yes, led by the Commission which
we have encouraged. For instance, at the December ECOFIN the Commission
were asked to accelerate their proposals, to bring proposals far
more quickly back to ECOFIN for consideration for the more speedy
exchange of relevant information. The summary of discussion, the
conference later this month, will provide the basis on which to
take forward the types of information and how Eurojust and Europol
might have a role to play in helping to do that risk assessment
and give us wider European analysis. The Germans and the Austrians
have required that the Commission reports back by the end of this
presidency on the implications for a full optional reverse charge
in Member States. I have to say most Member States are not attracted
to this proposition for the reasons that I have given.
Q252 Chairman:
You are puzzling us slightly because we all thought that the Chancellor
had welcomed French agreement for a derogation so that we could
put a reverse charge on a couple of classes of goods, one being
mobile phones. We are a little muddled to hear you say that you
do not think it is particularly useful.
Dawn Primarolo: Sorry, I was talking about a
full reverse charge. The Germans want to have a full reverse charge
across the whole of the system in a Member State on an optional
basis. There is precedence for this, a small precedence, for instance
when there were difficulties with gold bullion and a reverse charge
was used. We believe that a limited reverse charge helps us target
it, because it still has downsides in that very limited area.
The targeted reverse charge plus administration, plus looking
at some of the administrative rules offer the way forward.
Q253 Lord Cobbold:
Would you not be following the fraudsters and their next step?
Dawn Primarolo: That is the issue. The reverse
charge by itself is not a complete solution we need further consideration
by the European Member States on how we could improve our current
exchanges of information and collaboration in order to be sharing
information much more rapidly which would enable Member States
to act promptly where there was a potential risk to their revenue.
That is the only way forward if we are not to have a completely
new system which business would not like. It is the balance that
we talked about earlier on.
Q254 Lord Cobbold:
Is there any evidence of services being used by the fraudsters
in Austria?
Dawn Primarolo: No, we have no evidence of that.
We have seen nothing in our systems that indicate that. The difference
is we are tracking them. Other Member States may suggest that
it is going into other products but we have no evidence of that.
Q255 Lord Inglewood:
I wanted to ask a question quite similar to yours. As I understand
it, you said to me and to Lord Kerr we were on top of the problem
as currently constituted. That being so, I cannot see why the
Chancellor went and requested the reverse charge in this area.
If we are on top of the job, then there is no requirement for
it is there?
Dawn Primarolo: It is a question of resources.
I have said repeatedly we are deploying huge amounts of resources
to try and hold this in check. The reverse charge would hold it
in check. We could then monitor and use our resources to chase
up other things.
Q256 Lord Inglewood:
You could then release resources to chase up something different.
Dawn Primarolo: Indeed.
Q257 Lord Kerr of Kinlochard:
Are you going to obtain a derogation?
Dawn Primarolo: I am hopeful that we will, yes.
It is not unusual for requests for derogation to take this sort
of time. There is the issue of some of the technical detail because
of the concern for the wider reverse charge which is across the
whole of the VAT system in a Member State. The French in particular,
and we still have some technical details to settle, are concerned
that our reverse charge will be a stalking horse for something
wider. That is not the case. We need to settle these outstanding
points which I hope will be done.
Q258 Lord Jordan:
We have looked at most of the reforms that have been mentioned
here today. Whenever we mention them to witnesses we either get
visions of further problems, if they are implemented, or resolute
objections from other Member States. What has come across is that
several witnesses said that one of the major flaws in the system
was allowing goods to be traded across EU borders without VAT.
One, do you agree with this and, two, do you have or know of any
specific amendment which is likely to be proposed in the current
VAT rules at EU level that would actually make it less susceptible
to fraud?
Dawn Primarolo: Removing the zero rate for cross-border
supplies of goods is certainly one possible way of dealing with
MTIC fraud. However, and it is a very big however, it brings with
it its own enormous difficulties in then how we manage, across
all the Member States, the collection and paying of VAT on its
current basis. If we had a piece of paper which on one side said
what is pro for business having a zero rate and what is minus,
it is an enormous difference. Given it facilitates trade and is
of such enormous importance across the single market and operates
for the overwhelming majority of legitimate business as well,
the obligation on us is not to take away something that is of
such great benefit to business and the consumer. The obligation
on us is to find out how, by co-operating together, we can deal
with these rogue traders, these organised criminal gangs and that
is the path we are taking.
Q259 Lord Jordan:
You have referred to organised crime and it has been obvious to
us that the colossal rewards which carousel fraud can deliver
has surely attracted organised crime across Europe. Is the UK
being targeted by them because of its perceived VAT registration
regime and, if it is, what are you doing to deter them? Is there
evidence that we are moving in the direction of more severe sentences?
We have heard about the odd one now and then. The detection rate,
which is another great deterrent, is that going in the right direction?
Are there more victories than reported crimes?
Dawn Primarolo: We have no evidence which suggests
that somehow organised crime is attracted to the UK. The prosecutions
we are seeing through our own courts, increased sentences, severity
with which the judges are taking prosecutions in this crime, there
is no evidence there is a migration to the UK. Certainly some
of the principals who have been prosecuted so far are UK nationals,
UK-based. Clearly they do work internationally and that is why
we need international co-operation because the chain goes outside
our jurisdiction and we have to prove across the chain. The combination
of prosecutions in the court, the firmness of the requirements
on evidence following clarification of the three ECJ cases—because
the Bond House ruling in the ECJ took away one of the legal
points that we relied on in prosecution, although then the subsequent
Kittel case did bring in and reinforce the knowledge or
"should have known" point—indicate we are in the
right place but we should not underestimate. These people are
incredibly well resourced. They have the very best legal minds,
accountants and everybody else, and so have we. They are not opportunists;
they plan this as an international business to steal money from
tax administrations. We happen to be able to quantify it and we
are trying to tackle it in a much more transparent way than some
of our colleagues in the European Union but they have the same
problems.
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