Clause 6 - Regulating trade in rebated heavy oil etc

Finance Bill – in a Public Bill Committee at 6:00 pm on 14th May 2002.

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Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 6:00 pm, 14th May 2002

I was expecting the Financial Secretary to speak to the clause first, because I assumed that he would wish to counter the criticism made by the Federation of Petroleum Suppliers, the trade association for the oil distribution industry in the United Kingdom and the Republic of Ireland. It represents the majority of distributors in the UK, from the small family businesses that form the greater part of it to the distribution arms of some of the major oil companies.

The FPS met Customs and Excise to discuss its proposals for tackling misuse of rebated fuels before submitting comments on the consultation document in February. The whole of the industry, I am told, is united in its view that the Customs and Excise proposal

''will not be effective in tackling the problem but simply add to the burdens on industry, being particularly onerous for small businesses, which make up the majority of distributors.''

The FPS is

''very disappointed that the Treasury has gone ahead with its proposed approval scheme for distributors and has ameliorated its original proposal only very slightly in the light of''

the comments that it has made. It says:

''The Government made a commitment not to place excessive burdens on small businesses by way of regulation. With the majority of distributors beings small businesses, the scheme to limit misuse of rebated fuels repudiates this commitment, our view being supported by''

none other than

''the DTI's Small Business Service.''

Those are serious allegations being made against the Government. I hope that the Financial Secretary has an answer to them, because another point that the FPS makes is that the simple way to eliminate fraud is to lower duty on road fuels. It also says that the present scheme will be unworkable and unfair to distributors, and that it does not address the problems in Northern Ireland. We know from the National Audit Office report and other information that the problem of fraud and duty avoidance in Ireland, and particularly Northern Ireland, is by far the largest proportion of the overall problem.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I certainly was intending to speak to the clause, and I am delighted to have caught your eye, Mr. Benton. I prefaced my intention to speak to it in my earlier reference to concerns about red diesel. The matter is something that would give any responsible person charged with consideration of the issues a great deal to think about, and certainly something to say.

I am bound to say that, having heard the hon. Member for Christchurch, I had rather hoped to have a more constructive and supportive response in tackling what is a very real problem: serious and increasing fraud involving the misuse of rebated fuel oils. All parties must take that issue seriously. I know that many right hon. and hon. Members sitting on

Select Committees that have an interest in the matter certainly take it seriously, and we do as a Government.

In the calendar year 2000, mainland diesel fraud accounted for 4 per cent. of the market and cost at least £450 million. We estimate that, with no action, that fraud will have doubled by 2005–06. At present, there is little or no control over the distribution network for red diesel and kerosene after they pass the duty point. That enables fraudsters to purchase those fuels as if they were to be used for approved purposes and then misuse them as road fuel with relatively little fear of detection. Customs has increased its volume of intelligence-based investigations into oils fraud, and we have seen a tenfold improvement in detection rates as a result. I commend Customs and Excise for its vigour, but the fact of the matter is that we lack the basic information on the distribution of rebated fuels that would help us to target our resources in Customs and Excise investigations more effectively.

Unless we significantly tighten the control regime for rebated fuels, diesel fraud will continue to grow rapidly, with serious implications for revenues, the competitiveness of legitimate retailers and hauliers and for the environment. All parties have urged us to tackle that problem. That is why the comprehensive strategy announced in the Budget is designed to reverse the growth in oils fraud, reduce the illicit market share to 2 per cent. and secure £550 million against the pre-Budget revenue baseline by 2004–05. Instead of filling the fraudsters' pockets, that money will assist in implementing our public policy proposals.

Photo of Michael Jack Michael Jack Conservative, Fylde

On Second Reading, I raised with the Financial Secretary the line of figures in table A.1 on page 155 of the Red Book. I wonder whether he could share with the Committee some more detail as to how the calculations were done to increase the oil fraud strategy revenues to which he refers. This year, the figure is £100 million. It goes up to £290 million, and then a colossal £550 million. Could he explain how the build-up is accounted for?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall happily do that, but first I shall address the points made by the hon. Member for Christchurch. I am grateful to the right hon. Member for Fylde for raising that issue again. He did raise it on the Floor of the House and I will deal with it in detail in a moment.

The Government are determined to introduce to distributors of rebated fuels a system of approval that I do not believe is disproportionately burdensome on the industry. The system will require distributors to tell us about the supplies that they make and to take reasonable steps to check that their supplies of rebated fuels are made only to customers who intend to put them to an approved use. Only those trading in these fuels will need to be approved, and end users of the oils will not be affected. The scheme will, therefore, radically improve our control over the distribution of rebated fuels and will provide a regular flow of information about their distribution and use, which will help Customs to improve its intelligence, its ability

to identify potential misuse and its ability to target the use of anti-fraud resources effectively.

We consulted the industry closely on the introduction of the scheme. The hon. Member for Christchurch said ''You can target it, but you don't accept everything that it says.'' No, we do not accept everything that it says. We consulted it, and we met it some of the way. Some of what it had to say had force and we accepted the arguments; other arguments we could not accept. I have placed in the House copies of the regulatory impact assessment and a summary of the responses received to the consultation. I do not believe that, if the hon. Gentleman reflects on those, he will find our response wanting.

Is the estimated revenue yield from the strategy realistic? The answer is yes but I would say that, wouldn't I? The reason why I say that the estimate is based on sound analysis and cautious assumptions is that, in 2000, mainland diesel fraud accounted for 4 per cent. of the market and cost at least £450 million. We estimated that, with no action on our part, the fraud would double by 2005–06. That was the basis of the revenue projections in the pre-Budget report. The strategy announced in the Budget will radically enhance our capacity to control the oils distribution network, making it far harder for fraudsters to get hold of rebated fuels and misuse them. We estimate that this strategy will reduce the market share of illicit fuel to 2 per cent. by 2005–06. It is the impact of this estimate against the previous revenue base line that has been scored in the Budget projections. Hence the saving of £550 million by 2005.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Given the extent of red diesel fraud, is it mainly of a local nature or is there evidence of large-scale, organised crime behind it?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

There is large-scale, organised crime behind it in Northern Ireland. The links with terrorism are real, and we should not ignore them for one moment. There are also some indications that it is spreading to the mainland, so we must take the matter seriously.

There is a clear and pressing need to improve customs controls over the distribution of the network and to persuade distributors to exercise more control over who they supply the fuels to. As I say, we have consulted industry on the matter and we shall issue a discussion document on the details of the scheme, because it is in nobody's interests that it should not work effectively or should be so burdensome that the various stakeholders do not feel they have ownership of it. Customs will hold further meetings with representatives from the industry as we introduce the draft regulations. That will provide an opportunity to clarify the trade's requirements and the cost involved.

I hope that, with that assurance, right hon. and hon. Members on both sides of the Committee will feel that they can give the clause a fair wind.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I am grateful to the Financial Secretary for what he has said, but can he assure us that the proposals to penalise the distributors, which many people find particularly offensive because the distributors have no control over the use to which the fuel is put once it has been sold, and the penalty

regime will also be the subject of a consultation document? Will the attitude of the Financial Secretary's Department be to deal with the matter with a light touch, rather than to make enemies of responsible small businesses?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The Department's attitude is to deal with the matter effectively. The penalties will be proportionate to the extent of the negligence.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Further consideration adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at fifteen minutes past Six o'clock till Thursday 16 May at half-past Nine o'clock.