Examination of Witnesses (Questions 340
- 359)
TUESDAY 17 APRIL 2007
MR MIKE
ELAND, MR
TONY WALKER
AND MR
RICHARD BROWN
Q340 Lord Cobbold:
What about migration to other European countries?
Mr Eland: We work with other countries to look
for movements across different boundaries. We hosted a conference
of all European investigators and associates recently to share
experiences and practice and look at how we could co-operate to
deal with that and we have mounted some joint operations. Last
year we participated in an operation which involved four other
countries and hopefully the people we caught as a result of that
operation will be convicted, so it is an international problem
and it does need to be dealt with internationally, and we are
working to do that.
Q341 Lord Jordan:
Mr Eland and your colleagues, as you know, it has been suggested
to us that the majority of this fraud is undertaken by criminal
gangs.
Mr Eland: Yes.
Q342 Lord Jordan:
I was interested when you were saying that you have had this international
conference. Is there now sufficient collective evidence that it
is being organised by established gangs who have migrated to what
they see as a soft target and have you any idea of the numbers
of people involved in this criminal activity? On the last point
where you just mentioned cases, are there any actual or pending
prosecutions and have you recovered any of the vast amounts that
this fraud has enabled people to take?
Mr Eland: In terms of evidence, I do not want
to get into too much detail, but I will try and give you a picture.
As I said in my description of the three groups, there is a group
of organising gangs who manipulate the chains, relatively few
in number—
Q343 Lord Jordan:
Established gangs or are they newcomers to the game?
Mr Eland: Some of them have criminal convictions
in other areas, some of them do deal in other criminal activity,
particularly money-laundering, and there is some evidence of drug-smuggling
as well, so yes, these are not purely set up for this fraud, it
is people moving out of other areas of criminality into this.
There are other people who have become effectively an organised
group that have specialised in this, so it is not all one type.
Finally, some established criminal gangs are now, as is normal
in the criminal world, extracting extortion from the organisers,
so some of the big London crime family types are actually saying,
"We want a percentage of your profit", so it is very
much into criminality and, therefore, we do work closely with
the Serious Organised Crime Agency and we also work closely with
a number of other police forces, with the Metropolitan Police,
Manchester Police and Staffordshire Police and a number of others,
in looking at this in the round. I think that answers part of—
Q344 Lord Jordan:
Are hundreds or thousands involved?
Mr Eland: It is a small group. It is in the
hundreds rather than the thousands, the low end of the hundreds.
There are not huge numbers of people, but they are serious criminals.
Q345 Lord Jordan:
Are any of them currently facing charges and have you recovered
anything from them?
Mr Eland: Last year we had two major operations,
one of which involved 400 of our own investigators and 100 police,
and we believe that the people in that operation were one of the
organisers, but it has obviously not come to court yet, so I cannot
give you any further details than that, but we arrested a large
number of people and we hope to bring that in a major prosecution.
In terms of the assets, I cannot give you the numbers off the
top of my head, but it is a part of tackling the fraud which we
do take very seriously. We were involved with the Dutch over the
Bank of Curaçao, which was a bank which was being used
for moving the proceeds of this fraud, and we have a number of
freezing orders in place on accounts in that bank, so it is something
we do take very seriously and go after.
Q346 Lord Jordan:
The derogation, as you were saying, is obviously going to be a
tremendous help. It has been suggested that this crime could even
go into very high-value products, not large numbers, but very
high-value products. Do you really feel that you have got sufficient
powers to investigate the potential breadth of this fraud and
the way in which it almost interplays with other groups? There
are freight-forwarders, for example, who might be facilitating
a crime, although they are themselves acting within the law. Do
you have enough powers or are you seeking any more?
Mr Eland: Other than the ones we are seeking
currently in the Finance Bill, which I touched on earlier, we
do feel we currently have the right range of powers. Because the
fraud does potentially migrate to anything, it might be that we
need to come back to Parliament in the future looking for additional
powers, but at present we feel we do have those powers. One of
the ways in which we have approached this fraud is to try and
use the full range of our activity. You mentioned freight-forwarders
and we do have our Customs staff who are involved actually in
checking the consignments and things as they go round, scanning
the numbers on mobile phones into a computer database so that
we can now start to actually see the rotation of carousels, and
obviously that is now acting as a brake on people doing it. In
the case of exports and freight-forwarders, we have come across,
as part of this extended verification campaign, a number of incidents
now where goods have not been exported when they are claimed to
have been exported or they have been mis-described or false values
have been given. There is a whole range of things like that where
we can bring some of the Customs legislation into play against
that, so we are trying to use the full range of powers.
Q347 Lord Jordan:
Have you any specific areas of worry yourself that you are thinking
about? You have tried to cover everything, but are there some
you are thinking of?
Mr Eland: None that I particularly want to highlight
to the Committee, but I do not want to give the impression of
saying that I think we have got enough powers and no, I do not
have any worries or that I am at all complacent. I do have a lot
of worries obviously with such a large-scale fraud that we do
tackle it responsibly and well without damaging legitimate business
where we can avoid that, so I am not at all complacent on that,
but I do not think we have anything missing at the moment. Ministers
have been very ready to legislate to help us in this and we have
had legislation in the last two or three Finance Bills and I think
that is keeping pace with what we need.
Chairman: We would now like to change
our focus a bit to, instead of grilling you about what you are
doing, what could be done differently.
Q348 Lord Blackwell:
Listening to you, I think we are all very sympathetic to the challenge
you have got, but it does, perhaps unfairly, feel a bit like putting
fingers in a dyke and lots of fingers as new holes spring, and
even though reverse charging is in a sense only a temporary derogation
for two years, because of the way definitions move it would be
difficult to imagine something which had relevance perhaps beyond
that, and if someone had a derogation for gramophone players years
back, how relevant would it be today? I think I am left with the
feeling that you are doing your best to deal with an issue that
is a problem of the way the system is designed and works, but
there is still an underlying problem in the way the whole system
is set up. If you think about what you could do, one solution
is just to accept that it is a function of the system and that
there will continue to be fraud of this scale and it may migrate
and you will run as fast as you can to keep a lid on it, but there
will be continual sore, a continual loss. The second solution
would be to say, "Can we change the VAT system to eradicate
some of the loopholes?", but it seems, and I would be interested
in your comments on this, that most of the things one could do
to change it may end up imposing more uniformity or more centralised
control over the system, so you run into the issue of whether
that is acceptable and whether it is uniform rates or a centralised
clearing house, but have you thought about any of those and are
there any of them which would work? The third solution is actually
the problem with VAT and whether we should extend the principle
of reverse charging to its logical conclusion and actually go
back to having a sales tax.
Mr Eland: I am going to ask Richard Brown from
the Treasury to come in on future systems. All I would like to
say, speaking from an operational perspective if I may, is that
yes, it is always the best solution to change the rules so that
things cannot happen in the first place. Any enforcement activity
is always going to be following on after the event or in response
to a failure, if you like, of those rules, so getting the rules
right, I agree, is obviously what we want to do. That is often
easier said than done. I will now hand over to my colleague from
the Treasury to talk about that.
Mr Brown: Given that we are where we are, having
the targeted reverse charge and the derogation agreed is going
to be a major weapon in our armoury as far as the fight against
VAT fraud and in particular MTIC fraud is concerned, but we are
more than prepared to explore all options that will allow us to
assist in combating VAT fraud. I think though that we have to
assess the possible options against probably three criteria. The
first is to ensure that the right tax ends up in the right place,
that is, the Member State of consumption, at its rate and that
is something which avoids the harmonisation. Secondly, the new
system that you put in place has got to minimise the potential
for significant new forms of fraud and non-compliance, and the
third point, again, I think the point you mentioned, is that we
have to avoid putting unreasonable burdens on business, and I
think Mike Eland would probably add "and tax administrations"
in the new system that we might put in place. It might be helpful
to take those criteria and talk briefly about what would happen
if you got rid of the zero rating of intra-Community supplies.
I can envisage systems where you would get the right tax paid
in the right place, and actually technology has moved on so that
you could probably do it on the basis of specific transactions
and you would not need the sort of clearing house operated on
the basis of macro-economic data which was discussed extensively
in the early nineties. In that sense I think the potential of
new technology means that one can look at other solutions that
were not available then. However, there would be, I think, in
almost all of the alternative regimes to the one that we have
in place at the moment, new non-compliance and fraud risks. For
example, could a Member State be certain that it would receive
the tax due from transactions involving a business based in another
Member State and the tax which the Member State and its business
would seek to recover, so that in place of the current arrangements
where the tax zeroes off you have both a payment and a claim associated
with it? Ensuring compliance across borders, which is what could
happen, is a very difficult thing to do and the amounts of money
that are involved are potentially huge. There would be around
£40 billion worth of VAT associated with goods coming into
and going out of the United Kingdom. To ensure that you are not
suffering very significant tax losses the level of compliance
that you would then need to have would have to be extremely high,
and if you were to ask me whether we could be confident that we
are in a position where the compliance losses would not be significant
I think I would at present have to answer in the negative.
Lord Blackwell: Could you just elaborate
on that point? If you get rid of the zero rate and then suppose
anything coming in came in with the originating country having
a rate of 15 per cent, say, so it comes in having had tax paid,
and on everything going out we collect 15 per cent, where is the
compliance risk there? Once it has come in somebody has already
collected the tax. We have not got to refund stuff across the
border. If it has gone out it will go out with export records.
It will cross a border somewhere where you can check that the
15 per cent has been paid going out. I understand the numbers
may add up to a different amount than the current system.
Q349 Chairman:
This is beginning to look to a lay eye like one of the more sensible
systems that one might consider, a flat 15 per cent tax which
takes the fun out of the fraud fundamentally. We do need to press
you on why that will not work.
Mr Brown: I understand. I do not think that
I have said that it would necessarily not work. What I have said
is that there would be considerable risks associated with such
a system and that the difficulty that arises is that, for example,
if you had the situation where a business in one Member State
failed to pay the tax due whilst in the other Member State you
have got the tax being claimed, how would you ensure that you
had not got one or other tax authority out of pocket and which
tax authority should it be? These are not problems that arise
when you have merely got transactions taking place within a Member
State.
Q350 Lord Kerr of Kinlochard:
Mr Brown, I think you are repeating yourself. I think this is
exactly what you said when you came to see us in February. I do
not think you totally convinced us then that the risks of being
defrauded by other people's fiscal authorities, governmental services
in other Member States, were as high as the present risk of being
defrauded by fraudster traders. We do see some possible attraction
in the areas which Commissioner Kovacs is talking about, and we
do not accept that there is a £40 billion risk of being defrauded
by other Customs revenue services across the European Union. It
seems to us that that risk must be lower than the risks you run
now from having goods crossing frontiers with no tax paid, leaving
you chasing the fraudsters by all these subtle methods you have
been describing to us. In principle I do not think we really buy
your £40 billion.
Mr Brown: I think that in forming a judgment
about the point you have put across you have to have a view about
the level at which we can reduce fraud and losses under the existing
regime and the combination of the reverse charge to get rid of
the problem with phones and chips plus the operational strategy
applied by HMRC to reduce the level much below the levels that
we have had before and that have led to the very large degree
of public interest in VAT fraud that exists at the moment. The
other side of the equation is the risks associated with collecting
the tax from other administrations or being confident that other
administrations are going to be, frankly, as interested in collecting
tax that is going to end up in the United Kingdom or some other
Member State as they are in collecting tax that is due in their
own.
Q351 Lord Kerr of Kinlochard:
It is not necessarily tax that is going across the frontier. Commissioner
Kovacs is talking about a different solution, as you know, whereby
everybody pays 15 per cent on intra-EU exports. You do not get
the money collected elsewhere. You get the money when a British
exporter exports. That seems to be the idea. He is interested
in 15 per cent which is not transferable from one country to another
but is retained by the country where the goods were produced.
Mr Brown: But that is an origin system.
Chairman: Yes, a flat rate origin system.
Q352 Lord Kerr of Kinlochard:
So?
Mr Brown: But the result is that the tax is
not ending up in the Member State where the consumption takes
place.
Q353 Lord Kerr of Kinlochard:
But it is open to the government of the country where the consumption
takes place to charge some more. Its rate could be higher. Yes,
it is a modified origin system that Commissioner Kovacs appears
to be talking about. That is why we are pushing you a bit. We
do not really buy your argument that you cannot trust other revenue
services to do their job. We think they are on the whole likely
to be more trustworthy than crooks; but we want to know what lies
behind your use of such arguments.
Mr Brown: Given that you are talking about an
origin system, there is a panoply of things that goes with it.
For example, what do you do about reduced rates in such circumstances,
a politically sensitive issue both for us and for other Member
States? I do not think that the ideas that Commissioner Kovacs
has advanced really address that sort of question and they end
up with money being in the wrong place. If you are a net exporting
economy you would show a gain from such a situation. If you are
an importing economy you would see a revenue loss, and that has
not been acceptable in the past and I am quite surprised that—
Q354 Lord Kerr of Kinlochard:
Let us come back to reduced rates for a second. Take, for example,
zero rating on children's clothes. The UK price of children's
clothes manufactured elsewhere in the European Union would go
up marginally if tax had been paid on their export from that other
country to us. The price of children's clothes manufactured in
this country or manufactured in China would not change at all.
We would still apply our zero rating. So there would be a marginal
increase in the cost of that part of the market occupied by children's
clothes produced elsewhere in the EU. That is all. I do not see
why that amounts to an argument of principle against what Commissioner
Kovacs is talking about. I do not see why our right to zero rate
sales in the shops of children's shoes and clothes would be affected
at all by what Commissioner Kovacs is talking about.
Mr Brown: The fundamental point is that the
right tax would not end up in the right country and you could
have winners and losers to the extent of billions of pounds as
a consequence.
Lord Kerr of Kinlochard: That is true.
That is usually true in life. I am with Lord Blackwell. I see
you rushing around thinking of extremely clever ways to stop the
water coming through the dyke and it seems to me the chances are
that the water is going to find new holes in the dyke, and therefore
I think we need to think about draining the lake.
Lord Trimble: At the risk of being naïve
on these matters, not just with regard to VAT on zero rating but
with regard to all taxes, is it not hugely desirable as a matter
of principle to minimise the disparities of tax rates between
trading partners? I am not going to go into harmonisation; I am
just talking of it as a matter of prudence, that once you let
rates of anything get to a significant disparity between ourselves
and anyone proximate to us you are creating a situation where
fraud and criminality will flourish and that there ought therefore
to be a general consideration, and it is largely in the same territory
that Lord Kerr has been raising, that that ought to be the case.
Q355 Chairman:
I was reading all the inquiry papers last week and this system
was not intended to be permanent; it was intended to be a temporary
system. What happened? Why did we collectively never manage to
achieve something that does not let water through every single
hole, because if you have two different tax rates, a vast difference
in tax rates anywhere, of course you get arbitrage, do you not,
whether through fraud or illegitimate activity?
Mr Brown: I think what happened was that Member
States looked carefully at the alternatives and have so far come
to a conclusion that they are less attractive than the transitional
regime that we have at the present.
Q356 Chairman:
Which is where you started. You said that, as it were, Customs
were doing so well in reducing the level of fraud that we should
in fact go on trusting them to do that rather than changing the
system. It does not seem like a great conclusion.
Mr Brown: I think the pluses and minuses are
such that at the moment ministers would not want to contemplate
moving away from the current regime. It is perhaps worth mentioning
though that there are discussions under way within the European
Union which will lead to limited introduction of taxation on cross-border
supplies specifically as a response to the development of new
technology and e-commerce, that is, the supplies of telecoms and
broadcasting, where what used to be national monopolies have been
replaced by businesses which can be mobile. The changes that are
under consideration there would lead to taxation across borders
and we are in the process of discussing and coming to, I hope
within the next few months, agreement about the mechanisms that
would support this new regime which is known in the VAT world
as the one-stop shop or the one-stop system. I think one of the
things that will do is probably provide a proving ground for the
arrangements which allow or involve a greater degree of co-operation
and a greater degree of reliance than we have at the moment between
one Member State and another in terms of collection of taxation
and ensuring it ends up in the right place, but not involving
anything like the sums of money that are associated with moving
to a full-scale removal of the zero rate on the intra-Community
supplies of goods.
Q357 Lord Maclennan:
Mr Brown, en passant you described the present arrangement
as transitional. Does that not imply that you have a recognition
that we are or should be moving to something else and are you
not able to say what are, as Commissioner Kovacs put it in the
paper which we have all seen, the required elements of such a
system? Could you not contribute to that debate which has been
opened up by Commissioner Kovacs?
Mr Brown: I think the United Kingdom is contributing
to the debate but we want to be confident that any new arrangement
that would be put in place would have less risk associated with
it than the current regime has.
Q358 Lord Maclennan:
In broad terms would you be able to tabulate the pros and cons
of the alternatives that would make that happen, and presumably
it would impact on different countries in different ways, as I
think, we agree, but nonetheless, looking at it from our point
of view and looking at it so far as we can, knowing the broad
parameters and the fiscal bases of the other partners in the EU,
can we not come forward with something rather more positive?
Mr Brown: In terms of judging the pluses and
minuses associated with the various regimes, the principles that
I mentioned at the beginning of this strand of questioning, namely,
that the tax ends up in the right place—
Q359 Lord Maclennan:
What does that mean? It begs every question I asked.
Mr Brown: In short it means that the VAT is
paid to the Member State where consumption takes place at the
rates that are applicable within that Member State.
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