25 November 2003
SPEECH BY ECONOMIC SECRETARY JOHN HEALEY to representatives of the mobile phone and computer chip industries on VAT fraud
Can I welcome you to No 11 and thank you for joining us.
In advance of the Pre Budget Report next month, I wanted to let you have an update on Customs’ enforcement of the indirect tax regime, and in particular of VAT Missing Trader Intra-Community (MTIC) fraud.
You bring different perspectives from business, law enforcement and tax advice. I want to set out both Customs’ successes to date and the challenges that lie ahead, before encouraging what promises to be a wide-ranging and well-informed discussion.
I’ve been Treasury minister for Customs for 18 months now, and I’ve been struck by two things: first, how complex, difficult and sometimes dangerous the job of Customs officers can be; and second, perhaps because of this, how strong the commitment is of Customs officers to their organisation.
Customs is a proud service. And I am proud to serve as Customs minister.
Customs is also an ancient service, with legal roots stretching back to the 11th century.
But the agency that was responsible in the past for import duties on French wine following the Norman Conquest, tax on male servants and excise on hair powder when wigs were in fashion … and for whom Geoffrey Chaucer, Adam Smith and Thomas Paine were all Customs collectors … has come a long way since King John first established a national Custom service in 1203.
It is still a major revenue department, collecting one third of the Government’s revenue - £109 billion last year.
It is the lead agency at Britain’s borders, operating the UK’s excise and prohibition regimes – and balancing such interdiction with the imperatives of trade facilitation and the single European market.
But it is also a major law enforcement agency, with the largest intercept capacity in Europe and a worldwide network of intelligence officers, responsible for bringing one in four of all serious criminal cases brought before the UK courts.
However, it is only in the last three years or so that these special non-revenue law enforcement skills have been systematically applied to fiscal collection and brought together with a new strategic approach to tackling tax theft and fiscal crime.
Strategic Focus
So fast and so far has the organisation moved that it is now hard to believe that until 2000, Customs and Excise had no clear picture of how much tax was potentially collectable and how much was lost to fraud and avoidance.
No comprehensive programme of research had been undertaken. No methodologies to estimate loss had been established. And no analysis of the nature of fiscal fraud or the full revenue risk for the taxpayer had been published.
Nor was the UK alone. Even now, only Germany amongst other EU states publishes an estimate of VAT fraud losses. And no other European country has set about analysing the scale of their indirect tax gap as we have done in Britain.
For years we didn’t know how much tax went uncollected, until
Treasury and Customs concluded that in a modern trading economy this approach was unsatisfactory for two principal reasons.
First, lack of information about how much tax we were failing to collect and why, restricted Customs operational planning, made them slow to react to new threats, diminished the value of their policy advice and almost certainly resulted in lower tax receipts.
Second, fraud is not in steady-state. Like most other areas of commerce, it is increasingly international and well resourced. And our capacity to tackle it effectively depends on understanding its patterns of activity and market dynamics.
Since 2000, Customs approach to countering fraud and other fiscal crime has undergone major change. Instead of a largely tactical response, Customs fiscal enforcement is now comprehensive and driven by overriding strategic outcome targets to close the indirect tax gap.
This strategic approach was pioneered by Customs with the Tackling Tobacco Smuggling strategy published in early 2000.
It is based on accurately assessing the size and nature of each indirect tax gap, setting clear objectives for tackling it, identifying the full range of operational responses required to achieve those targets, then monitoring the delivery of results.
From the mid-1990s tobacco smuggling grew rapidly, so that by 2000 almost one in five cigarettes smoked in the UK was illicit at a cost of more than £2 billion a year to the public purse. Customs target was to stop the rise and reverse the trend so that by 2005-6 the illegal market share is 17%.
The tobacco strategy encompassed legislative change with the introduction of fiscal marks, extra enforcement staff, state-of-the-art technology with scanners at our major ports and adoption of risk-based targeting backed by sophisticated investigation and intelligence skills, largely developed through Customs drugs work.
The Chancellor backed the tobacco fraud strategy with £209 million because it is essential to invest to enforce.
Without intervention the illicit cigarette market was set to hit 34% this year. Instead it is on a downward trend and over the three years of the tobacco smuggling strategy receipts have risen and more than £3 billion of revenue has so far been protected.
Similar strategic approaches have been put in place for alcohol, fuel and now VAT fraud. In each case, the characteristics of the strategy are similar:
- Published analysis of the scale of the fraud losses
- Targets directly focused on protecting tax revenues and reducing the fiscal gap
- Action within Customs across the compliance continuum, linking sophisticated law enforcement with traditional revenue collection
- A comprehensive range of measures from legislation to publicity to investment and finally
- Direct accountability to the Chancellor and to Parliament for the success of each fraud strategy.
The nature of the strategic focus and the accountability are particularly significant.
With the overriding imperative to reduce the illegal market share and therefore the tax gap, the tactics of traditional law enforcement – prosecution, disruption of organised gangs, seizure of criminal assets – all play an important part. They are necessary but not sufficient ends in themselves, and in setting out both to protect public revenues and to protect legitimate businesses, Customs’ ultimate goal is economic.
This strategic response to organised fiscal crime since 2000 is now paying dividends, with fraud losses already some £5.7 billion a year less than trends projected if no action had been taken.
Half the indirect tax gap is now due to serious, organised criminal attacks on the tax system.
In the new world of fiscal crime the image of tax evasion simply being cash-in-hand transactions, sharp accountants, sloppy bookkeeping or firms cutting corners is well past its sell by date.
The clearest, most serious category of organised fiscal crime – and the most recent example of Customs’ strategic response – is VAT Missing Trader Intra-Community (MTIC) fraud.
From the late 1990s losses from this type of fraud were growing by up to three quarters of a billion pounds each year. By 2001-02 MTIC was costing the UK taxpayer up to £2.75 billion.
These fraudsters create bogus companies, import goods VAT free, collect VAT on onward sales to customers and then disappear without accounting for the tax due leaving the tax payer hundreds of millions of pounds out of pocket.
MTIC fraud is perpetrated by businesses that are set up for the sole purpose of stealing tax and defrauding the revenue.
Their products of choice are small, high value, easily transportable goods, such as mobile phones and computer components.
Often these gangs simply move their goods around Europe, stealing the VAT they collect every time the goods move into the UK from another Member State.
Often the frauds involve complex networks of buffer companies where the same goods carousel around the fraudulent system many times. No real transaction is taking place: in some cases the goods simply move in and out of the UK without a genuine sale being made.
The sheer scale of this fraud is staggering.
At one time, it as not unusual to see 14 tonnes shipments of mobile telephones – enough to fill the cargo hold of a jumbo jet. Yet the phones are frequently European standard with two-pin plugs and, therefore, useless to the UK retail market.
In the first six months of last year, sales to Ireland of a leading computer chip exceeded the total market for those chips in the continents of Africa, Europe and Asia combined.
And according to VAT repayments data in March this year, one tenth of all worldwide mobile phone sales were from the UK to Holland – a country with a total population of only 16 million.
Now, unlike tobacco or alcohol or fuel fraud where there is a real market to supply with illicit goods, with MTIC there is no natural ceiling to the fraud, and it can escalate to alarming levels with huge volumes of goods going round and round while tax revenue is stolen at each stage.
Customs have seen packing cases where the same goods have circulated up to 35 times by which time the boxes containing these sensitive computer chips or mobile phones are falling apart.
In a recent prosecution, one defendant is reported to have said he doodled a face on a box of computer chips as it left the warehouse. He saw it reappear later with ears added, then again after that with hair!
But the very serious side of MTIC is that Customs are tackling hard core gangsters, not soft white collar criminals or firms doing dishonest business at the margins.
In a recent case involving £120 million fraud, Customs and their Spanish counterparts used bugging devices in cars and premises to maintain covert surveillance for 18 months, before making 39 simultaneous arrests at 70 properties across the UK and Spain. They also seized shotguns, hand guns and a machine gun in the raids.
An equally aggressive, sophisticated and systematic response is required of Customs to tackle this type of criminal fraud. The reality of today’s tax world is that a revenue organisation cannot survive simply through assurance activity for the huge majority of law-abiding businesses and individuals.
It must match criminal methods and maintain a blue-chip law enforcement capacity to ensure that taxpayers’ money goes where it should – into public services, not into the pockets of serious tax criminals.
The published commitment of the Government’s MTIC strategy is to slow, stabilise and reduce revenue losses by half by the end of this financial year. And Customs, as with other fraud strategies, will be directly accountable to the Chancellor and Parliament for meeting this tax theft target.
Customs law enforcement experience and resources are therefore reinforcing more traditional VAT assurance work, so that action is coordinated across the compliance spectrum, including:
- Stepped up registration checks, so all are risk- assessed before VAT numbers are allocated – resulting in the identification and refusal of over 1000 suspect registrations which could have cost up to £2 billion in stolen VAT; and cancellation of over 450 fraudulent registrations
- 450 extra VAT staff
- non-traditional fiscal enforcement methods, including intelligence profiling, covert surveillance, undercover and informant work
- DOCEX – highly sophisticated document and data matching technology, supplied to Customs by the US Drugs Enforcement Agengy
- New legal powers in this year’s finance bill on alternative evidence for input tax deduction, extended security and joint and several liability.
And Customs’ action is also coordinated across Britain’s frontiers, inland and internationally.
And I can release details today of the latest MTIC operation, when, in simultaneous dawn raids on 11 premises across the country Customs arrested 12 people and smashed a missing trader network thought to have pocketed £25 million in a single 25 day period.
Now, I do appreciate the sensitivities of those of you trading in the sectors that are badly blighted by MTIC and the fears that you as legitimate businesses may be caught up in a system designed to target serial VAT abusers.
As I explained in Parliament during debate in the finance bill standing committee, I recognise that the new legal powers are tough and we do not take them lightly. But we have introduced them with additional safeguards and, although it is unusual with anti-fraud measures, we have consulted with the industry.
The consultation confirmed – what I hope is still your judgement – that what businesses were being advised to do to avoid being caught up in a contrived supply chain were commercially reasonable and accurate.
But we aim to root out those attacking the VAT system and discourage legitimate businesses from dealing with them.
Let me return to the principal purpose and strategic target of the Government’s MTIC fraud strategy – to protect legitimate businesses and the public tax revenues.
The strategy has still to take full effect but we can see encouraging signs:
- Customs investigators are currently working on approximately 100 MTIC cases worth around £2 billion
- 44 buffer traders have ceased trading since Customs began issuing warning letters under the extended security powers from section 17 of the Finance Act
- repayments to known brokers have fallen from a peak of £600 million in the second quarter of 2002 to just £100 million in the same quarter this year.
This means one important thing for the taxpayer and the Chancellor, as he considers the PBR next month – VAT revenues are strong and the MTIC clampdown is playing a significant part. The Chancellor will be able to set out the position in the PBR – but indications are that VAT receipts are running about £2billion ahead of Budget forecast for the year as a whole.
A number of factors are clearly involved but our current estimates show the reduction in MTIC may be responsible for around a third of this.
We must however remain continually vigilant.
MTIC is a highly fluid form of fraud.
And as we know from long experience in tackling other forms of organised crime in drug running, human trafficking and excise smuggling, the criminal networks responsible are constantly capable of changing their tactics.
If we relax our focus, reduce our efforts or relegate the priority we now give to fiscal enforcement, then we will undermine the impact of the powerful anti-fraud strategies that Customs has put in place over the last three years.
We will allow the organised criminals to get on top again and put both Government revenues and legitimate trade at risk.
Customs is getting the upper hand but combating tax theft is not a battle that can never be conclusively won.
Where there are laws, there are law breakers.
Where there are taxes, there are tax fraudsters.
When King John set up customs, little can he have realised that he was launching 800 years of struggle to collect and enforce taxation due to the state.
Today, our Customs service continues this struggle with as much determination as it has ever shown over the last eight centuries.