Gerry Steinberg MPIn the House...

Commons Gate

HM Customs and Excise:
Standard Report 2002-03 (284-I)

Public Accounts Committee 26 Jan 2004

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Evidence presented on Monday 26 January 2004 by Mr Eland, Mr Hanson and Mr Wells

Q56 Mr. Gerry Steinberg (City of Durham): This is a very low key hearing and perhaps we should liven it up a little. I do not know what you think.

Mr Eland: I am perfectly happy.

Q57 Mr. Gerry Steinberg (City of Durham): It is quite clear that the amount by which the Treasury is being defrauded is between £600 and £700 million. One could argue that is not a lot of money, bearing in mind the amount of tax you have taken in which for alcohol is £7 billion. I was just going to work out the percentage when the Chairman called me, but there are so many noughts there I do not think I can do it. It must be a very small percentage. How much is taken in duty on tobacco?

Mr Wells: We collect around £8 billion.

Q58 Mr. Gerry Steinberg (City of Durham): So that is £15 billion in duty on alcohol and tobacco. How much is not paid in tobacco duty? Approximately how much fraud is there?

Mr Wells: Round about 18% of the cigarette market is illicit, so, doing my sums very rapidly, that is somewhere in the order of £2 billion I would say.

Q59 Mr. Gerry Steinberg (City of Durham): So we are talking about close on £3 billion. So we are being a bit complacent, are we not really? Three billion pounds out of a lot of money is still a lot of money. It seems to me that the problem is recognised but not a lot is done about it.

Mr Eland: On the tobacco front we have got the illegal market down from 24% and rising to 18%, so we are making progress in that area. We have introduced a number of measures in the alcohol area which I should like to think have stopped it rising as rapidly as it has, but clearly we have not done sufficient, which is why we are now looking to introduce tax stamps and various other measures which were announced in the PBR as an attempt to get that down as well.

Q60 Mr. Gerry Steinberg (City of Durham): From the report it appears that you do not know accurately how much fraud there actually is. If you do not know how much fraud there is, how can you take effective measures to stop what you do not know is happening?

Mr Eland: There are estimates. We believe they are good quality estimates. We have been working on them for three years, they have been examined by different people in that time including the NAO. We do not know for certain, but we have good quality estimates. Three or four years ago we did not even have those. We have made a lot of progress in setting up these estimates, precisely, as you say, so that we know what the problem is and we can tackle it.

Q61 Mr. Gerry Steinberg (City of Durham): How come it is much easier to estimate the fraud in tobacco and you seem to be able to judge how much fraud there is in spirits, yet you cannot do this for beer and wine? The report seems to suggest that you have no idea on beer and wine. Why is that?

Mr Eland: We have not been able to do this gap analysis, but we do know that in the beer area one of the major problems was the white van trade, the cross-Channel smuggling and we have a separate set of indicators there which has enabled us to confirm that we have pretty well got on top of that. Mr Wells might want to add something on the wider beer and wine market.

Mr Wells: The problem with a gap analysis on beer and wine is that it tell us that we have a negative gap, in other words that we are collecting more tax than there is beer being consumed, which is unlikely. We draw two principal conclusions from that: one that people understate their consumption of beer, which I think we probably knew already - I guess we probably all do that from time to time; secondly, we believe that the problem on beer is relatively small and therefore we are talking about a gap which is right at the margins of measurement. We believe that the overwhelming supply of illicit beer in the past has been through the so-called white van, cross-Channel passenger smuggling and we have reduced that very substantially through our activities on the cross-Channel routes.

Q62 Mr. Gerry Steinberg (City of Durham): In paragraph 3.3 we are told "... in January 2003, a number of prosecutions relating to major alcohol fraud perpetrated through London City bond warehouses collapsed". Why did they collapse?

Mr Eland: It collapsed because of defects in our investigation. We had not been able to identify fully documents which needed to be disclosed; procedural failures in the prosecution.

Q63 Mr. Gerry Steinberg (City of Durham): That brings me on to the fact that we have had a gentleman writing to us over the last few months about the fact that Customs and Excise have failed miserably in a number of cases. This gentleman is arguing that potential criminals are walking away basically because of the incompetence of the investigating staff and the way cases are presented; criminals are walking away yet the ordinary citizen who messes up his VAT is being penalised quite considerably. How do you answer that? Frankly we do hear very often on the television about a case collapsing because of this, because of that, because Customs did not present the case properly. You have just told us that the London City one collapsed for that very reason. Is that not a serious concern?

Mr Eland: It is a serious concern to us certainly and there was a period in the mid-1990s which is where a lot of these investigations originated, where our procedures were not up to it. We have made a whole lot of changes since then. We had a judicial inquiry looking into those City cases and Mr Justice Butterfield who conducted it thought we had made huge progress since then. I am hoping that for the future we are going to ---

Q64 Mr. Gerry Steinberg (City of Durham): If you do look at the report, paragraphs 3.38 and 3.39 - presumably we have all read it so I shall not read it - they do make pretty poor reading in that there seems to be no liaison with other departments and departments are not working with each other and therefore information is not divulged by one department to another department. If that is the case it is no wonder things go wrong.

Mr Eland: I do not think there is any evidence there of any systemic failure. Certainly there are isolated cases where people have not properly brought in others when they should but it is a very small number of cases out of the total which the NAO examined; it is three out of 50.

Q65 Mr. Gerry Steinberg (City of Durham): Could you tell me, as a matter of interest, whether you use former police officers as your investigating officers?

Mr Eland: Yes, we do have some people who are former police officers. We do recruit outside in the recruitment market for some of our investigators; others come from within the service.

Q66 Mr. Gerry Steinberg (City of Durham): It seems to me that in specialised activities such as prosecuting and evidence and presenting evidence you want somebody who is properly trained.

Mr Eland: I would not want you to think, because there have been some high profile prosecutions which have gone wrong that our overall record is unsatisfactory. In fact our overall success rate in prosecutions is better than the Crown Prosecution Service.

Q67 Mr. Gerry Steinberg (City of Durham): Could you send us a note on the statistics of how many prosecutions you have had in, say, the last five years and how many have been successful and how many have not been successful and why they have not been successful?

Mr Eland: Yes, we certainly can do that.

Q68 Mr. Gerry Steinberg (City of Durham): We have talked about the tax stamp. Even before I read this report I thought to myself that there was one way you could guarantee that you get your tax and that is to tax the product at its manufacturing stage. Why do you not do that? Why do you not, for example, at Newcastle Breweries tax them on every barrel of beer that they produce and then you could have a rebate system so that once it is sold, wherever it is going, the tax could be refunded. I accept that would be expensive, but presumably the amount of money which would be saved would cover the administration costs.

Mr Eland: It would be very expensive for us and it would cost the industry quite a lot. It would be possible to circumvent it by exporting and then bringing things back in from overseas. I am afraid that is not the total answer.


Q131 Mr. Gerry Steinberg (City of Durham): May I return to collapsed cases and quote to you from letters I have received from a journal? Perhaps you would explain it to me, because I did not understand what it meant and I am sure you do. A letter came to us all saying that another criminal case had collapsed because of the civil stance of the Customs and Excise in non-economic activity. I do not know what that means at all. Perhaps you could explain that to us.

Mr Eland: I am sorry, I cannot.

Q132 Mr. Gerry Steinberg (City of Durham): Then the actual article in the newspaper says "The trial was halted last Monday, 10 November, after the case was dropped by VAT commissioners. Details of the offences were not available at the time of going to press. In a Customs operation code named Entrée four men had all charges against them dropped by Customs for undisclosed reasons. A Customs spokesman confirmed that proceedings in Operation Entrée were stayed in the public interest. The news comes just a few weeks after Customs lost a VAT trial in Leeds Crown Court when five defendants successfully cited an earlier case relating to a company called Bond House, when it was determined that VAT does not apply to carousel fraud" whatever that means. "However, Customs claimed that the Operation Entrée case was halted for different reasons from Operation Dundee. Operation Dundee fell apart due to the indictment and Customs trying to amend it. Operation Entrée never went that far. We cannot go into detail for sensitive reasons. In another current VAT trial code named Expire Customs say the defendants are now due for sentencing this Friday, 27 November". Can you explain?

Mr Eland: I cannot give a precise reason for those cases. If you like, I could let you have a note on that. Sometimes cases have to be withdrawn in circumstances where there is a danger of exposing an informant or something else.

Q133 Mr. Gerry Steinberg (City of Durham): What is a carousel?

Mr Eland: The carousel frauds are VAT missing trader frauds where there is a movement around between different European countries and it is called a carousel. From the details you have given me, I cannot identify that particular case.

Q134 Mr. Gerry Steinberg (City of Durham): Cases.

Mr Eland: If you like, I can add that to this note we are doing on prosecutions.

Mr. Gerry Steinberg (City of Durham): Yes, if you would. Fine.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

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