Committee of Public Accounts

Press Notice No. 48 of Session 2005-06, dated 22 June 2006


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

"I welcome the success enjoyed by the former department HM Customs and Excise in sharply cutting the market share in illicit cigarettes over four years. But an enormous sum of revenue is still being lost. £2.9 billion was defrauded in 2003-04 and the Department believes that 2004-05 will probably see an increase. The Treasury and the Department should now carry out a cost-benefit analysis of directing more resources at cutting this trade.

"Tobacco smugglers cheat the taxpayer. Where they deal in counterfeit cigarettes, manufactured in the Far East and Eastern Europe from inferior quality tobacco, they are also subjecting the health of smokers to even more risk. The Department must further develop its strategies for combating the smuggling and sale of these counterfeit cigarettes and also, another significant illicit trade, that of hand rolling tobacco.

"Extra resources put by the Department into VAT compliance have been successful in uncovering fraud and debt. But at the end of the day these sums have to be collected for the benefit of the public coffers. And, where debt is uncollectible, tough targets for resolving the cases must be set."

Mr Leigh was speaking as the Committee published its 48th Report of this Session.

Tobacco strategy

HM Customs and Excise (the Department) collects some £8 billion in tobacco revenue each year. The Department estimated that in 2003-04 the total loss of excise duty and VAT from tobacco fraud was £2.9 billion: £2.2 billion on cigarettes and £0.7 billion on hand rolling tobacco.

In March 2000 the Department launched the 'Tackling Tobacco Smuggling Strategy', which aimed to cut the level of tobacco fraud. Between 2000-01 and 2003-04 the market share represented by illicit cigarettes fell from 21% to 16%, producing an extra £2.1 billion in revenue in 2003-04. The Strategy has ensured that on average almost £1.5 billion per annum in additional revenue has been collected since its launch. The Department has not yet produced an estimate for 2004-05 but believes it is likely to show an increase in the level of fraud.

The Department's efforts to counter the smuggling into the United Kingdom of cigarettes manufactured in the UK but destined for other markets have met with some success. The Department is seeking to strengthen its co-operation with manufacturers to combat this type of smuggling activity.

There has been a significant increase in the proportion of counterfeit cigarettes smuggled into the UK. Counterfeit cigarettes are predominantly manufactured in the Far East and Eastern Europe, and distributed outside normal retail outlets. As well as having an adverse impact on revenue collected, counterfeit tobacco also presents an increased health risk. The Department has reviewed the Tobacco Strategy to counter the growing threat from counterfeit cigarettes and to combat the smuggling of hand rolling tobacco.

VAT debt management

The Department collects gross VAT receipts of more than £125 billion a year. Most businesses remit by the due date but some fall into arrears. At March 2005 the Department reported that overdue VAT amounted to £2.6 billion. The VAT debt management team aims to reduce the debt outstanding, maximise revenue collected and encourage improved compliance in future.

In June 2003 the Committee noted a rapid rise in VAT debt levels and the need to reverse this trend. Since 2002, the Department has re-engineered the structures, systems and training for VAT debt management with the aim of promoting consistent, effective debt collection practices. In 2004 the Treasury provided funding for 150 additional staff and the IT debt case handling system was upgraded.

These changes have produced some improvement in aspects of debt management: an extra £299 million debt was collected in 2004-05. Debt that is immediately recoverable stood at £912 million in March 2005, its lowest level for three years. Reported debt, which includes recoverable debt and debt which the Department is currently unable to collect, continues to rise. At March 2005 reported debt stood at £2.6 billion, 24% more than the March 2002 figure of £2.06 billion. The Department believes that this increase is partly due to their success in combating missing trader fraud.

The Department has however failed to resolve the significant differences between its VAT mainframe accounting system and its trader register, which meant that some £900 million of debt was not reflected in the debt case management system and therefore not under active management. The Department is working to ensure that all VAT debt is transferred on to the trader register, and expects to achieve this by July 2006.

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