Committee of Public Accounts

Press Notice No. 15 of Session 2005-06, dated 6 December 2005


Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:

"Hydrocarbon oils fraud and VAT losses cost the public purse almost £13 billion in 2003-04. While there has been some improvement in cutting losses, a mountain of money is still being lost.

"The Registered Dealers Scheme for hydrocarbon oils was established successfully, but the Department seriously underestimated the number of traders dealing in rebated oils. Traders have been slow to adopt electronic returns and a target should be set for them to do so. Intelligence and enforcement activity varies from region to region and few fraudulent traders have been brought to justice. Who can believe that potential crooks are being effectively deterred?

"The Department has made good progress in cutting VAT losses as a proportion of the total amount collectable in theory, but losses each year amount to an estimated £11.9 billion. The Department has so far been unable to determine how much of the extra revenue brought in is down to enforcement activity and how much is simply the result of economic growth. It is also unable to compare individual traders' compliance performance with other traders within the same sector or industry. Continued progress will be heavily dependent on the new HM Revenue and Customs doing a far better job of intelligence gathering and analysis."

Mr Leigh was speaking as the Committee published its 15th Report of this Session, which examined the HM Customs and Excise Standard Report for 2003-04.

HM Customs & Excise (Customs, now part of HM Revenue and Customs) collected £162 billion of gross receipts in 2003-04 in value added tax (VAT) and excise and customs duties from over 1.8 million business traders. The two most significant revenue streams are VAT, which generates £63.6 billion net, and hydrocarbon oils duty, mainly on petrol and diesel, which provide £12.7 billion and £9.8 billion net respectively.

Customs provide annual estimates of the level of hydrocarbon oils fraud, and report that it cost the Exchequer some £850 million (6% of the market) in 2003. Customs have devised and implemented a strategy to tackle this fraud and to meet their Public Service Agreement target to reduce the scale of the illicit market to 2% by March 2006. The most recent available data show that at the end of 2003, earlier reductions in fraud appear to have levelled out and amounts lost are increasing.

Some oils are not subject to the standard rate of fuel duty. Those used for agricultural purposes or as heating oil, for example, attract a lower rate of excise duty than that charged on fuel for road vehicles. Misuse of rebated fuel, particularly diesel, represents a significant risk to revenue. Customs have responded with a regulatory scheme, the Registered Dealers in Controlled Oils (RDCO) scheme, to control the supply of rebated oils. This scheme requires all dealers in controlled oils to register with Customs and to provide returns giving details of their customers. Dealers are also required to take reasonable steps to ensure that their sales are for legitimate purposes.

The RDCO scheme has been implemented successfully but there have been problems along the way. In its Regulatory Impact Assessment, used to inform decisions about the effect of new legislation and regulation, Customs estimated that some 1,200 traders would be required to register under the scheme, but in practice some 4,700 have registered. Through their initial research, Customs did not correctly identify the number and average size of traders to be affected. Traders have been slow to use e-filing for returns required under the scheme and Customs have had to use more staff for manual processing.

The effectiveness of the UK Oils Strategy rests on reducing the size of the illicit market. But the data to underpin Customs' estimate of the level of fraud are available only annually from the Office for National Statistics and the Department for Trade and Industry, so Customs cannot measure progress in closing the tax gap on an in-year basis. Better information would enable Customs to use resources to tackle fraud more effectively.

Customs estimate that VAT losses cost the Exchequer £11.9 billion a year. Customs have a VAT compliance strategy aimed at reducing VAT losses from 15.8% of total theoretical yield in 2002 to 12% by 2006. The results for 2003-04 indicate that they have made good progress, with the VAT gap reducing to 12.9%.

Small and medium sized enterprises pay around 56% of total net VAT receipts (£38.6 billion in 2003-04). Regional Business Services are the Customs team responsible for collecting VAT from these traders. To use resources efficiently and to minimise the compliance burden on legitimate businesses, Customs do not make direct contact with all traders every year, but use risk assessment to select traders for assurance activity. Customs' VAT compliance strategy has led to a more flexible and varied approach to risk assessment and resource deployment, co-ordinated by a national risk management structure. But this new approach has not yet been consistently applied by all regions.

Customs' focus on risk assessments places greater reliance on the underlying trader and trade sector data. They have undertaken new projects to help to understand the trader population and the risks posed by individual businesses and business sectors. Customs have launched an internal campaign to improve the quality of the information through an initiative to establish minimum requirements for information held for all traders.

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