PROTECTING INDIRECT TAX REVENUES

The growth in cigarette smuggling has been stopped for the first time in a decade, the Economic Secretary to the Treasury, John Healey, announced today, but there would be no let up against those who abuse the tax system and threaten the revenue required for investment in UK public services.

Economic Secretary, John Healey, said:

In this Pre-Budget Report, the Government has renewed its commitment to create world-class public services and to tackle child and pensioner poverty. If people are paying their fair share towards achieving those objectives, they have the right to expect that everyone else will do the same, and that the Government will crack down hard on those who do not.

Cigarette smuggling

Two years ago, it was estimated that smuggling gangs, whose operations had been growing rapidly in recent years, would be supplying one out of every three cigarettes smoked in the UK by the end of 2002, if the Government had taken no action.

However, new figures published today show that - as a result of the Government's strategy to tackle tobacco smuggling launched by the Chancellor in March 2000 - the share of the market taken up by smuggled cigarettes has been held at 21 per cent and that the growth of cigarette smuggling has therefore been stopped for the first time in a decade. In addition, the Government announced that in 2001-02:

Customs seized 2.5 billion cigarettes destined for the UK, with the new network of x-ray scanners detecting 13 tonnes of hand rolling tobacco and 325 million cigarettes, 30 per cent of all those seized at UK ports;
Customs cut the size of cross-Channel passenger smuggling by a further 25 per cent, reducing the annual revenue evaded through this type of smuggling from £1.5 billion to just £290 million in two years; and
Customs investigators have broken up 83 major organised crime gangs involved in the large-scale smuggling and supply of excise goods.

Protecting indirect tax revenues, a paper published today, explains how the same strategic approach to tackling tobacco smuggling is being applied across the excise duty regimes, with the launch of a major strategy designed to tackle the misuse of rebated fuels, and the formation of a new Joint Spirits Fraud Task Force through which the spirits industry now provides direct support to front-line Customs officers to help them detect illicit and counterfeit spirits. The paper also reviews the new package of measures announced by the Government in October to reinforce the rights of cross-Channel shoppers and strengthen the fight against cross-Channel smugglers.

Tackling VAT losses

Protecting indirect tax revenues also sets out the first ever concerted strategy to tackle the VAT revenue losses, which have a wide variety of causes from deliberate fraud and avoidance to simple error, which have been a standing feature of the VAT system for more than a decade.

Supported by the deployment of 1,000 staff to key problem areas, Customs will expand the support they give to help businesses meet their VAT liabilities, while cracking down hard on those who choose not to comply, who engage in abusive tax avoidance schemes, or who try to defraud the revenue.

This strategy is designed to reduce the proportion of VAT which goes uncollected, and produce more than £2 billion per year in additional VAT revenues by 2005-06 which - instead of being lost - will go to support increased investment and improvement in the public services. This is the Government's aim, but in line with the audited approach underlying public finances, it is incorporating a lower figure in the Pre-Budget Report public finance forecast.

DETAILS

Tackling tobacco smuggling

In March 2000, the Government launched its Tackling tobacco smuggling strategy, which is designed to put tobacco smuggling into decline by 2003, with £209 million provided for investment in almost 1,000 front-line staff and investigators, and a national network of x-ray freight scanners designed to detect bulk consignments of smuggled tobacco.

After the first year of the strategy, when Customs succeeded in slowing the previously rapid rate of growth in the UK illicit cigarette market and held its share of the total UK market to 21 per cent, the key target for 2001-02 was to slow that growth further and hold smuggled cigarettes to 22 per cent of the total UK market.

The second-year results show that Customs have exceeded their key target, restricting the illicit market share to 21 per cent, and thereby stopping the growth in the illicit market for the first time in more than a decade. Customs have also seized 2.6 billion cigarettes in 2001-02, making a total of more than 5 billion cigarettes seized in the first two years of the strategy. Of the 83 major excise smuggling gangs broken up by Customs, 60 were involved in the large-scale smuggling and supply of illicit cigarettes.

Customs have also achieved a further 25 per cent reduction in the amount of revenue evaded through the cross-Channel passenger smuggling of tobacco and alcohol, following last year's 75 per cent reduction.

As a result of this success, cross-Channel smugglers have increasingly sought to pose as shoppers in their attempts to evade detection. In October the Government announced a new package of measures designed to be fair for honest shoppers, tough on criminal smugglers, and clear about the distinction between the two (see Notes for Editors).

Protecting indirect tax revenues

Protecting indirect tax revenues, a paper by Customs published today:

explains why it is essential to tackle those who abuse the tax system to protect the revenue required for investment in essential public services, and to protect the competitiveness of legitimate businesses; and
reviews the way in which the Government's successful strategic approach for tackling fraud has been applied across its excise regimes, based on accurately assessing the problem, setting clear objectives for tackling it, identifying the measures and resources required to achieve those objectives, and delivering them.

Protecting indirect tax revenues also sets out the Government's new strategy to reduce the long-standing VAT revenue losses caused by fraud, avoidance, non-compliance and the failure of businesses to register for VAT.

These losses - measured as the proportion of the VAT that should be collected - rose fastest in the early 1990s, but have stabilised over the past six years at 12 to 14.5 per cent. The Government is determined to reduce this shortfall using the same strategic approach that it has applied successfully in relation to losses in the excise duty regimes.

The Government believes that businesses that abuse the tax system must not be allowed to compete unfairly with those who abide by it. It also recognises there is a difference between those businesses which have genuine difficulty complying with the VAT rules, and those which deliberately bend or break them.

The new VAT strategy is therefore based on an integrated approach which will continue to improve the service that Customs offers to businesses, make it simpler and less costly for them to comply with the requirements of the VAT system, and crack down hard on those who continue to abuse the system through fraud, abusive avoidance schemes and persistent non-compliance.

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The strategy will be supported by the deployment of more than 1,000 staff to the key problem areas over the next three years, with which Customs will:

reinforce their efforts to tackle VAT Missing Trader Fraud, by speeding up the identification and challenge of bogus traders attempting to complete intra-Community transactions and disappear without paying over the VAT due to Customs;
increase the number of challenges brought against existing abusive tax avoidance schemes, and identify and challenge new schemes before they can be widely marketed; and
combine increased support, education and advice for compliant and newly-registered businesses with a range of specific measures to target, prevent, deter and punish businesses which choose not to comply or fail to register when they should.

The strategy will seek to stop the long-term growth in the losses as a percentage of the VAT that should be collected, and cut them to 12 per cent by 2005-06, thereby reducing the size of the problem to the levels of ten years ago. The measures contained in the strategy are designed to produce more than £2 billion per year in additional revenues by 2005-06. This is the Government's aim, but in line with the audited approach underlying the public finances, it is incorporating in the Pre-Budget Report finance forecast a lower figure of £1.4 billion per year by 2005-06.

To accompany Protecting indirect tax revenues, the Government has also placed in the libraries of the Houses of Parliament a technical paper, setting out the methodology which has been used to produce estimates of leakages within the VAT system, and updating the methodologies relating to estimates of fraud in the excise duty regimes.

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NOTES FOR EDITORS

Click here for copies of Protecting indirect tax revenues. Copies of relevant earlier papers, Tackling tobacco smuggling (published 22 March 2000) and Tackling indirect tax fraud (published 27 November 2001) are also available at www.hm-treasury.gov.uk and www.hmrc.gov.uk.

Copies of Protecting indirect tax revenues and Customs' technical paper on the methodology of its estimates, Measuring indirect tax losses, are also available on request from: Analysis Division, HM Customs and Excise, 7th Floor Central, New King's Beam House, London SE1 9PJ.

Summary of the VAT strategy

The key measures which will deliver the VAT strategy are as follows:

the deployment of 1,000 staff both to enhance existing efforts in the key problem areas and provide the resources for the new activities described below;
a new out-reach programme designed to get businesses, especially newly-registered ones, into a sustained pattern of voluntary compliance;
a broader-based, intelligence-led, risk-based approach to tackling non-compliance, based on improved analysis of the patterns of non-compliance, and targeting of resources on high-risk sectors of the economy;
an increase in the use of deposits and guarantees to secure timely VAT payments from businesses with histories of persistent non-compliance;
a one-off, short-term scheme where unregistered businesses operating above the VAT threshold will be able to obtain relief on their penalties if they come forward for registration voluntarily;
followed by a tough crackdown - alongside Inland Revenue - on those businesses who continue operating above the registration threshold but outside the VAT system;
the recruitment of a number of new highly-specialised anti-avoidance experts with proven ability to identify and shut down legislative loopholes and abusive tax avoidance schemes;
the inclusion - alongside the Regulatory Impact Assessments which accompany new legislation - of a specific avoidance impact assessment, explaining the elements included to prevent avoidance and the steps taken to make the legislation avoidance-proof;
a substantial increase both in the speed with which avoidance schemes are identified, and in the number of schemes challenged;
a stepping up of efforts to prevent bogus traders from registering, identify those already on the register, stop their frauds before they grow, and recover VAT Missing Trader debts from the fraudsters; and
the use of Customs specialist investigators, with proven track records in dismantling organised criminal operations, to target the gangs behind Missing Trader Fraud.

Cross-Channel smuggling

To protect the rights of honest cross-Channel shoppers to bring back as much tobacco as they want, for their own use, the Government announced in October that:

the indicative levels for tobacco would be increased from 800 to 3,200 for cigarettes (equivalent to 6 months supply for the average smoker), and from 1 kilogram to 3 kilograms for hand-rolled tobacco;
a new step-by-step guide to the appeals process would be published, and a review launched to simplify the present appeals and complaints system; and
the burden of proof on the individual to show that goods are for their own use would be replaced with new legislation, obliging Customs to satisfy themselves that goods are for a commercial purpose, and setting out the factors officers may consider in order to come to such a view.

To strengthen the action taken against smugglers, the Government also announced that:

there will be more prosecutions of large scale and regular smugglers;
Customs will prosecute anyone who commits violence against Customs staff;
while small-scale first time offenders will be offered their vehicle back for a fee equivalent to the amount of duty which has been evaded, large scale and repeat offenders will have their vehicle seized, and not restored; and
cross-Channel operators will be challenged to step up the part they play in cooperating with Customs to catch smugglers, by providing accurate and timely information, both to Customs and the public.

The full text of the speech on 29 October 2002 by John Healey is available at www.hmrc.gov.uk/pbr2002/ce1.htm

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