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The National Audit Office today reported the results of their examination of HM Customs and Excise’s systems to ensure the systems provide an effective check on the assessment, collection and allocation of tax revenue during the year ending 31 March 2000. The report includes details of a serious breakdown of controls in Customs which contributed to over £600 million being lost through fraudulent diversion of alcohol onto the UK market.

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According to the report to Parliament by the head of the NAO, Sir John Bourn:

  • alcohol destined for export was fraudulently diverted from the warehouses where it was held into the UK market (so called ‘Outward Excise Diversion’ fraud), leading to a net loss of duty estimated at £620 million over a period of 4 years; and a further £216 million was lost from diversion onto overseas markets where duty would have been due in the country of import had the goods not been fraudulently diverted;
  • Customs became aware of the threat of this fraudulent movement of goods where duty had not been paid as early as 1994, but did not take effective action to curtail these frauds until 1998;
  • it is estimated that about one half of the revenue would not have been lost if Customs had decided to intercept the fraudulent consignments, rather than seeking to obtain sufficient evidence to prosecute those involved by allowing the goods to be diverted to the home market and letting the investigations continue; or if other effective action had been taken earlier; and
  • senior management did not take appropriate action until 2000 to inform ministers of the scale of the problem or write off the losses as required by government accounting rules;

As a result of an internal review by Customs, the Paymaster General was not convinced that sufficient action had been taken. She announced that an independent investigation, headed by John Roques, former senior partner of Deloitte and Touche, had been commissioned to look into the matter.

"Because of serious failings by HM Customs and Excise, revenue of over £600 million has been lost from the diversion of alcohol onto the UK market. I am concerned about these substantial losses and I will be making a further report to Parliament on the causes of the diversion fraud, the lessons to be learned and the action planned by Customs."

In reviewing Customs’ systems, Sir John also reported on the operation of the Landfill Tax Credit Scheme which permits landfill site operators to reclaim contributions towards environmental projects under the Landfill Tax Regulations.

The regulations and the workings of the scheme itself are complex; and payments for projects that fall within the scheme's rules are not public expenditure because decisions to contribute to environmental projects are made by landfill site operators. This makes external examination of the value-for-money achieved by the scheme difficult for anyone to assess. Sir John concludes among other things that:

In other parts of his report, Sir John recorded the results of his examination of a variety of key systems operated by the Department. Work on import controls highlighted the need to improve checks by Customs at Belfast docks on consignments imported from outside the European Union which ensure that the correct amount of duties has been paid by importers. Sir John concluded that both risk assessment and control over movements were weak, and that significant reliance was placed on importers to pay the correct amount of duty.

Sir John Bourn


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