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Sir John Bourn, head of the National Audit Office, today reported the results of his examination of HM Customs’ systems for the assessment, collection and allocation of tax revenue during the year ending 31 March 2005. In 2004-05 Customs collected £120.7 billion (net) in taxes and duties.

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Sir John’s report focuses on Customs’ work to manage the risk of tobacco fraud and to collect VAT debt. His examination also covered Customs’ financial accounts. The key findings are:

Tackling Tobacco Fraud

Customs have developed an effective approach, working with the tobacco trade, in their fight against tobacco fraud. This has resulted in the level of fraud and smuggling, which increased significantly in the late nineties, being reduced from an estimated 21 per cent of the total market in 2000 to 15 per cent in 2004. More recently, though, the estimated level of fraud has stabilised. The Department have reported that their activities reduced revenue losses by more than £3 billion during the first three years of the Strategy.

Customs have worked hard to improve their working relationships with major tobacco manufacturers. This has reaped dividends, with the agreement of Memorandum of Understanding with the trade, which now works with the Department to reduce supplies to known areas of risk. The Department are also working proactively with manufacturers to enhance further the Memoranda to respond to new areas of risk, as patterns of fraud develop and change.

The existing strategy has been focused on tackling cigarette smuggling. More recently, smuggling of hand rolling tobacco has become a more significant area of revenue loss. This now accounts for more than one-third of total revenue losses. The Department are developing measures to tackle this new area of fraud.

Managing VAT Debt

The level of outstanding VAT debt has continued to increase. Outstanding VAT stood at £2.56 billion in March 2005. However, much of this outstanding VAT at any given time cannot be collected by the Department as it represents officers’ assessments against traders which are undergoing appeal, or amounts, particularly relating to suspected VAT fraud cases, which are subject to ongoing legal challenge. Customs have successfully reduced the level of outstanding recoverable debt, and also increased the amount of cash successfully banked by £299 million in 2004-05.

Customs have overhauled their VAT debt management procedures, through the implementation of a National Business Model, the provision of high-quality, commercial-style training, and through the reorganisation of debt management units. The Department’s management of VAT debt remains, however, reliant on a number of old IT systems which are awaiting or undergoing replacement or upgrade.

It was also a concern that the amount of VAT awaiting collection from businesses according to the debt case handling system did not reconcile to the main VAT computer by some £1.3 billion. The Department have since identified some £900 million of debt which should have been passed to debt management units, £35 million of which represented overdue debt available for collection.

In April 2005, the operations of Customs were transferred, along with those of the Inland Revenue, to Her Majesty’s Revenue and Customs, a new department with responsibility for all taxation. One of the first announcements made by the new department was the creation of a single debt management and banking service. Work is currently ongoing to design the new service and implement the required changes.

“Customs’ Tobacco Strategy has had a welcome effect on the levels of cigarette smuggling, and much has been done to develop positive working relations with the major UK tobacco manufacturers. However, in the last two years, the estimated level of smuggling has plateaued. I welcome the Department’s work to refresh their approach to take account of the changing nature of tobacco fraud and smuggling, in view of the growing threat posed by the smuggling of hand rolling tobacco.”

“Customs have been successful in reducing the level of outstanding debt available for collection, and have also managed to increase the amount of cash banked as a result of debt management activities in 2004-05. The failure to reconcile key systems on a regular and timely basis, and the failure to ensure that all amounts recoverable are under active management, though, represents a disappointing oversight which the Department are working to address.”

Commenting today on his audit, Sir John Bourn


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