Written evidence from HM Revenue & Customs. This covers the specific issues the Committee have asked HMRC to address in their evidence.

Transcription

1 Written evidence from HM Revenue & Customs This covers the specific issues the Committee have asked HMRC to address in their evidence. 1. The amount and extent of fuel laundering and smuggling in Northern Ireland HMRC has published estimates of the indirect tax gap (the shortfall in revenue between the tax collected and the tax which should theoretically be collected) since For Northern Ireland (NI), revenue losses arise both through illicit activity and legitimate cross-border shopping. Estimates for the tax gap in NI therefore relate to total non-uk duty paid activity, rather than the illicit market, since it is not possible to disaggregate revenue losses between illicit and legitimate activity In , the estimated non-uk duty paid market share was 28% for diesel, and 9% for petrol. The associated revenue not collected was 160 million for diesel and 30 million for petrol. The estimated non-uk duty paid market share for NI diesel has shown a downward trend in recent years, falling from 40% in to 28% in There has been no clear trend in the NI petrol non-uk duty paid market share. Full details of the tax gap estimates can be found in Annex A The tax gap methodology is very sensitive to a series of assumptions and is, therefore, best viewed as a general indicator of long term trends in the illicit market share rather than an exact estimate of the tax gap. 2. The impact of the border with the Republic of Ireland on this illicit trade, including the impact of devolution of justice and policing on cross border liaison to counter fuel laundering and smuggling The border between NI and the Irish Republic provides two distinct opportunities for fuel fraudsters. First, differentials in both duty rates and exchange rates make smuggling of fuel from one side of the border to the other more or less attractive at various times, and so the traffic is not one way. Currently, the comparative prices north and south have lessened the profitability of outright smuggling of finished fuel products to the north. Launderers also have the option of using Irish green diesel as their base fuel, rather than red diesel, which is controlled under our Registered Dealers in Controlled Oils scheme. This scheme is designed to control the supply of duty rebated fuels, such as red diesel for agricultural use and kerosene for heating. Suppliers dealing in rebated oils have to register with HMRC and provide regular information on quantities of product and who they are supplying. There is still a market for Northern Irish heating oil in the Republic and this is smuggled south. Higher Irish fuel duty rates have created a larger market for laundered fuel in the Republic than in previous years. However, duty rate differentials between the Republic and NI are not the sole driver for fuel fraud. The Republic also has a history of laundering and mixing even though their duty rates were historically very low The second opportunity presented by the border is its use by the criminal gangs to conceal their activities and disrupt law enforcement action. Certain areas of the border remain difficult to police and the continuing security situation is deliberately exploited to hinder law enforcement efforts. Any worsening of NI security is likely to affect the operation of HMRC adversely in certain areas On the other hand, the devolution of policing and justice has great potential to assist in the battle against fuel fraud. Our co-operation with the Police Service of Northern Ireland, both at a local level and through the Organised Crime Task Force, remains strong. An initiative led by the Justice Minister provides opportunities for all agencies and political parties to press ahead with efforts to change the public mind-set around fuel fraud along with other forms of organised crime. It is hoped that the involvement of local politicians will begin to highlight the link between revenue collection and the provision of public services in all sectors of society. Furthermore we are working together to amend the Petroleum Licensing Regulations to include diesel (via devolved legislation) which should incentivise retailers into better behaviour or provide further justification for the removal of licences by local Councils Liaison with our partner agencies in the Republic of Ireland is healthy. This is conducted informally on a day to day basis with our colleagues in the Revenue Commissioners and formally through the Cross Border Fuel Fraud Enforcement Group (an Organised Crime Task Force sub-group). In addition, HMRC has a

2 Fiscal Crime Liaison Officer permanently stationed in Dublin to act as a conduit for information and intelligence sharing. 3. The role and effectiveness of the Organised Crime Task Force, and other ways to ease coordination between organisations involved in the fight against organised crime The Organised Crime Task Force has been hugely successful in acting as a platform upon which interagency work can be built. The Cross Border Fuel Fraud Enforcement Group was the first Organised Crime Task Force sub-group to include representatives from the Republic s agencies. A number of planned crossjurisdiction investigations have been carried out under the auspices of this group Together with enhanced cooperation from police, customs and revenue agencies North and South of the border, the Cross Border Fuel Fraud Enforcement Group has harnessed other Government Departments in the continuing campaign to reduce harm to the public and the environment. The Northern Ireland Environment Agency and the Department of Environment in the Republic sit on the group and are key partners, attending laundering sites and dealing with the associated waste and pollution issues. This is an area where the Cross Border Fuel Fraud Enforcement Group is seeking to maximise publicity and focus public attention on the detrimental environmental impacts of this fraud. The Northern Ireland Environment Agency and HMRC are submitting a single file to the Public Prosecution Service this month reporting a joint operation into a fuel laundering operation, a move which has been agreed by the Public Prosecution Service and which acts upon the Judicial Studies Review Board advice that harm reduction as well as any revenue loss / evasion charges should be made clear to the judge at an early stage in any legal proceedings The Health and Safety Executive also sit on the Cross Border Fuel Fraud Enforcement Group. In that arena and through the Fuel Oils Forum (chaired by the Chief Environmental Officer NI and attended by HMRC and Health and Safety Executive) a manual of standards has been developed and implemented to ensure the Petroleum Licensing Officers from the 26 Councils in NI adopt the same procedures, background checks and safety measures before granting petroleum licences. This important development has also encouraged sharing information about prospective petroleum licence holders to ensure public safety comes first Police Service of Northern Ireland and the Garda are represented on the Cross Border Fuel Fraud Enforcement Group from a perspective of both roads policing and organised crime. Intelligence on vehicles believed to be involved in transporting or distributing illegal fuel is shared by all agencies. This enables challenges to be made by the relevant police force; this not only assists with the interception of non duty paid or laundered fuel, but it also protects the public by removing dangerous vehicles with concealed loads and concealed tanks from the public highway. Joint Police Service of Northern Ireland and HMRC operations targeting road users have enabled us to identify a number of HMRC and Police Service of Northern Ireland offences, and such operations will be repeated throughout the year. (For example, a recent HMRC operation resulted in the arrest of a man who was driving a tanker without either a driving licence or the prerequisite authorities for driving a tanker.) 3.5. The main factor that inhibits further successful co-operation is the very slow speed at which evidence may be exchanged between the two jurisdictions. The mandatory procedure requires a Letter of Request which is issued by the Public Prosecution Service to the Irish prosecutor. This is an inhibitor to all law enforcement partners and regularly causes serious delays in the prosecution of offenders The level of sentencing in Northern Ireland remains out of line with that in Great Britain. It may be that, historically the Courts have taken a view that there is no victim in fiscal fraud. However, by linking waste/environmental damage to fuel fraud and, where possible, including charges for those offences, we aim to bring sterner sentencing to bear. We hope that focusing the courts on harm reduction in addition to revenue loss will improve the sentencing results; and we are increasingly targeting the proceeds of offenders crimes. 4. The extent to which organised crime gangs profit from this loss to HM Revenue & Customs The levels of profit generated by cross border fuel fraud are high. In Northern Ireland, the most recent estimate was that the loss to the Exchequer from cross border shopping and fuel fraud was in the region of

3 190 million. Since this estimate includes legitimate cross-border shopping, this is not the level of profit available to the fraudsters, but it gives a good idea of the potential In recent years, we have seen a general decline in the number of sites selling fuel below the market price, and an increase in sites selling fraudulent fuel at prices similar to supermarkets. This makes it harder for HMRC to identify illegal vendors and for the public to distinguish between legitimate and illicit fuel. Lastly, it substantially increases the profit margins for the fraudsters Production costs for fraudsters are relatively low. There would be an initial outlay of a few thousand pounds to buy storage and filtration tanks and to rent premises. The process then requires relatively cheap cat-litter, bleaching agent and/or acid. For laundered diesel, fraudsters can expect a profit of at least 40 pence per litre (allowing around 30 pence per litre for production and distribution costs), with the current price of red diesel being approximately half of the typical road fuel price Last year, HMRC dismantled laundering plants with the capacity to produce 90 million litres of illicit fuel. Using this figure as a basis to form a rough and ready estimate of profit would give a minimum of 36 million per year Increasingly, organised crime gangs are tackling the entire process of the fraud from production through distribution to retail sales. This again increases their profit margins by avoiding a middle man. In a recent investigation resulting in arrests, substantial fuel seizures and searches, an organised crime gang was dismantled that controlled red diesel supply, fuel laundering, distribution and at least one retail site. Close to 300,000 cash was seized. 5. Other smuggling activity that the same organised crime gangs might be involved in HMRC has intelligence that several organised crime gangs are involved in other forms of crime as well as fuel fraud (for example tobacco fraud). The laundering of fuel is a specialist activity: fuel launderers are often specialists within an organised crime gang that may be involved in other criminal activities The market for illegal fuel in Ireland is limited compared with the UK mainland because of the size of population. A recent case, due for trial in the autumn, identified a transport company mis-describing laundered/smuggled fuel as lamb and water. This cargo was intercepted as it was landed from the Larne/Cairnryan ferry. Liaison with the Maritime & Coastguard Agency enabled charges of endangering the public to be laid Reports by the Independent Monitoring Commission indicate that some organised crime gangs have links to paramilitary groups; it is therefore also likely that fuel laundering and smuggling helps to fund other serious criminal activity, including terrorism and drugs. 6. The effectiveness of measures to counter fuel laundering and smuggling The best way to tackle fuel fraud is via multi-agency, cross border approaches, applying pressure through criminal prosecutions and confiscation of assets, together with civil proceedings involving confiscation and seizure of goods, vehicles and suspect fuel Our approach combines the expertise of law enforcement agencies and government departments: this has led to the examination and tightening of controls around, for example, the issue of licences; the Registered Dealers in Controlled Oils scheme; and approval by the Health and Safety Executive and local councils for premises to retail petrol. We also act at a more strategic level: for example, we are working with the Republic s State Laboratory and with LGC Forensics to improve the effectiveness of fuel testing; and we are securing support for a more robust European marker to be added to rebated fuel In addition to a multi-agency approach, we have also built strong partnership links with the legitimate trade organisations in Northern Ireland through the annual Joint HMRC Northern Ireland Oils Industry Oils Intelligence & Security Forum.

4 6.4. Where cheap fuel is sold below the market price, we regard this as an indicator of crime. This tactic has helped to drive the illicit sellers to charge higher retail prices. Unfortunately, this is part of the economics of the fraud and it makes it harder for the public to tell the illicit retailers from the legitimate. It also increases the profit margins for the fraudsters. We have tried to educate the public about the signs of illicit fuel are - e.g. if its looks too good to be true it probably is. Furthermore we ran a high profile Crimestoppers Campaign called Fuel Fraud - it s a dirty business outlining the detrimental effects of fuel fraud. The fraudsters are now acquiring end-to-end control by taking over filling stations. To mask their fraud from the public and HMRC they are only under-cutting legitimate stations by a small margin Improvements in laundering techniques make it likely that some laundered fuel will fail to be detected. Often illicit fuel detected in NI can only be identified by the most sensitive roadside test or by further chemical analysis. In one criminal investigation, the organised crime gang paid an independent laboratory to test its laundered fuel in order better to withstand scrutiny from HMRC We are satisfied with the quantity and quality of our criminal interventions. However, unless these interventions are backed by a strong deterrent message from the judiciary, it is difficult to see how we can reverse the tide significantly in this highly profitable, low risk area of crime. 7. The number of arrests, prosecutions, fines, confiscations, and other sanctions, aimed at punishing and deterring those involved in fuel laundering and smuggling. 2009/10 Oils Total Of which: 2009/10 Northern Ireland GB Arrests Confiscation Orders 1,085, ,085,715 Convictions Custodial Sentences Suspended Sentences Non - Custodial Sentences Seizures (Million Litres) Laundering Plants /11 Oils Total Of which: 2010/11 Northern Ireland GB Arrests Confiscation Orders 503,788 20, ,788 Convictions Custodial Sentences Suspended Sentences Non - Custodial Sentences Seizures (Million Litres) Laundering Plants NB totals for convictions and sentences may differ where defendants are sentenced in a different year from their conviction 8. The technologies that are currently available, or being examined, by HMRC and other to address this problem. 8.1.HMRC is running a Fuel Testing Project the objective of which is to improve roadside and laboratory testing. Work has so far included: Enhancement of our roadside testing capability by introduction of the solid phase extraction test (SET). Using funds from the Asset Recovery Incentive Scheme (ARIS) to purchase equipment for Road Fuel Testing Unit vehicles and to fund research into strengthening the current marker.

5 Sharing information and collaborating with Republic of Ireland Revenue Commissioners and the State Laboratories in Dublin. Seeking information from industry about what new fuel marking products are being developed or are available. 8.2.As a short/medium term improvement HMRC has commissioned LGC Forensics to develop a more resistant version of the current marker. We are hopeful that this change could double the cost of laundering the marker out of fuel We have undertaken some work to develop a new marker. We have received information from four companies, one of which is working with the Irish Revenue. We have agreed with the Irish Revenue that we should work together to develop a new marker. 8.4.Finally we are also looking to develop new/improved means of roadside and laboratory detection. We have commissioned LGC Forensics to develop new versions of the Solid Extraction Test to deal with distortions caused by the presence of biofuel in the sample; and a way of detecting and testing the residue from various laundering agents. These developments could improve significantly our ability to detect laundered fuel and LGC Forensics is currently working on prototypes. 9. The damage to the environment as a result of the fuel laundering process. 9.1.The Northern Ireland Environment Agency, the Health and Safety Executive NI, and the Department of Environment in the Republic sit on the group Cross Border Fuel Fraud Enforcement Group and are key partners (for example, attending laundering sites and dealing with the associated waste and pollution issues). This is an area where the Cross Border Fuel Fraud Enforcement Group is seeking to maximise publicity and focus public attention on the detrimental environmental impacts of this fraud. 9.2.The picture attached at Annex B illustrates some of the environmental issues associated with this type of fraud August Not printed

6 Annex A NI Diesel Non-UK-Duty Paid market share and associated revenue not collected 1,2,3, NUKDP Market Shares: Upper Confidence Interval 45% 47% 45% 37% 32% Central Estimate 40% 43% 41% 34% 28% Lower Confidence Interval 36% 38% 37% 30% 25% Associated Revenue Losses ( million): Upper Confidence Interval Central Estimate Lower Confidence Interval Figures are rounded to the nearest 10m or 1%. 2 Estimates include duty and VAT. 3 Figures for previous years have been revised due to new input data. 4 Figures for are provisional, as not all components of the total consumption estimate are available at this time. NI Petrol Non-UK-Duty Paid market share and associated revenue not collected 1,2,3, NUKDP Market Shares: Upper Confidence Interval 19% 21% 19% 22% 18% Central Estimate 13% 12% 10% 13% 9% Lower Confidence Interval 7% 3% 1% 4% - Associated Revenue Losses ( million): Upper Confidence Interval Central Estimate Lower Confidence Interval Indicates figures are negligible. Negative numbers have been truncated at zero. 1 Figures are rounded to the nearest 10m or 1%. 2 Estimates include duty and VAT. 3 Figures for previous years have been revised due to new input data. 4 Figures for are provisional, as not all components of the total consumption estimate are available at this time. NI: Breakdown of Volumes within Diesel and Petrol (million litres) 1,2, Diesel: Total Consumption UK Tax Paid Consumption NUKDP Market Share Petrol: Total Consumption UK Tax Paid Consumption NUKDP Market Share Figures are rounded to the nearest 5m litres. 2 Figures for previous years have been revised due to new input data. 3 Figures for are provisional, as not all components of the total consumption estimate are available at this time.