HM Customs and Excise Annual Report and Accounts 2001-02 Public Accounts Committee 3 Feb 2003

Examination of Witnesses

Mr. Gerry Steinberg: I would like to cover a few points that are not in the report but are of great interest regarding VAT payment in the retail trade in particular, and it is to do with VAT receipts. Are VAT receipts automatic when somebody buys something and, if not, why not?

Mr Broadbent: They are not automatic. VAT is a tax where there is a very high degree of automaticity, if I can put it that way, because every month or every quarter a trader makes a declaration and sends the declaration in with the tax, so at that point we have an assurance function to conduct but we do not go out and extract the tax. There is a process which collects quite a lot of the tax without intervention. Our task therefore is less to intervene to get the tax; it is more to make sure that that process is working to a very high degree of efficiency so that we are not missing people, we are not getting errors, we are not losing the tax we should collect.

Mr. Gerry Steinberg: If you go to the garage, for example, and you buy petrol, they will say to you after they have given you the receipt, "Do you want a VAT receipt?". It seems to me that if it was going through the till showing the VAT you would know exactly what each firm owed you. Why can you not do it that way and then there would be no arguments because if they sold you 20 gallons of petrol it would say on the receipt 20 gallons of petrol, the VAT that they have been paid and it would go through the till?

Mr Broadbent: It is a fact that we can go to that garage the next month and say, "We have had your VAT returns which says this month and I want to go through your till roll and check that the two are the same", which keeps the garage honest.

Mr. Gerry Steinberg: Let us move on to take-away restaurants. You order over the telephone a meal and you go and pick it up. You never receive a receipt, let alone a VAT receipt. I can only assume, being a very cynical person, that that money that you are paying for the take-away meal never goes through the till and the number of take-away meals that must be sold in a year in this country must be hundreds of millions. None of that is ever recorded through a till, so how do you know that you are getting the VAT there, because you are not automatically given a VAT receipt?

Mr Broadbent: We are fairly cynical people as well because the problem is exactly as you express it. That means we would use a different assurance technique. You do not go and ask for the till roll. What you might do in that case, for example, is position an officer outside the restaurant for two days and just count the people going out.

Mr. Gerry Steinberg: But you cannot do that everywhere. You have not got hundreds of thousands of VAT officers standing outside every Indian or Chinese restaurant in the country.

Mr Broadbent: But we do it for some restaurants and once we have done it for one or two we do not need to do it for the others. You go to them with an estimate. I can go through the process but I absolutely accept that there is a problem of suppression of takings. All I am saying is that the assurance technique is different and this is a technique to use here. You actually observe and statistically analyse one or two, and when you have done one or two you get the other 20 in and say, "Right: that is what we think you are doing. This is your assessment. You owe us this tax now". They can take us to a tribunal and we can discuss it there, and many of them come through and agree.

Mr. Gerry Steinberg: It seems very cumbersome when all you need to do is to insist that it goes through the till in the first place and a receipt is given and it goes on to the till receipt.

Mr Broadbent: I believe it is technically an offence not to carry complete records. The difficulty is that the fact that it is an offence does not always stop some people not carrying complete records and so we have to be very diverse in our assurance methods. Indeed, under the VAT strategy, which is a very balanced strategy in the shadow economy in many areas, that is something we will be spending a bit more time on.

Mr. Gerry Steinberg: Moving on from that, the increased debt over the last five years is 220%, £2.1 billion. Does that include the VAT for, for example, take-away restaurants, or is that not included in that figure?

Mr Broadbent: The process essentially is this. Where a declaration comes in with a cheque, that is fine. If a declaration comes in without a cheque or there is no declaration a debt is created and the £2.1 billion is a measure of that, so if somebody has not made a declaration who we think should have made a declaration or where there is a declaration but no payment, that is the point where debt collection starts.

Mr. Gerry Steinberg: So basically I am right. You are saying that when I go to a take-away restaurant and get a meal and pay £30 and no VAT has been paid clean on that, that is not included in the debt?

Mr Broadbent: That is correct.

Mr. Gerry Steinberg: In other words there must be hundreds of millions of pounds of VAT which have been defrauded through this system.

Mr Broadbent: That is absolutely right and for the first time ever in November I was personally delighted that we published estimates of VAT fraud.

Mr. Gerry Steinberg: How much is it, as a matter of interest?

Mr Broadbent: There are different sorts of fraud and not all non-payment of VAT is fraud, but if you look at the gap between the amount of VAT which in theory, if you measure the total activity in the economy, might be available and that which we have collected, it is of the order of 14%. Some of that is quite legally non-collected, some of that is to do with tax avoidance, some of that is to do with the fact that courts have interpreted the law slightly differently, and some of it is to do with fraud. Of the fraud we have identified two major sorts. One is the really big organised fraud which gives me a great deal of trouble; it is what I lose sleep over at night now. Most of it is in trader fraud which, to give an estimate, is of the order of £2 billion. The second would be this area where the line between error, negligence and suppression is harder to draw, but there are some hundreds of millions.

Mr. Gerry Steinberg: You mentioned about the law. I have to say that I have a tremendous amount of sympathy with you. I sit and watch the television and I have got to an age now where I sit and argue viciously with the television screen. I shout at it. What really incenses me is when I see Customs and Excise taking people who are clearly criminals to court for offences and these criminals then get off on points of law or because you have not investigated the thing properly. It really annoys me. As a total layman it seems pretty daft to me that although you do catch these criminals who are, after all, defrauding the country of millions of pounds, they can get away with it because the investigation has not taken place properly. As far as I am concerned they are breaking the law or they are not, and if you prove that they are then that should be sufficient. When I read paragraph 6.4, again it is a good job it was not on the television, otherwise I would have been shouting at the television again. It says here that a quarter of the £2.1 billion that is outstanding is not collectable because there is an investigation going on. Can you explain that more fully?

Mr Broadbent: A lot of that will be missing trader fraud. One of the reasons for the increase in debt, as I said, is that that is an area where we have made a material effort over the last 12-18 months. We saw this fraud beginning to increase and as a result we now have a very mature amount, about £350 million in the current year, of debt relating to these frauds on our books, which we are trying to pursue. There are two possible reasons why it cannot be cleared. One is that the people concerned, because they are organised criminals, have absconded and the debt is there and we are not prepared to write it off until, if we caught them, they had been prosecuted and convicted, or because increasingly we are going through the civil recovery process. Again, this is a change from a couple of years ago. If we do not convict somebody, or even if we do, we do not stop there. We now also go for civil recovery.

Mr. Gerry Steinberg: Why can you not move in as soon as you believe that there is a fraud taking place or there is something illegal going on and confiscate immediately and then, if the courts find them guilty, you have got it, and if the courts find them not guilty you can give it back?

Mr Broadbent: One of the most important bits of legislation which this House has passed, which I personally think is going to be a big step forward, is the Proceeds of Crime Act which came into force in January, which means that instead of effectively having to demonstrate that any cash we seize is the proceeds of serious crime, which is drugs, the onus has shifted the other way. Since that act was passed in January we have been seizing a million pounds a week of criminal assets.

Mr. Gerry Steinberg: Turning to the missing trader fraud, which is talked about in paragraphs 6.11-6.13, this again makes pretty impressive reading for a number of reasons, because seemingly you have employed 400 extra staff, you are £358 million in debt but you have only recovered £2 million worth. Again, fraudsters seem to be getting away with it. It seems here that it costs more to chase the debt than you are getting back in recovery. How can that be put right?

Mr Broadbent: There is a time lag effect here. I have to say first of all that I think we are losing far too much money in missing trader fraud. It is my biggest single anxiety at the moment. Having said that, the £2 million partly reflects a time lag. There is actually £47 million which is, if you like, injuncted and frozen and is working its way through the courts. As I said, although it is not particularly related to missing trader debt, we are currently seizing a million pounds a week of cash under the new legislation which has been passed, so it is not quite as small as that. There is a real problem here. The problem is that the nature of missing trader fraud is that you have to be effectively in on the act almost before it has happened. This is very highly organised crime with essentially large numbers of buffer and artificial companies, and by the time the fraud has been committed you are almost certainly too late. The money is offshore, so you have to get in in advance. You have to be quite careful. For example, at the moment I am getting a lot of letters from people who are being denied repayments. We have got a deliberate policy at the moment of denying repayments in certain areas and we have to tread extremely carefully but those are very effective in bringing this figure down. The level of repayments in certain industrial sectors in the current months is less than half what it was six months ago. We have to be extremely careful because I am not unaware that if I hold back a repayment from a legitimate trader then I have not done my job. That is probably the biggest difficulty we have: given that we have to get in early, distinguishing the honest and the dishonest in a very rapid judgement. If I withhold money from an honest man and he suffers, I am in trouble.