HM Customs and Excise

HC Deb 06 July 2000 vol 353 cc437-76

[Relevant documents: Second Report from the Treasury Committee, Session 1999–2000, on HM Customs and Excise, HC53, and the Government's response thereto, HC442; and HM Customs and Excise Departmental Report 2000: The Government's Expenditure Plans 2000–2001 to 2001–2002, Cm 4616.

Motion made, and Question proposed, That a further, revised sum, not exceeding £482,077,000 be granted to Her Majesty out of the Consolidated Fund to complete or defray the charges which will come in course of payment during the year ending on 31st March 2001 for expenditure by the Customs and Excise Department on the administration of taxation; the operation of customs and revenue controls and other Customs and Excise-related services; and payments in respect of Shipbuilder's Relief and the Customs and Excise National Museum.—[Mr. Kevin Hughes.]

1.16 pm

Mr. Giles Radice (North Durham)

As Chairman of the Select Committee on the Treasury, not of the Sub-Committee, I shall make only a brief intervention. The hon. Member for West Worcestershire (Sir M. Spicer) is the Chairman of the Sub-Committee, so he will make the Chairman's speech. I simply wanted to act as a master of ceremonies, introducing the guests to the hosts.

The Sub-Committee was set up in 1998 to scrutinise the bodies and organisations for which Treasury Ministers are responsible. For a year now it has been well chaired by the hon. Member for West Worcestershire. This afternoon we are discussing the Sub-Committee's fourth report, the second report of this Session on HM Customs and Excise.

The Sub-Committee had five sessions of oral evidence and visited Canada to consider the merger of authorities. It has done a thorough job. There were three issues of which the Sub-Committee rightly made much. The first was whether it was desirable to merge Customs and Excise with the Inland Revenue, and the Sub-Committee concluded that it was a good idea, for three main reasons—that it would improve compliance with taxation, reduce businesses' compliance costs and reduce the Government's revenue costs.

The Government, as my hon. Friend the Paymaster General knows, rejected our proposal and defended their position of so-called closer working between the Inland Revenue and Customs and Excise. I look forward to hearing the Government justify their position. In that context, I want to mention the news yesterday, reported in the Financial Times, that an internal investigation ordered by the new chairman of Customs and Excise has identified losses of up to £1 billion, which apparently could be double that, in Customs and Excise's collection role. That is its core activity, on which, apparently, it has fallen down. That is another reason why the Government might reconsider their position on merger. In any case, I should like to hear something about that matter.

The Sub-Committee also investigated alcohol and tobacco smuggling. It concluded that tobacco smuggling was a much more serious problem than alcohol smuggling, in the sense that the revenue loss is much greater, and it recommended that further resources should be given to Customs and Excise to slow down and eventually stop tobacco smuggling. I congratulate the Government on accepting many of our recommendations under this heading. I understand that they have provided extra resources amounting to £209 million. I should like to know how that money will be spent. Is it new money? This is a useful occasion on which to inform the House about that.

The third main issue that the Committee considered was compliance and compliance costs. Again, the Government have accepted some of our proposals. We believe it to be important that they target reductions in compliance costs, and that there should be legislative underpinning of the so-called Sheldon doctrine. I understand that in a sense the Government have come forward with a compromise proposal, and that is a code of practice. I would like to hear about that, too.

I end by congratulating the Sub-Committee on doing extremely useful work for the House. It has demonstrated the useful work that Select Committees can do in digging away at things. Their work is useful for Parliament—that is their main purpose—and for the Government. There are some who consider that Select Committees are there to attack the Government. In fact their role is to make Government accountable, so there should be a win, win situation. It is right that Government should be investigated and made accountable. It is right also that the activities of Government should be transparent, and the report provides a good example of a Select Committee doing its work properly.

1.22 pm

Sir Michael Spicer (West Worcestershire)

I feel these days that I should begin all speeches by declaring an interest, however remote or obscure it is, as president of the Association of Electricity Producers. I do not think that there will be any read-across, but I declare the interest in case there is.

I do not want my remarks to turn into a boring, self-congratulatory society debate. However, I shall return two of the compliments of the right hon. Member for North Durham (Mr. Radice). First, he is an excellent Chairman of the Select Committee on the Treasury. He is particularly good in the way that he has devolved responsibility. He allows the Treasury Sub-Committee freedom to investigate the range of departments and agencies for which the Treasury is responsible. I thank my other colleagues on the Committee, who have given a great deal of time to its work. I see some of them in the Chamber. Working on the Treasury Committee with the Sub-Committee has become almost a way of life for us.

The Sub-Committee is behind the report, and it drafted the initial report. It has taken a pretty dyspeptic view about Customs and Excise and the way in which it is run. I believe that it is fair to say that we think that, as a department, it is defensive and pretty secretive. Perhaps that is because before the Committee began its work it was unused to discussing its policies in the light of day. It is pretty unwilling to innovate. Above all, it has been unsuccessful in carrying out its policy remit, particularly its remit of closing down the revenue gap that arises from smuggling. As the right hon. Member for North Durham has suggested, this is perhaps symbolised by the revelation yesterday that Customs and Excise had lost up to £2 billion between 1995 and 1998 in unfound excise duties. That was in the period when Customs and Excise also lost around £1 billion of VAT, which, as far as I know, has not been found yet. Perhaps the Minister will tell us later that that money has been found. The loss of £1 billion in VAT is additional to the latest revelation of the £2 billion that was lost in excise duty.

Smuggling is at the centre of the problem, especially cigarette smuggling, which is not only serious but increasing greatly. In the report, we accept that various remedies may exist for the massive loss of duties, which occurs through cross-channel and other international smuggling, especially of tobacco, but also of alcohol. We found that, were duties lowered, fewer losses through smuggling would be likely. When we visited Canada, we discovered that, when the Canadian Government reduced duties, especially on tobacco, there was a reduction in smuggling.

However, we also accepted the conclusions of the Institute for Fiscal Studies, which showed that a reduction in duties would lead to a reduction in revenue. We acknowledge that the industry does not accept that conclusion. It argues that leakages occur, and that the elasticities are such that further increases in duties might lead to losses in revenue through further leakages to smugglers and negative elasticity.

There is much logic in the industry's comments. We also recognise that the Treasury has forecast a fall in revenue, which accompanies high duties, but makes no assumption about future duty levels. However, the industry's position is not based on any independent research. There is no substantive research behind the industry's conclusions. We therefore have to accept that the IFS study is the only truly independent study that has been undertaken of the effect of duties on revenue. We took that study as our evidence. That is why the Taylor report is important in that context.

There is a suspicion among those in the tobacco and alcohol industries that the Taylor report recommended a reduction in duty in response to the problem of smuggling. There is a further suspicion that the report's publication was suppressed because of that advice to the Government. The Committee was saddened by the fact that the conclusion and analysis of the Taylor report, which was forecast in the Budget last year, could not be published. The suspicion therefore lingers that the Government have on their desk recommendations to reduce duty in the context of smuggling and the general efficiency of Customs and Excise.

Mr. Oliver Letwin (West Dorset)

Did the Treasury Sub-Committee seek to take evidence from Mr. Taylor, and discover his account of his recommendations in the undisclosed document?

Sir Michael Spicer

No, we did not decide to take evidence directly from Mr. Taylor. However, we pressed the Government hard to produce the papers behind the Taylor report. We received a negative response.

Mr. Letwin

My hon. Friend will realise that it is important for the House to hear the answer to my next question. Why did the Sub-Committee decide not to interview Mr. Taylor?

Sir Michael Spicer

I suppose the Sub-Committee accepted that, because the Government had commissioned the report, it was for the Government to determine whether it should be published. We certainly pressed the Government. Indeed, I shall press the Government today, as I shall return to the issue shortly. We all thought that it would have been helpful to have the report, but we also thought that, as it was a Government report, it was for the Government to decide whether to release it.

Having dealt with the question of reduction of duties, we were left with the question of how we were to address the serious and remaining problem of what to do about the increase in smuggling, and the loss of revenue, amounting to as much as billions of pounds, resulting from the current rate. We considered two possible solutions. The first was greater administrative efficiency, which led us to discuss the possibility of closer working between Departments on revenue-raising. We found that the roots of what has come to be described as closer working were planted as long ago as 1994; we also found that very little had actually happened. In fact, no proper liaison committee had been established until our Committee's interest in the subject had been made public.

We were unhappy about both the progress of closer working and the way in which the Government seemed to be setting about pursuing it in the future. In our report, we said: We are surprised that more thought has not been given to the evaluation of the Closer Working programme… We received no clear indication from Customs and Excise of how it intended the Closer Working programme to develop in future. We concluded: do not believe that the Closer Working programme will fully achieve its objectives and deliver the benefits claimed by Customs and Excise. Consequently, the option of merger requires serious consideration. That brought us to the question of merger between the Inland Revenue and Customs and Excise. In part, we referred to Canada on that, because Canada had recently carried out precisely such a merger. We said to the Canadians, "We have two revenue-raising departments, one of which does not seem to be working particularly well. Do you think that there are arguments for merging?" We found that, in Canada, many of the worries about merging did not apply. It had worked, and we thought that there was at least a case—a case that the Government should consider—for merging the two departments. The argument would be that, given that Customs and Excise says that it is short of resources, merging the departments would make economies. More money could be used for customs purposes than is used at present, and the whole arrangement would be administered better.

Other arguments were advanced. The right hon. Member for North Durham mentioned compliance costs for industry. It has been argued that—certainly in regard to the collection of VAT—Customs and Excise is less than assiduous in allowing for the needs of business, and in making business tax collection as efficient as possible in terms of costs. The Inland Revenue undoubtedly does that; it is argued that Customs and Excise tends to be more heavy-handed. Compliance costs might therefore be another factor in favour of merging the departments.

However, the Committee was particularly interested in efficiency in the context of customs and collection. When we questioned the Minister, we learned that the Government had not particularly studied the Canadian example—which we had pressed them to do for some time—and that they were relying on a report produced some six years ago, under an earlier Administration, which had apparently argued against a merger. We pressed on many occasions to have the report put on the Table, but were unsuccessful. We were even prepared to look at it in confidence, but there was complete reluctance to let us look see it. As it was used constantly in evidence—it was the only real justification for not going further into the merger issue—we were extremely dissatisfied.

I must read to the House the conclusions that we reached. It was a serious matter to us. We felt that we should have been allowed to look at the report on the question of merger. We say in paragraph 22: It is extremely disappointing that, as the Freedom of Information Bill began its passage through Parliament, Customs and Excise refused us access to a six year old report on a matter of departmental organisation central to our present inquiry, far removed from party political controversy or national security, defence or foreign policy concerns. We entirely fail to see how the public interest could be harmed by the disclosure of this report, although, of course, the Government's case against merger of the revenue departments might easily be harmed if we were to have found that the report's analysis of the costs and benefits of merger had been inadequate or skewed against the merger option. We are led to conclude from this episode that the 1993 report would not have stood up to vigorous scrutiny by this Committee. That was a fairly serious thing for us to say. It did not please me to have to say it, but I still hope that Customs and Excise and the Government will reconsider the matter. An argument against merger cannot be based on the findings of a report whose analysis and premises we are not allowed to see.

In trying to achieve greater efficiency in Customs and Excise, proposals have been made to introduce new technology, particularly X-ray equipment. The problem is that, in recent years, none of the three great initiatives on the matter seems to have had any positive effect. The first resulted from the 1998 alcohol and tobacco fraud review. That ended with a lot of conclusions about the need for more technology and various other proposals, focusing particularly on X-ray equipment. That stood in the open and was apparently applied, but, when we got to last year's pre-Budget report, the programme put forward as the answer to the problem was almost precisely the same as that which had been put before Parliament almost two years previously. Apparently, nothing in the meantime had happened. The smuggling had become worse in the process.

Then on 30 June, just a week ago, the Paymaster General announced that she had commissioned a full independent investigation into the collection of excise duties in HM Customs and Excise, so we have had three promises of new initiatives on Customs and the way in which it collects duties. In the meantime, no one disputes that the situation is getting worse and worse.

The last Government initiative was certainly in anticipation of the latest scandal being revealed. There we have it. Once the £2 billion had been acknowledged to have been lost, the Government came up with yet another initiative, which seems similar, if not identical, to previous initiatives, which so far have failed.

That leaves us with a number of questions to ask the Government. What did the Taylor report say? They are not prepared to let us look at the actual text of any report, but we need to know. The Committee decided to leave the Government quite a lot of room for manoeuvre on the question of excise duties and their effect on smuggling; some of us even felt that we left them too much room for manoeuvre. In return, Parliament must be allowed to know the details of the Taylor report.

Has there been—or will there be—proper consideration of the merger issue? Specifically, will the Government think again about why Parliament should not be allowed to see a six-year-old report on which they seem to be basing the entirety of their case for not considering the merger issue further?

There have recently been three statements that new technology will be introduced. But why has technology not been more effective? Why have there not been greater results from a programme that has now been under way for several years? Why is the programme becoming less effective with the passing of each year?

There is also the issue of the latest scandal. If there is to be a public inquiry, when will it be established and when will it report? Given that the new scandal comes on top of what one might call previous unfortunate incidents, will the Government start to take a rather less cavalier attitude to the overall issue of smuggling and reforming Customs and Excise? Will Ministers also reconsider the Committee's suggestions—although they have already rejected most of the major ones?

1.41 pm

Mr. Jim Cousins (Newcastle upon Tyne, Central)

I do not envy my hon. Friend the Paymaster General in having to address this issue. The Government's inheritance from the previous Administration on the issue was woeful. That was made clear to the Treasury Sub-Committee in the evidence presented to us in our examination of Customs and Excise. It is quite clear that Customs and Excise have long been badly led and managed, badly resourced and badly organised. It is also clear that there are not sufficient resources for it to do the job that it wants to do and should do.

Nevertheless, I acknowledge the heroic work with VAT and excise duty, being done by many people in the front line of Customs and Excise. The House should pay tribute to the excellent work being done daily by them in a desperate and heroic attempt to stem a tidal wave of abuse that they are not properly equipped and organised to deal with. The House should try to address that issue in this debate.

We must deal with some very serious abuses affecting our communities and striking at the heart of public confidence in some key aspects of the machinery of government. If we cannot stem the rising tide of tobacco and alcohol smuggling, the very integrity of Government policy will be put at risk. Thousands of legitimate jobs and businesses are being put at risk by those growing abuses. We should not overlook the similar problem in the collection of value added tax. VAT evasion and growth in the informal economy also are endangering legitimate jobs and businesses. The Sub-Committee has attempted to address that overall issue.

The Sub-Committee clearly formed the view that the abuses that I have described are real and increasing, and that they are probably more extensive than Customs and Excise were at that time prepared to tell us. I think that the Sub-Committee's instinct on that matter has been proved by subsequent events to be entirely correct.

Secondly, the Treasury Sub-Committee realised that wholly new demands were being placed upon Customs and Excise, particularly around the growth of electronic commerce and the problems of identifying businesses and tracking commercial activity for the purposes of excise and VAT control and enforcement.

Thirdly, the report drew attention to some massive and quite deep-rooted organisational failures and inefficiencies and the lack of resources available to Customs and Excise either to deal with the growing number of abuses or to confront the need to expand their efforts and organisation to deal with new areas of commerce and the new demands.

Since the Treasury Sub-Committee reported, at least four major inquiries have either reported with reference to Customs and Excise or are about to do so. They include Lord Grabiner's report on the informal economy, particularly VAT abuse, and the report of his honour Gerald Butler on his inquiry into the case of Regina v. Doran, the so-called "Operation Steeler" case, which threw considerable doubt on the internal effectiveness and good order of Customs and Excise as an investigating and prosecuting organisation. The Government responded to the Butler inquiry by setting up a further inquiry, led by the Attorney-General, into whether Customs and Excise should properly retain their powers of prosecution.

There was also—this makes life particularly difficult for my right hon. Friend the Paymaster General this afternoon—the inquiry that she launched only last Friday as a result of information that was brought to her by the new chair of the Customs and Excise board into excise evasion, this time in respect of alcohol. This afternoon's debate provides an opportunity for my right hon. Friend to set out her objectives and those of the Government in that inquiry. I am sure that she will do that.

Although one must always show proper courtesy, respect and restraint on these occasions, I very much welcome the indication that the new chair of the Customs and Excise board will be more proactive than several members of the Sub-Committee felt that the previous leadership of the Customs and Excise board had been. That is an excellent sign, albeit that it puts my hon. Friend the Paymaster General in a difficult position this afternoon. The House will rightly expect to know a great deal more about her intentions. Much of the debate should be taken up by my hon. Friend explaining to the House how she intends to address the problems.

A number of other points should also be mentioned. First, we should consider the large scale of the abuses in respect of tobacco and alcohol. The hon. Member for West Worcestershire (Sir M. Spicer) referred to the fact that in its evidence to the Select Committee, the Tobacco Manufacturers Association, which obviously has an interest in the matter, asked for a reduction in tobacco duties as a method of controlling the abuse. I do not share that view, but the association showed evidence to the Committee that almost one in three of packets and cartons of cigarettes sold in this country were either smuggled in or re-imported after having been disguised as exports. The association attributed a total revenue loss of some £3 billion to smuggling on that scale.

The scale of the abuses is recognised in some of the court cases. A gentleman in Essex was fined £10 million by a court after being found guilty of smuggling offences, which shows that the scale of abuse is considerable. Legitimate traders are extremely concerned about the scale of abuse. I have been given a dossier of evidence by a firm which runs a cash and carry business in Essex, which reveals an extensive correspondence between the firm and the south London and Thames branch of Customs and Excise in an attempt to address obvious abuses that have come to the firm's attention, but without success.

It is a cause of concern that the ability to tackle the growing scale of abuse appears non-existent. That is partly because of the considerable cuts in staff numbers that were made by the previous Government. They reduced numbers and also disrupted some of the lines of command and control that would have been useful to contain the growing abuses. However, it is fair to point out that the latest annual report from Customs and Excise shows that the number of man-years available in the south-east—which is in the front line of our defence against excise duty abuses—in 1999–2000 was less than in the previous year. That is a matter for concern.

The Government intend to recruit almost 1,000 additional officers for Customs and Excise, but it is important that my hon. Friend the Paymaster General sets out how that will take place and on what scale. What resources and organisation will be provided to support those additional members of staff?

The Paymaster General (Dawn Primarolo)

I do not intend to intervene through the debate but will give a reply at the end. However, on the specific points that my hon. Friend raises about the south-east, he will know that we now deploy staff in teams according to risk, and we move the teams around considerably. However, I understand that that is not happening in the south-east. My hon. Friend raises an important point that I may not be able to deal with in detail later. I have heard his comments and I will try to address them when I reply. I shall try to address all the specific points that hon. Members raise.

Mr. Cousins

I am grateful to my hon. Friend for saying that. I draw to her attention the fact that I had hoped to be able to say—based on the annual report from Customs and Excise—that the unsatisfactory position in the south-east in 1999–2000 would be corrected in 2000–01. Conservative Members will understand that Labour Members constantly hope for such relief, but I was not able to find it when I read the Customs and Excise report. I was filled with gloom to discover that a change in regional boundaries meant that the figures for the south-east for 2000–2001 were not available. That does not reinforce confidence among people whose businesses and jobs are at risk in the area.

One of the Committee's conclusions was that there are deficiencies in the internal organisation of Customs and Excise. Although the possibility of closer working, or even merger, with the Inland Revenue has been suggested, the people responsible for value added tax do not work sufficiently closely with the people in the excise section. In addition, the respective Inland Revenue and Customs and Excise computer systems do not talk to each other, even though huge resources have been applied to them.

The internal information arrangements in Customs and Excise involve a computer system called PRISE, which the previous chairman of the Customs and Excise board assured the Committee was not relevant to increasing the efficiency of excise enforcement. Other internal information systems include CRIP, the compliance risk information project, and the analytical centres project. Considerable sums of money have been spent on both, but the Committee was unable to satisfy itself about who in Customs and Excise had access to them.

The overall picture is an extremely unhappy one. The Government must rectify that, urgently.

The Government have pledged £209 million in additional resources for Customs and Excise, and have focused particularly on the £23 million being made available for new scanners. They will greatly improve the speed, efficiency and effectiveness of excise evasion detection, and I hope that my hon. Friend the Paymaster General will clarify whether that £23 million is included in the total of £209 million, or is additional to it.

However, the first of those scanners will not become operational until November. Originally, they were being installed to deal with excise duty problems but now—after the almost incredible horror of the incident in which so many unfortunate Chinese people were trapped in a container—it is clear that they will also have to bear the burden of immigration detection. The additional resources will therefore have to cope with demands way in excess of what was forecast when they were first allocated.

Mr. David Kidney (Stafford)

Would not every lorry go through fixed X-ray scanners at ports? Could not the scanners detect illegal immigrants in one lorry, and an illegal load of cigarettes or tobacco in another?

Mr. Cousins

My hon. Friend is right, of course, but he should bear in mind that using the scanners is complex. New and much larger dedicated parking areas will have to be laid out, where lorries can queue to use the scanners. Clearly, moreover, not every lorry could be scanned. Questions of intelligence, preselection and so on would therefore arise again. That only reinforces my anxiety about whether Customs and Excise is sufficiently well organised internally to be able to do the job with the greatest effectiveness.

In addition, when the scanners are put into use we shall soon hear about horrendous parking problems and delays in processing lorries and vehicles through Dover. The House had better stand ready for those complaints, because there will then be immense pressure on Customs and Excise to reduce the number of lorries that it seeks to check and scan. These are very difficult issues.

Mrs. Ann Winterton (Congleton)

I have been very interested in the hon. Gentleman's remarks about the scanners that are to be introduced into our major ports. I hope that he will forgive my ignorance, but I wonder whether a solution, as far as immigration is concerned, is that lorries should pass under gantries, which can be built quite easily, and that there should be heat-seeking cameras on the top and at the sides, rather like those used by the police when they go up in helicopters to try and find people who are missing but not yet dead. Is that an over-simplistic view, or could it be carried out more simply than the complete scanning? Would it cost less and be easier to implement?

Mr. Cousins

The hon. Lady raises an issue that does not properly form part of this debate, and to attempt to respond to it is totally beyond my information. She speaks of immigration, which is the responsibility of the Home Office. I was seeking to draw the attention of the House to the fact that the scanners, which were acquired for the purposes of detecting excise duty evasion, may be given a new range of responsibilities as a result of other events. That will make life more difficult when it comes to detecting excise duty evasion.

There is considerable confusion of investigatory authorities in considering excise duty evasion. It was of interest to me that in its most recent report, the Intelligence and Security Committee drew attention to the fact that drug smugglers and other organisations with political purposes, which are often linked to trade in materials such as drugs, are switching their organisational skills into tobacco smuggling. It is closer to legality in most regimes than drugs, and the profits are as great or greater.

The Intelligence and Security Committee was extremely concerned about the lack of co-ordination of our investigation services in redeploying to meet that difficulty. We have the National Criminal Intelligence Service, the national investigation service within Customs and Excise, normal police arrangements and the activities of the security services. The Intelligence and Security Committee echoed the evidence of the Select Committee on the Treasury in its great concern about the lack of co-ordination and effectiveness between the various investigatory agencies.

The matter goes to the heart of the Butler report about the collapse of the Steeler case, in which those very issues are highlighted dramatically. The Government must, as a matter of urgency, address the confusion and lack of effectiveness on the part of the various arms of investigation. They are coming at the same problem from a number of different directions, using various techniques, resources and legal channels, and the result is not in the public's best interests.

Let me turn to closer working. The Committee discussed a merger of Inland Revenue and Customs. The House must confront the old Spanish—perhaps I should say Spanish-British—practice of having two distinct revenue collection agencies. Most modern revenue collection regimes have a single agency. Those who defend the practice of having two should justify it. It is not normal, and other revenue collection regimes have not found it the most efficient and effective model.

The Government, however, favour closer working between the Revenue and Customs. That requires us to confront long-established cultural differences between the two organisations—the main reason why people reject merger. We cannot escape the problem of having two organisations with different histories and cultures by simply avoiding the question of merger. That difficulty will have to be addressed if closer working is to be established.

There is practical evidence for that proposition. The Inland Revenue, which has historically not visited taxpayers in great numbers, has introduced a programme to increase visits. Customs and Excise, meanwhile, which has historically made many visits to those who pay VAT, is scaling back. That is an example of what closer working means, and of the difficulties involved.

The legal basis and status of investigation officers in the two organisations are hugely different. Closer working cannot overcome that. We must put investigations on a platform of common intelligence and common investigatory powers. To forestall anything that the hon. Member for West Worcestershire might say about that, I do not mean that we should always scale up the powers of the Inland Revenue to those available to Customs and Excise. We should find new, more appropriate legal powers to address issues such as electronic commerce.

The establishment of a single business register list will be an important innovation, providing an identifier and a tax collection point for Inland Revenue taxes, VAT or excise duties. The Government have launched pilots, experiments and test studies on a list, but I am far from satisfied that their approach is as well co-ordinated as it should be. Some initiatives have been taken through the Department of Trade and Industry and others through the Treasury. I wonder whether enough co-ordination or urgency is being given to a simple organisational change that could provide a platform for more effective regulation and enforcement to protect legitimate business.

Neither the Committee nor the House knows what commitment the Inland Revenue and Customs and Excise are genuinely making to closer working. There is a great deal of talk, and some money has been allocated. Mysterious switches of money are made between Customs and Excise and the Inland Revenue, but what it all actually involves remains entirely obscure. Today's debate provides a chance to begin to tease out what closer working means.

The House is in a difficult position. The scale of the problems that we detected when we made the studies that helped to produce the report has been entirely borne out by subsequent events. Looking back on the matter, there was almost an attempt to conceal from the Committee the true scale of some of the difficulties. Even while the Sub-Committee was conducting its investigations, certain matters must have been known; for example, the collapse of the Steeler case and the subsequent discrediting—fairly or unfairly—of the Customs and Excise as a prosecuting authority. I have some doubts—

Dawn Primarolo

indicated dissent.

Mr. Cousins

The Minister shakes her head, so I accept that she is trying to reassure me. However, I remain concerned as to whether Customs and Excise were frank enough with us during our inquiries. We were there to help. We identified problems. They are much greater than even we had supposed. The matter is of serious public importance. It puts at risk jobs and businesses throughout Britain. The scale of abuse in the excise area and, to some degree, in the informal economy discredits some of our normal, legitimate practices.

Such matters cannot be overlooked; they must be addressed. The Paymaster General is entirely capable of shouldering the burdens and setting us on the right course. We look to her to reassure us and to tell us clearly that we are set on a course whereby these matters will be addressed.

2.11 pm

Mr. Edward Davey (Kingston and Surbiton)

I apologise to the House for the fact that, unfortunately, I shall not be present for the end of the debate. I apologise especially to the Paymaster General, because her answers and her summing up of such debates are always useful—certainly in relation to my remarks.

I serve on the Select Committee on the Treasury and attended a few of the Sub-Committee's hearings, although I did not play a great part in the inquiry. I pay tribute especially to the hon. Member for West Worcestershire (Sir M. Spicer) and to my other colleagues who undertook the bulk of the work. It is a tribute to the operation of Select Committees that when I considered the proposals and recommendations made by my colleagues, I agreed with all of them.

The report is strong; it is hard hitting. As the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) says, it raises many questions about the way in which Customs and Excise has been working for many years. We may question whether we got to the bottom of all the issues. The Sub-Committee may have to return rapidly to the issue of Her Majesty's Customs and Excise. The questions that we focused on need to be answered quickly.

Sir Michael Spicer

The hon. Gentleman reminds me that we had already agreed to return to the matter. The Liaison Committee has said that the Sub-Committee should follow up that report and we certainly intend to pursue the matter.

Mr. Davey

I welcome that news. It makes this debate even more important. It is the job of the House and of the Committee to ensure that we play our part in turning around that failing organisation. There could be many reasons for the failures. It could be under-resourcing, although I think that it has much to do with poor leadership over several years. The new head of the board faces a real challenge.

Two major issues were identified in the report. The first is smuggling and the measures that are needed to bear down heavily on that abuse. The second is the merger. The Committee came out strongly in favour of merging Customs and Excise with the Inland Revenue.

Customs and Excise might not be capable of taking on both those challenges simultaneously. However, that is not an argument against having a strategic vision for that important Department of State. It is crucial that the Government go much further than they did in their reply to the Committee. Although this may not be the time to take a rapid approach to merger, they should tell us that merger is the goal. It may take place in four or five years, but the Government should tell us that that is what they want for Customs and Excise.

Many of the remarks made by the hon. Member for Newcastle upon Tyne, Central were especially pertinent. He referred to the failures of co-ordination and communication within Customs and Excise. Those are shown clearly by the report. It is thus doubtful whether a quick merger would be possible, because of such weaknesses—mainly in Customs and Excise. However, merger must be the vision.

I was delighted to read, in Wednesday's Financial Times, the suggestion that the Government may be considering merging Customs and Excise with the Inland Revenue because of the failures of Customs and Excise in relation to alcohol smuggling. Obviously, the Paymaster General will want to put on record the Government's position and whether, after the recent evidence, they have shifted from their reply to the Committee's report.

Dawn Primarolo

indicated dissent.

Mr. Davey

The hon. Lady shakes her head, so it appears that they have not done so.

I hope that she will leave the door open to that policy goal—as she did when she came before the Committee. Possibly, she will suggest that there will be a review or an independent inquiry into the possibility, so that the debate can progress. That is the right route.

The Committee's arguments for a merger should be put clearly to the House. The evidence showed many benefits, such as improved compliance with taxation. Presumably, that would bring a greater yield to the Exchequer. Another important advantage is often overlooked—indeed, far too often overlooked in Whitehall: the reduction in business compliance costs.

When we debate the regulations that we impose on the private sector, we often overlook the fact that taxation is the biggest source of regulation, involving not just the cost of the tax itself, but the compliance costs for completing forms, keeping records and contacting the tax authorities. Taxation—be it VAT, excise duties or corporation tax—is the largest regulatory burden faced by business.

For too long, the House has paid too little attention to that fact—especially as it relates to Customs and Excise. We must bear down on business compliance costs; they are far too high, especially for small businesses, which face too many inspections. If there was only one point of contact with Government in respect of taxation, that would simplify their affairs. They would expend less senior management time and less anxiety on their relationship with the tax authorities. From the point of view of the private sector, that is a strong case for merger. It should be one of the clinching arguments.

The reduction in the Government's revenue collection costs is a strong argument. I was struck by some of the examples in the Committee's evidence. In a former life, I undertook a little research into the Swedish taxation system. For my sins, I visited the centre outside Stockholm where taxation forms are printed, as my job was to ask about the questions on the forms. It was interesting to see how many taxes were dealt with by one form; for example, income tax, VAT and property tax.

Sweden may be smaller than Britain, but there is no reason why we should not take that route. We could try to include as many aspects of taxation as possible—especially for business—on one form. That is a real goal. It certainly coincides with the Committee's recommendations.

I would go a little bit further, but I promise that I will not spend too long on this subject because you would call me out of order, Mr. Deputy Speaker. I believe that we have far too many bureaucracies in our town halls. One of the strongest arguments for abolishing council tax and introducing a local income tax is that it could piggyback on the Inland Revenue. We could then get rid of a lot more of the tax bureaucracies in this country and save an awful lot of money in the process.

The Committee heard some very strong arguments for a merger of Customs and Excise with the Inland Revenue; so why do the Government persist in not going ahead with it? I was interested in the physical reaction, from a sedentary position, of the Paymaster General when I said that perhaps Customs had lot on its plate at the moment, especially in tackling the smuggling problem. That may be the reason why the Government are not pushing ahead with considering the merger. If that were so, it would be slightly more understandable. If it is the case, I hope that the Minister will confirm it, because I found the arguments in the Government's reply unconvincing.

There were two main arguments. It was said, first, that a merger would entail risks, costs and structural upheaval. Of course there would be up-front costs; of course it would be an upheaval. Of course there are risks in the process—there are in any structural change, and certainly one of this magnitude. That is why there would be a long process of consultation, a process in which the merger was planned out over a period of four or five years, to ensure that we got things right. That is not an argument against the merger; it is just an explanation of the obvious.

The second main argument is that closer working can achieve the benefits of merger without the disbenefits. Well, we have been experiencing closer working and it does not seem to have been very effective, for many of the reasons that the hon. Member for Newcastle upon Tyne, Central has just stated. The Government really must do an awful lot better to produce—

Dawn Primarolo

I shall answer that point now, as the hon. Gentleman will not be present for the end of the debate. That is a contradiction that continually runs through this debate. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) asked why the Inland Revenue was doing some more visits while Customs was reducing its number of visits. The answer to that question is that, through closer working and shared experience, the two Departments have a better understanding of when they should visit and how to conduct such visits. Therefore, what appears to be a negative—that is, a reduction in visits—is actually—[Interruption.] My hon. Friend the Member for Newcastle upon Tyne, Central laughs, but it is about understanding risk, sharing information and visiting where necessary, but not burdening business with unnecessary visits. That is just a minor example of some of the things that are emerging from closer working.

Mr. Davey

I am grateful to the Paymaster General for intervening then and explaining that point, and I am pleased to hear that some benefits are emerging from the closer working programme. However, from the evidence that the Sub-Committee heard, and that I have read, it does not appear that the closer working programme is progressing apace. There does not appear to be a huge degree of commitment at senior level to it, and as I—

Mr. Cousins

I was trying to bring to the attention of the House the fact that visiting policies clearly differ. I draw it to the hon. Gentleman's attention that the Sub-Committee had evidence that there had been a previous programme of joint visits by Customs and Excise and Inland Revenue, which had been quietly abandoned and ditched by both organisations. That gives rise to some concern about what the present course of action might be.

Mr. Davey

I am grateful for that intervention. The hon. Gentleman shows that he is a rather greater expert on the details of this subject than I am.

That intervention backs up the point that I was coming to, about whether there is commitment, and sufficient commitment, to the closer working programme. We hear that Customs and Excise has undergone a restructuring programme. It restructured its board recently; I am not quite sure why. I am sure that the Paymaster General will enlighten us in due course. However, interestingly, when that restructuring was going on, no board-level closer working director was appointed. If there was a commitment to closer working at the highest level, one would have expected that. One would have expected the board to take the matter seriously.

We are told by Ministers that closer working is really important—that the two organisations will learn from each other, and understand the benefits and share information and so on, which is what we believe could happen after merger. However, I am not convinced that experience of closer working has shown that the benefits of merger can be achieved in that way without the disbenefits. The closer working programme must do an awful lot better, and be undertaken with far greater commitment and extremely quickly if the House—and, I believe, the Sub-Committee—is to have faith in it as an alternative to merger. I am not convinced by it at all.

When, elsewhere in government, some successful mergers of Departments have taken place, the risks, the costs and the structural upheaval—all the excuses that have been made for not merging Customs and Excise and the Inland Revenue—have not been considered. I pay tribute to the Government for the way in which they have integrated the Contributions Agency with the Inland Revenue. It was an excellent idea; I totally support it. The Government have also set up ONE, by merging parts of the Benefits Agency and the Employment Service. The political will was there to carry out that merger. Why is not the political will there to carry out this merger? It seems that when the political will is there, the practical arguments against merging sometimes fade away.

I shall now move on to the smuggling issue. The Paymaster General knows that, in debates that we have had on that issue, in the House and in the Committee of the Finance Bill, I have in many ways supported what the Government have said about administrative changes and the introduction of new technology, such as X-ray scanners. However, I have been concerned about the delays in action, and the report increases my anxiety.

I know that the Paymaster General is committed to hitting the smugglers hard, and she is coming up with a set of policies which, I believe, will be effective; but there are delays. As the hon. Member for Newcastle upon Tyne, Central said, many people are worried about those delays.

Dawn Primarolo

indicated dissent.

Mr. Davey

The Paymaster General shakes her head, but we have known that this has been a problem since the day that the Government took office, and we had hoped that we would have got further down the track than we have.

That brings me to the report in yesterday's Financial Times in which, as the right hon. Member for North Durham (Mr. Radice) has said, there is news that alcohol smuggling is significantly more extensive than Customs and Excise had previously thought. When we debated the subject in the Committee on the Finance Bill and when we had evidence from Customs and Excise, we heard that the real problem was tobacco smuggling, not alcohol smuggling, but the new evidence would suggest that alcohol smuggling is on a par with tobacco smuggling. If that is the case, that again raises questions about the competence of officials within Customs and Excise, because they had not detected the scale of the problem earlier; their capacity to tackle the problem is seriously called into question.

I know that other right hon. and hon. Members want to speak on those issues. I just want to finish on the figure on the Order Paper for the estimates that we are debating. I apologise to the Minister if my lack of research has not produced the answer for me, so that I may have to wait until I read this debate in Hansard to find out the answer—or she may find that she has to write to me. I am slightly puzzled by what is on the Order Paper. We are being asked to support the granting of £482,077,000 to Customs and Excise and various other people, and payments in respect of Shipbuilder's Relief and the Customs and Excise National Museum. When I look into the departmental report for the same year, for the same class and the same vote—class XVI, vote 4—I am unable to find that figure. That may well be my own incompetence. I may have misunderstood something. We may have previously voted on the rest of class XVI, vote 4 on some other occasion and this money may be additional. However, that is not clear from the Order Paper or the departmental report, although it should be. It is an awful lot of money for the administration costs of a Department, and the departmental report's account of the class XVI, vote 4 suggests that the costs are significantly larger than those set out on the Order Paper. I hope that the Paymaster General is able to explain why that is.

I know that estimates have received cursory attention over the years and that they are not taken terribly seriously, but it would be nice if the Government at least made an attempt to assist the House so that, when we looked at the Order Paper and the departmental report, we were able to work out what was going on. If those of us who take an interest in the subject cannot easily work out what is happening, what hope is there for casual observers or our colleagues who are not so interested in or anoraky about the subject of Government expenditure? How are they able to understand what the Government are trying to do with their expenditure? If there is an easy explanation for the difference, I shall be grateful to hear it. However, I hope that, in future, the Government will make their requests for Supply rather clearer.

2.31 pm

Liz Blackman (Erewash)

The wide-ranging inquiry that the Sub-Committee carried out was very interesting. It covered merger and closer working, the smuggling of alcohol and tobacco, and compliance. The subjects are inextricably linked to a degree, but, having given the matter a great deal of thought, I decided that, like other hon. Members, I would focus the main part of my speech on tobacco and alcohol smuggling.

Tobacco and alcohol smuggling damage our society from top to bottom in many different ways. It makes it difficult to secure the right level of Government revenue, can result in violence, poses a health threat and causes unemployment. We also have to pay out substantial sums for the detection, prosecution and punishment of offenders.

What tipped the balance in favour of my decision to speak on this issue was a visit that I made to my local off-licence last week where I slightly inflated the profits that it made on wine. Its owner collared me and spent a long time explaining how much he had lost in the past eight years. He said that his profits were less now than they were eight years ago and he put that down predominantly to alcohol smuggling. He was being undercut by alcohol that had been smuggled into this country and which was being sold in other off-licences in the city where I live.

The man to whom I spoke is honest, above board, pays his taxes and works hard. His off-licence is in a relatively affluent area where people have money to spend, but he was seriously worried by the damage that smuggling has caused to his small business. I imagine that the impact of smuggling is being replicated across the United Kingdom. Therefore, I decided to focus my remarks on smuggling.

As hon. Members have already said, the scale of smuggling is immense, but it is very difficult to quantify. A rough estimate is that £2.5 billion was lost to the Exchequer in 1999 as a result of tobacco smuggling alone. We were told that that figure was 10 times more than the one for alcohol, but I doubt whether that is the differential between the two. The scale of the problem should not be underestimated, and we do not do that. In fact, I imagine that it is very difficult to assess its true scale.

I am encouraged by the fact that there have been record levels of success in the detection of smuggled goods, but it is difficult to say whether the increased detection is a sign that we are beginning to crack the problems or the result of greater smuggling activity and an ever increasing culture of smuggling. We must bear that point in mind.

The Sub-Committee considered the way in which Customs and Excise measured its performance. We discovered that its previous measures of performance did not fully gauge the impact of its efforts on overall smuggling volumes. In fact, many of the performance indicators were a moveable feast, because a number of variables changed so that it was not possible to make any comparison between one year and the next. Therefore, it was very difficult to assess whether Customs and Excise was doing well, or doing better.

For example, in 1995–96, Customs and Excise announced that it had exceeded its target of securing 900 vehicles used to carry smuggled goods. However, that target did not appear again. In 1997–98, the number of detections made of smuggled goods yielding excise revenue of more than £10,000 was reported as a target and, in 1998–99, the number of major smuggling organisations dismantled or disrupted was used an indicator. Clarity and stable targets are necessary.

I am delighted that Customs and Excise is to have a public service agreement—PSA—target focusing on the penetration of smuggled tobacco into the UK. That target has been set higher in the first instance, which suggests that the amount of smuggled tobacco is predicted to increase in 2001–02 before it then begins to decrease. One could be cynical and ask whether we will win the battle, but I guess that the answer is, "Yes, we will." My confidence is not without foundation; substantial resources are being put in and there has been a shake-up in management structure and practices. Therefore, I explain the rise and fall in the target in those terms. Targets have been set for the number of tobacco smuggling gangs disrupted each year and for asset seizures. If those targets remain in place, we shall be able to compare how Customs and Excise is doing over the years.

On tobacco smuggling, I support the Sub-Committee's recommendation that the Government should continue to protect the revenue obtained from tobacco duty. We have health objectives and we should not give in to criminal activity. Therefore, I was disappointed with the Opposition when, during consideration of the Finance Bill, they suggested that that duty should be reduced. That argument is disingenuous, particularly in the light of the evidence that the Sub-Committee took. Canada was cited as an example of a country where excise duty on tobacco had been reduced and smuggling had decreased as a result. In fact, one consequence was a switch to the smuggling of alcohol and Canada lost revenue.

Another argument is that we harmonise tobacco duty with that in other European Union countries. However, duty-free tobacco from outside the EU is the problem. Italy and Spain, which have lower duties on tobacco products, still face a huge problem with tobacco smuggling. The only way that we could level the playing field is to get rid of the excise duty, but we, like many other countries, predicate our public expenditure on that revenue stream. We also have other objectives when we raise tobacco duty.

Moving on to resources, I echo my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins), who said that the Opposition have selective amnesia on the Cinderella service that we inherited in 1997. Massive staff cuts had taken place and one of the first things done by my hon. Friend the Member for Coventry, North-West (Mr. Robinson), the then Paymaster General, was to stop 300 anti-smuggling officers being let go, as had been planned by the previous Administration—and, I understand, to prevent the loss of 1,100 VAT officers from the fundamental expenditure review.

Nevertheless, the Treasury Committee was concerned that there was evidence of staff being switched to deal with more disruptive activity, but at a cost to other areas. Customs officials who came to my constituency office said that they felt that staff were being switched to more pressing areas, which left their flanks exposed. I am pleased that there is now a commitment of £209 million and nearly 1,000 new staff. I am aware that those figures are indicative, and depend on the outcome of the spending review. Will my hon. Friend the Paymaster General tell us, without giving anything away, how confident she is that that staffing level will come through? The appointment of 300 anti-smuggling officers has already been given the go-ahead. How are staff recruitment and training proceeding?

I shall deal briefly with the £23 million for X-ray scanners. It would be interesting to know whether that money has come from the capital modernisation fund or is new money contained in the extra £209 million. Those scanners are welcome and were chosen because of their effectiveness in other countries, where they have an extremely good track record. They will not be in place until November, when all the logistical and technical issues—such as installing them, training officers to operate them, how to select goods coming through and working out how to interpret the data coming across the channel—will have been resolved. There are logistical problems, but I am sure that the scanners will not arrive at ports without any of that preparation being done. I am, therefore, interested to hear my hon. Friend the Paymaster General's response to the issues raised by my hon. Friend the Member for Newcastle upon Tyne, Central.

I have a couple of questions on the marking of tobacco products. I very much welcome the pack mark scheme. The Treasury Sub-Committee, however, recommended a date mark, as we thought that that was a good way of countering forestalling. My understanding is that that has been rejected, and I should be interested to know why as I am sure that the idea of countering forestalling has not been rejected. However, if the date mark scheme has not been rejected, has it been accepted and is it going ahead? Similarly, in their response, the Government said that they would consider the Committee's remarks on health warnings on packs and would come back with information. Will my hon. Friend the Paymaster General comment on that?

When the Treasury Sub-Committee spoke to the head of Customs and Excise, he recognised that, although closer working by the Department was moving forward, perhaps much more needed to be done on internal linkages within the Department, as opposed to closer working with the Revenue. Customs and Excise has anti-smuggling teams and back cash teams which monitor retail matters, and also has shadow economy teams and excise verification teams. We were told that the operational policy directive was taking a holistic approach, but the way in which the different elements work with one another in the service is a management issue that needs to be further resolved. I welcome the appointment of the new head of Customs and Excise, as well as what he has already done. However, could we have information on whether he is making the matter a priority in his shake-up of the service?

The Treasury Committee clearly flagged up concerns about the control system for holding and moving excise goods, which is Europe-wide and paper based, thus providing ample opportunity for abuse, diversion fraud and freight train smuggling. An example of those controls not being in place is the gap in the revenue collection on alcohol, which has been mentioned by several hon. Members and is being investigated. There are now EU agreements to improve and modernise systems, but that is a fairly long-term project. There are on-going improvements to the early warning system, which will continue to be made as a matter of urgency. How are they progressing?

I was going to go into detail about concerns relating to a story that has recently hit the headlines on the gap of between £1 billion and £2 billion which resulted from fraudulent non-payment for wines and spirits between 1995 and 1998. However, I shall say only that I am pleased that that will now be the subject of an independent inquiry. I agree with the article which said that as well as the judicial element, there must be strong commercial input in looking at the problem and serious re-examination of control and information systems.

I shall touch on the issue of compliance. If the problem of non-compliance is simply about the complexity of having to comply, that is a concern for Government, as it encourages people into non-compliance. Of course, if someone sets out to be non-compliant, that is another issue. However, when systems are complex, telephone hotlines are not available, leaflets are inaccessible and explanations are not given, it is much more difficult for businesses to comply. It is revealing that, in the last 10 to 20 years, there have not been any studies on Customs and Excise compliance costs, although a survey is now planned. The Treasury Committee recommended that the Government should look at a targeted approach to delivering reduced costs, which is now going ahead. Indeed, it needs to go ahead with speed, as that is a move towards helping businesses to be compliant.

The huge challenge that the Government face in attacking and reducing smuggling includes tackling within Customs and Excise the serious problems associated with investigating and successfully prosecuting smugglers. I welcome the Butler report on that, and it is healthy that those problems are being faced. I hope that subsequent to the inquiry on the matter, recommendations will come before the House.

I welcome also the Cabinet Office report, "The Proceeds of Crime", which is another piece of the jigsaw in tackling the problem of bringing to book people who are making a considerable amount of money and causing a great deal of misery to our society. For those Members who have not read it, I can say that the report is still at the consultation stage, but it proposes that we extend civil forfeiture powers to strengthen the existing powers of seizure under the Drug Trafficking Act 1994. That would include not only cash linked to drugs crime, but other means of payment such as travellers cheques and bearer bonds. The report also recommends the setting up of a national confiscation agency to work with Customs and other law enforcers on cases that are not pursued by the civil route.

I am sure that there will be a great deal of debate about that in the House, if and when the proposals are included in legislation. However, the following figures are shocking: from 1987 to 1996, only 157 drug trafficking orders for over £100,000 were made, but there were 45,000 convictions. There is a gap between making the punishment fit the crime and what has been happening.

I end where I started, by saying that I am very supportive of all the measures being taken by the Government on this ever increasing problem, which has an impact on many different issues, including unemployment, which I have mentioned. Not least is the impact of cheap alcohol and tobacco on children.

2.53 pm

Mr. Peter Brooke (Cities of London and Westminster)

It is a great pleasure to follow the hon. Member for Erewash (Liz Blackman), as it is always a pleasure in such debates to follow a member of the Select Committee that has produced the report. Those of us who are in attendance at a debate on a Select Committee report, but who are not members of the Committee, inevitably have a slight sensation of being a Jehovah's Witness who has accidentally stumbled upon a coven. However, I declare an interest, having served for two years in the mid-1980s as a Minister answerable to the House for Customs and Excise—a task that I hugely enjoyed.

On my first day as Minister, I said that I should seek to get out of the Treasury once a month to visit Customs operations. My principal private secretary, who was a Customs official, and who I am delighted to say is now a commissioner member of the board of Customs and Excise, was sure that we would not achieve that, but we achieved visits once every six weeks or so, and 17 visits in all, so I have some knowledge of, and considerable respect for, Customs and Excise, at least in those years. I acknowledge that those years preceded the smuggling bonanza of the past decade.

Customs is an ancient service and existed in a privatised form long before it was a public service. It practised in the City of London, and in the port of London in particular. Chaucer was a Customs officer—it is a much older service than the Inland Revenue.

In the light of the Select Committee's comments on Customs' need to be more user friendly towards business, it is perhaps worth repeating the episode in the mid-14th century when Edward III, anxious to restore Westminster's economy after it had been ravaged by the shift of the Government to York in the context of the Scottish and Welsh wars, decided that the office for extracting imposts on all exports of wool should be moved from the City end of my constituency to the Westminster end, rather as more recently the French customs decided that all Japanese videos should enter France through Poitiers in the heart of that country. It will not surprise the House that, within a dozen years, 14th-century market forces had moved the taxing point back to the City.

If I express some loyalty to Customs and Excise in these remarks, it will not be the first time that I have done so. During the 1987 general election, my noble Friend Baroness Thatcher insisted that a Treasury Minister should be present at all her London press conferences, and that hazardous role fell largely on me because of my constituency. I say "hazardous" because the public prints of the day reported that, in one press conference answer, the Prime Minister criticised Customs and Excise for its treatment of small business and appealed to me for support on the platform. I had to say that I could not follow her the whole way because it was within my certain knowledge that Customs and Excise could visit each small business in the land on average only once every eight years for an inspection.

Given the Select Committee's new criticisms of Customs and Excise for business user-unfriendliness, I can see that the then Prime Minister may well have been more right than I had surmised. I did not so damage my standing with her that she resiled from appointing me chairman of the Conservative party six months later, but in reflecting on this debate, it has occurred to me that she may have decided that it was better to have me running Smith square than answering for Customs and Excise in the House.

At any rate, that move ended any responsibility that I had for Customs and Excise, to which my most notable contribution was the resolution of the Euro-tunnel treaty problem. We had to resolve the dilemma that French customs officers on trains entering the tunnel would still be carrying guns when the trains left the tunnel at our end, whereas British customs officers would not be carrying guns. Our resolution, accepted by both sides, was that French customs officers could carry guns on British soil, but if they wished to use them, they must apply in writing to the chief constable of Kent. One indirect contribution was that I chaired, from 1988 to 1989, the Government working party to set up the Government data network, initially between four Departments, of which Customs and Excise and the Inland Revenue were two.

I want to dwell on three issues: first, smuggling; then, briefly, the climate change levy, if that is in order; and, finally, the Select Committee's proposals for merging Customs and Excise with the Inland Revenue.

On smuggling, I called in 1991 on my successor at Customs, the then Minister of State, to discuss the plans for the introduction of the Single European Act in 1992 in the context of smuggling, and particularly the smuggling threat to Gallaher's factory in Northern Ireland, where I was then serving in government. I am against politicians saying, "I told you so," but I have to confess that after hearing of the preparations of Customs and Excise in 1991, I did not think that they were likely to be wholly effective, and I have not been wholly surprised by the turn of events since. In all honesty, I should, following various speakers in the debate, acknowledge that I was genuinely surprised by the reduction in Customs and Excise staff numbers in the previous Parliament, given the tasks that it was being asked to address, but then I was no longer a member of the Government.

Anyone interested in smuggling naturally has a sense of history in general and of the 18th century in particular. It was Pitt the Younger's triumph in his fight against smuggling that he characteristically went for essentials. His central problem was that the excise duty rates were so high that smuggling enjoyed considerable public respectability, as evidenced in Kipling's lines:

• Five and twenty ponies
• Trotting through the dark—
• Brandy for the Parson,
• 'Baccy for the Clerk;
• Laces for a lady, letters for a spy,
• Watch the wall, my darling, while the Gentlemen go by!

I hold no brief for espionage, but otherwise those lines catch the flavour of the age.

Pitt's solution, of course, was to slash excise rates, with the wholly benign result not only that smuggling ceased, but that the Treasury's revenue rose exponentially, as it did when my noble Friends Lord Howe of Aberavon and Lord Lawson of Blaby cut the top rates of tax two centuries later.

Of course I understand the Government's health arguments. I do not want to give the impression that I have not followed them in this instance, but I also followed the debates on the Finance Bill in Committee on the Floor of the House two months ago. My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), the shadow Chief Secretary to the Treasury, and several other hon. Friends drove an Exocet worthy of Pitt through the camouflage that was advanced by the Government in their arguments for joined-up government. Those arguments are a classic case of the school report stating, "The improvement in your son's handwriting has revealed alarming deficiencies in his spelling."

The Select Committee report and today's debate are invaluable searchlights on this major crux in the efficacy of Government policy. However, in constrast to the Select Committee's findings on Customs and Excise secrecy, the Select Committee on Northern Ireland Affairs, which examined Customs and Excise witnesses in the context of petroleum duties and consequential smuggling into Northern Ireland from the Republic of Ireland, gave us clear evidence, although I admit that that was under the leadership of my former principal private secretary, which may or may not have been a coincidence.

My remarks on the climate change levy will take the form of a single quotation. The other day, the Financial Secretary to the Treasury gave me a very civilised written answer on the levy, to what would have been an oral question, had it not fallen too low in the ballot. I have, however, heard him answer oral questions on the levy several times and every time, he prays heavily in aid my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer). It is too long a quote for an oral question, but I offer the Financial Secretary, in his understandable capacity today as Banquo's ghost on the Treasury Bench, my right hon. Friend's preface to a question to the Prime Minister on 12 April. He said: When I asked the Prime Minister some time ago what the effect would be on Britain's emissions of the moratorium on gas-fired power stations, he did not know. His right hon. Friend the Secretary of State for the Environment, Transport and the Regions thought that the effect would be so small as to be laughable. It turns out that the effect is, in fact, so large that it countervails the whole effect of the climate change levy.—[Official Report, 12 April 2000; Vol. 348, c. 360.] Those do not sound like the words of the Financial Secretary's natural ally.

I come to the merger. I have read the Select Committee report and have heard the arguments of its members today. I have also read the Government's response. In her letter accompanying the response, the Paymaster General states: there are also important differences between the roles of the two Departments, which require the development of different skills set in terms of assurance and collection. Indirect taxes are transaction-based taxes, requiring real-time identification of transactions with near-simultaneous and continuous collection. Direct taxes are periodic and accounts based, generally collected in arrears. She goes on to expand on the generic particularities of indirect taxes to the same effect in arguing the Government's response—that they were not in favour a merger.

The Select Committee report closed with a single sentence in heavy type at the end of paragraph 133, which stated: In our view, one of the main benefits of the merger of Customs and Excise and the Inland Revenue would be to effect a shift in the culture of VAT and excise collection so that it was more attuned to the needs of business. It is not for me to second-guess the Select Committee's final sentence, not least because it took the evidence, but I doubt whether the Select Committee would have ended the same way 15 years ago. In that era, the distinction between the two agencies was that the Inland Revenue was more deeply into precision, while Customs and Excise, because of its permanent interface with business, was more into rough and ready agreements with business by which it would seek to collect the broad necessary tax arising from legislation while making its collection convenient for both sides. Because of the longevity of both services over centuries, I should be surprised by so rapid a change in 15 years, and my instinctive objection to the proposed merger derives from the different cultures.

I do not know how many members of the Select Committee have been involved in the process of change in large organisations, but I had some experience of that in the margins during 18 years in the private sector, and it is a genuinely challenging task. Not least because of my involvement in helping to set up the Government data network, I am of course wholly in favour of further exploration of potential collaboration, but at this juncture I would need a lot of convincing to support a full-scale merger. The Select Committee report, however, has been eminently worth while.

Several hon. Members

rose—

Mr. Deputy Speaker (Mr. Michael Lord)

Order. Before I call the next hon. Member to speak, I remind the House that several hon. Members are trying to catch my eye. Not much time is left and, unless contributions are considerably shorter, some of them will be disappointed.

3.6 pm

Mr. David Kidney (Stafford)

The contribution of the right hon. Member for Cities of London and Westminster (Mr. Brooke) is all the more welcome because he is not a member of the Select Committee on the Treasury. Because some hon. Members who want to speak are also not members, I shall keep my remarks brief. I want to discuss closer working, smuggling and the Doran case.

I recognise the contribution that the tens of thousands of staff make to the work of Customs and Excise every day. I am sure that they seek satisfaction in doing their job well and in the knowledge that they are doing some public good by collecting moneys that will be spent on this country's defence, effective public services and keeping out illegal products and substances that we would prefer not to be here.

I have often noticed how comfortable politicians are in talking about structures. That is a dangerous thing for us to do; the important matters are the processes involved and the results. The proper taxes must be collected effectively and as politely as possible from honest and hard-working people. Those who have to pay their taxes must find the service that they receive polite and efficient, and they must be regarded as individual personalities, not as numbers or organisations. It is important to focus on that in any debate on how our tax collectors work, so it is legitimate to ask why two organisations collect our taxes and why there cannot be one.

I should like to defend the Treasury Sub-Committee from any suggestion that we became obsessed with structure and forgot to consider the delivery of the service, first by reminding hon. Members that the investigation into Customs and Excise followed a similar investigation a year before into the Inland Revenue, so we have thoroughly considered both tax collection organisations. Secondly, as the hon. Member for West Worcestershire (Sir M. Spicer) said, we closely considered the experience of Canada, which has merged all its tax collection functions into one organisation, not to try to save money—the evidence showed that no money was saved—but to get the service right, to collect the right amount of tax in a way that is acceptable to the public and to be customer friendly in carrying out such duties, thereby reducing the burden on those who have to pay their taxes, especially the costs to businesses, which, of course, have other priorities.

The Government response to the report states that closer working is a good way in which to ensure that the service provided by our tax collecting organisations is effective, and to achieve the desired results. We on the Treasury Sub-Committee found that in the 1990s, the organisations may have said that, but they did not practise it. The absence of a closer working director until last year has already been mentioned. Equally, there was no system to monitor and evaluate closer working.

I had the impression that the Paymaster General had come to the system years after it had been set up and found that she could not provide a proper assessment or evaluation of it because the systems had not been in place to provide her with the information needed to make that assessment. In the Government's response to the report, she tells us that the intention is now to ensure that the system has proper aims, such as closer working, and proper monitoring and evaluation in future.

Nevertheless, I still believe that closer working will not deliver on the agenda that we have all talked about today. I still believe that it is unambitious, and anyone who reads Lord Grabiner's report will see that we need a closer working programme much wider than the one in place. In April, the Committee received a letter saying that criteria for closer working would be established, but we are still waiting to hear what they are, and I am not even sure about what is happening with the budget for closer working. The Committee has just received a letter from the Treasury that talks about transferring closer working budget money from Customs and Excise to the Inland Revenue, but it is not at all clear why the Government are playing fast and loose with that money, which is supposedly important.

Whether or not a merger ever happens, we could look further at steps along the way to closer working, such as more co-locating of closer working teams, a small amount of which takes place. Why do we need two separate boards for the two organisations? Why could there not be one board for Customs and Excise and the Inland Revenue, even if they continue as two organisations for tax collecting purposes? Again, the Government have travelled along that road a little by having directors from each board serve on the other.

It is important to remember the distinction between the different kinds of smuggling, which no one has drawn in the debate. Different things are smuggled—ranging from human beings to tobacco, alcohol and drugs—and there are different smuggling operations. A lot of people listening to the debate may simply have in mind the so-called white van trade in which people from this country visit another European Union country with lower tax rates, fill up the van with stuff that they claim is for their personal use, transport it home and sell it commercially much more cheaply than the local off-licence can sell such goods to its customers, thereby doing the off-licence out of business and possibly its livelihood.

The white van operation is not attractive or desirable, but it is not the most prominent kind of smuggling. Much more significant is so-called diversion fraud, which was touched on in a report in yesterday's Financial Times. Goods leave this country, supposedly for export—therefore, no duty is payable—but, instead of going out to the claimed destination, they are diverted back to this country's markets to be sold without duty ever being paid. As we read in the report, and as has been mentioned by many hon. Members, billions of pounds can be lost. Also, goods in container lorries are smuggled into European Union countries from third countries such as Russia and China, where no duty or small amounts of duty, are paid, and sold without EU duty being paid.

Like many hon. Members who have spoken, I disagree with the idea that cutting duties would reduce smuggling. Most smuggling involves organised criminals—people who pay no duty at all—so unless we reduce duties to zero or close to it, we shall never be able to remove the motive to continue that business. We should therefore consider only the white van trade and whether harmonising duties in this country with those in other EU states is desirable. That would be an interesting debate.

I refer to the submission made to the Cabinet Office by the Public and Commercial Services union—the trade union that represents most Customs and Excise staff—on how, for a small outlay, the Government could significantly improve the detection and prevention of illegal drugs imports to this country. I support that submission and hope that the Government are able to give it some attention in the spending review announcement that will be made soon.

I refer also to the case of Doran and the Government's response to the report by Judge Butler, which my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) has already mentioned. In that multimillion pound drug smuggling case, the alleged perpetrators were prosecuted by Customs and Excise. However, the case collapsed and the accused walked free from court. As a result of comments made by the trial judge, an investigation was set up as to what went wrong and why the case collapsed. This is a sorry tale of poor preparation of the prosecution case, the misuse and abuse of investigative powers and a lack of total frankness and disclosure by those involved on the prosecution side.

As a former solicitor, I was horrified to see that some of Judge Butler's recommendations are very basic. For example, he said that all cases must be fully and properly prepared for presentation in court and that a barrister instructed by Customs must be provided with a formal set of instructions. I could not imagine a barrister not receiving a formal set of instructions and a properly prepared set of papers, even in the slightest case I ever dealt with. I stress that this case involved a multi-million pound prosecution.

The report is worrying, so no wonder the Government have agreed to set up a further investigation as to whether Customs and Excise should lose its status as a prosecuting authority. However, I must point out that my hon. Friend the Member for Newcastle upon Tyne, Central was wrong to say that Customs and Excise did its best not to tell us about the Doran case. I asked questions about it when we had Customs and Excise staff in front of us, but our own Clerk was worried as to whether the sub judice rule still applied and stopped the line of questioning. Customs and Excise staff made the point that they detect and prosecute many cases each year involving smuggled goods of great value. Those prosecutions are usually successful and those who are successfully prosecuted receive severe sentences. The picture is not gloomy—indeed, it is usually one of success—but this case is worrying.

Mr. Cousins

Is my hon. Friend concerned, as I am, that the Doran case is not the only recent one to involve large sums of money and a Customs prosecution that collapsed? A similar case in Portsmouth and a trial in Middlesex Guildhall both had a similar result, so perhaps we should consider not simply the issues involved in the Operation Steeler case, but a more widespread and fundamental problem.

Mr. Kidney

Yes, I am concerned that the public hear that people who have done terrible things have walked free from court and that Customs and Excise staff, who did their job properly to catch those people, see that an unsuccessful prosecution is the result of their work. That is worrying, which is why the investigation is welcome, and why the Government's decision to consider whether Customs and Excise should continue to be a prosecuting authority is the right one. I agree with that.

The Sub-Committee's work in considering the various agencies of the Treasury is immensely useful to us and to the agencies and organisations themselves. I am pleased that we are to go back to Customs and Excise later this year to see how it is getting on, not least with closer working.

3.18 pm

Mrs. Ann Winterton (Congleton)

In view of the time, I shall be as brief as possible and shall not touch on several issues that I should have like to have discussed, such as alcohol and tobacco smuggling and the new problem with petroleum, to which my right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke) referred and which has to be tackled. I shall leave them on one side as they have been well explored.

In briefly congratulating the Treasury Sub-Committee on its report, I shall take a slightly different tack. I welcome the opportunity to debate the work of Her Majesty's Customs and Excise on tackling the smuggling of drugs. It plays a vital role in the detection and prevention of drug smuggling in order to reduce access to drugs in Britain.

Front-line customs officers undertake a thankless task, dealing with verbally abusive and often aggressive travellers. Routine searches can lead to disturbing and distressing discoveries, as was tragically evidenced on 12 June at Dover. I have observed that Customs officers undertake their work efficiently and effectively, and I pay tribute to them for the role that they undertake on behalf of us all.

With regard to the performance of the Department in relation to drug smuggling, its efficiency is clearly demonstrated by the Department's increased use of intelligence-led operations. Customs and Excise has been successful in applying its specialist skills to the fight against commercial smuggling. Between April and December 1999, the Department disrupted or dismantled 35 smuggling organisations trafficking in class A drugs, and was on course to meet its public service agreement target of 60 organisations by March.

The Department was also on course to meet its target of preventing class A drugs with a value of £1.2 billion from entering the UK during 1999–2000. In 1998, the Department seized 88.3 tonnes of drugs, including a rise of more than 25 per cent. in the amount of cocaine and amphetamines seized in the previous year.

However, as has been mentioned in the debate, the number of successful prosecutions for drug smuggling has fallen significantly in recent years, and average sentences have increased by just one year to five and a half years. The new data collection system will give us a better understanding of the success of the 4,000 prosecutions brought by Customs each year, but serious questions have been raised recently about the Department's ability to prosecute offenders.

Following Judge Butler's inquiry into the collapse of the case against Brian Doran and Kenneth Togher for smuggling cocaine with a value of £34 million, his report last month found that mistakes were made by the Customs investigation team and the Customs solicitors department. Judge Butler found that the solicitors department is "simply not sufficiently resourced". He reported: These officers I saw I would describe as hard working and dedicated…for the kind of pay most lawyers would describe as derisory. A review of the Department's role in prosecutions and the possibility of transferring customs cases to another prosecuting authority is due to be completed in October this year. I ask the Minister for assurances that the lessons of the report will be learned.

A wider issue of resourcing gives rise to concern. The problem of drugs in Britain continues, and their availability is not declining, despite increasing seizures by Customs and Excise. Home Office research shows that the street price of most types of drugs continues to fall, yet in 1999 the estimated street price of Customs cocaine seizures amounted to more than £250 million.

Customs officers face diverse, more organised and more sophisticated challenges in suppressing the flow of illegal drugs. The Department's estimated expenditure on drugs enforcement in 1999–2000 is £209 million. However, the number of staff allocated to tackle the problem has decreased. I accept that intelligence work is crucial to the success of operations, but there is no question that front-line resources are needed to support the intelligence services.

The Public Accounts Committee took a detailed look at the Department's role in dealing with the drugs menace. In its report in November 1998, the PAC concluded that, while intelligence-led investigations may provide a deterrent to some commercial drug smugglers, it is nevertheless important to maintain a sufficient anti-smuggling presence at ports and airports to provide a perceived risk of detection, particularly for smaller-scale and opportunist smugglers. I acknowledge that staffing levels in the service declined under the previous Government. The level of Customs and Excise staffing has fallen further since 1997, particularly in intelligence and anti-smuggling. I refer the hon. Member for Erewash (Liz Blackman) to page 26 of the departmental report, where the staffing statistics clearly show that there were 14,364 staff years in 1997–98, when we left office, and that the forecast plan for 2001–02 is for 13,482 staff years. There it is, in black and white.

Front-line anti-smuggling officers are engaged in efforts to protect society against drugs, firearms, explosives and paedophile material. The Department believes that it can make more of an impact by deploying teams of anti-smuggling staff to different ports and airports. However, the PCS union reports that front-line staff feel a mounting frustration because more could be done to stop the tide of drugs entering the country.

The PCS is aware that drug smugglers switch their resources to where they think there is the least risk of getting caught. With a number of smaller provincial airports and ports not being staffed on a constant basis, the union believes, and I agree, that there are increased opportunities for smugglers. A MORI poll commissioned in 1999 revealed public comments about the lack of adequate staffing at smaller airports and harbours.

The PCS estimates that an extra 500 front-line officers would allow the Department first, to respond more strategically to known risks; secondly, to invest more resources in testing medium and low-risk traffic in order to give an assurance that that traffic did not pose a significant threat; and thirdly, to enhance the deterrent effect provided by a visible uniformed presence in preventing the import of drugs and reassuring the public.

The PCS expressed concern that the Department was underestimating the effectiveness of additional staff, and that the reduced level of resources was not a sufficiently considered response to the threat from the importation of drugs.

The lack of staff is deeply worrying. It reveals a fundamental misunderstanding of the drugs problem. In their White Paper, the Government identified four issues that needed to be tackled: first, helping young people to resist drug misuse in order to achieve their full potential in society; secondly, protecting our communities from drug-related anti-social and criminal behaviour; thirdly, enabling people with drug problems to overcome them and lead healthy and crime-free lives; and fourthly, to stifle the availability of drugs.

The final aim relies heavily on the ability of Customs and Excise to reduce the amount of drugs coming to, and crossing, the UK, through seizures and by disrupting trafficking organisations.

The crucial balance is between addressing supply issues and demand issues. The Government have pledged to tackle the supply of drugs, shifting the emphasis from dealing with the consequences of drug misuse to prevention of that misuse.—[Official Report, 25 May 1999; Vol. 332, c. 162] However, although they are ploughing £217 million of new money into the delivery of their strategy, all that money is allocated to dealing with the demand side. Customs and Excise, the major player in achieving the fourth strand of the Government's strategy, has not been allocated sufficient extra funding, despite the Department's track record in delivering increased seizures cost-effectively.

Initiatives to tackle the demand for drugs must be combined with initiatives directly to stifle drug availability in Britain. The PCS believes that if more resources were allocated to anti-smuggling staffing, the amount seized would increase substantially. I accept that additional staff for Customs will not alter availability unless demand is adequately addressed, but the funding designed to deliver the Government's aims in relation to drugs would be much more effective if it encompassed efforts to stem the problem at its root.

The focus on the recovery of hard drugs is also a worrying factor. In 1998, the seized quantity of cocaine rose, but there was a 28 per cent. fall in the quantity of seized cannabis resin. The shift of resources away from so-called soft drugs is in line with the Government's strategy, but there are downsides. The PCS has warned that the decreasing seizures of soft drugs is demoralising—it must be; they are, after all, illegal—undermining what is meant to be a tough Government stance against drugs. The PCS also warns that more sophisticated smugglers are exploiting the move away from targeting soft drugs by concealing hard drugs within consignments of soft drugs.

The work of the Department must be seen in the context of the overall anti-drugs strategy. Customs and Excise cannot work in isolation, and it must be resourced adequately to play its part fully and effectively. Visibility and effectiveness are not mutually exclusive. Intelligence gathering is important, but the Government should not underestimate the effective deterrent that visible customs officers provide to smugglers. However, the PCS considers that the existing resources are too low to deliver both options effectively.

The Department is rightly expected to deliver higher targets in order to prevent a greater amount of drugs from reaching the United Kingdom, but consideration must be given to the staffing levels which can best achieve those aims. Concerns have been raised by members of the public, the Public Accounts Committee and the PCS.

I urge the Minister urgently to examine staffing levels and to provide additional resources to stop drugs reaching our streets.

3.31 pm

Mr. Nick St. Aubyn (Guildford)

We have heard a great deal this afternoon from Labour Members about the Government's crackdown on evasion and the increasingly oppressive regime but, perhaps typically of this Government, we have heard nothing about the principles of Government by consent, which must include taxation by consent.

There is increasing evidence not only that the general tax burden is reaching a level that people do not accept is fair and just, but that the level of taxes being imposed, particularly in this area, is at the heart of the problems of collection that have been described this afternoon, because more and more people feel that the amount being claimed from them is grossly unfair.

At the back of the Select Committee's report is an account of the evidence given by the Tobacco Manufacturers Association, in which it points out that the charge on a packet of 20 cigarettes had risen from about £1.50 a packet in 1993 to £3 a packet by January 1999. It points out that the differential from the average throughout the other EU member states has risen from less than 50p to more than £1.75. The result is that, in real terms, the amount of revenue coming from tobacco taxes since 1992 has fallen—a doubling in the tax on tobacco and a fall in the revenue yield.

We heard from Labour Members how that was partly due to the white van phenomenon, but, evidently, the big criminal element has found that the profits to be made at those much higher levels of taxation are so attractive that it has decided to become involved. By raising taxes to such a high level, the Government have made an opportunity for criminal activity, which excessive taxation has been proved to create many times before.

If we are to have Government and taxation by consent, we must observe the proper way in which taxation is to be decided and debated. It was striking in the course of the Finance Bill Committee, on which some of us recently served, that the Government refused to give us the pertinent information from the Taylor report when we came to debate the level of tobacco duty.

Before we consider that, it is worth bearing in mind the fact that, if the Government had succeeded in maintaining the level of duty at the level they inherited, the yield from tobacco duty in the first three years of this Parliament would have been £3 billion higher than was actually achieved. That is £3 billion which might have gone into the health service or to meet the other needs of our society but which has been lost as a result of the Government's failure to follow a successful strategy in achieving not just the highest rate of tobacco duty, but the optimum level.

As the Select Committee pointed out, it, too, was disappointed that the Taylor report was not made available; that several key witnesses told it that they had not been consulted by Mr. Taylor; and that the advice tendered by Mr. Taylor was apparently personal and confidential to the Chancellor. The Committee concluded: We consider it unacceptable that the Treasury should commission a review of an important area of Government policy…without allowing Parliament access to the review's conclusions. The only person who had access to the conclusions was the Chancellor, who is described by one of his colleagues in the Government in today's Daily Express as being "power-crazed" and "bonkers." Should we really allow such an important report to be spirited and squirrelled away by the Chancellor to be interpreted purely in terms of his view of the situation, rather than having the type of open and clear debate that is needed if we are to develop an effective policy—not, as I say, of having the highest level of tobacco duty in Europe or anywhere in the world, but of having the optimum level, which would yield more revenue to spend on the services where it is needed?

3.36 pm

Dr. Peter Brand (Isle of Wight)

I am not accustomed to speaking on Treasury matters, but I was struck by the Select Committee's report, especially paragraphs 59 and 87, and the Government's response, which reflect the concern expressed today that we should have enough front-line officers to deal with smuggling. Clearly, we welcome the Government's initiative, particularly in concentrating on tobacco smuggling. The Government's response to the Select Committee's concern was the £209 million and the 1,000 extra staff to be employed, and that is welcome.

I have a particular interest in smuggling since my constituency has 60 miles of coastline, five harbours, two airports and many large houses which were built with profits from smuggling. In the midst of the 18th century, we employed 120 Customs officers, but now we have only 3.5. Those 3.5 people do an excellent job because they are equivalent to community policemen. They work through harbour-masters and yachtsmen, and people give them soft evidence and intelligence, so they have been extremely successful. We are a high-risk area, but luckily, a low activity area because we pick matters up before anything happens.

I am concerned that we have lost two of our allocation of 3.5 Customs officers to serve permanently at the container port in Southampton. I have made some inquiries and the same sort of thing has happened elsewhere on the south coast. There has been a 60 per cent. reduction in the Hamble and further down the coast.

It is important that yachtsmen see Customs officers around. Not only do they have a deterrent effect: law-abiding yachtsmen expect to be able to make easy contact with a Customs officer to pass on matters of concern or strange patterns of behaviour informally, without having to telephone an office and make a formal complaint. It is important that Customs and Excise should not lose sight of the invaluable role played by the local Customs officer, as opposed to the specialist teams that can be drafted in.

I have written to the area controller, and he assures me that the work will still be done, with specialist teams being drafted in when necessary. But they will arrive by ferry, and by the time they are on the ferry everyone will know they are coming. That is not the same as having people in the locality who are integrated with the local community and who have a visual presence. I urge the Minister to consider the policy, which has served the police badly. It is the equivalent of taking policemen out of the community and sticking them into cars and specialist teams.

If we go along that route, we may see good performance indicators, but in a way such indicators are those of failure. They are signs that we have virtually allowed smuggling to occur, after which we make arrests. Deterrence, and getting the community on the right side, is the way in which a stretched resource can be used most effectively.

3.41 pm

Mr. Oliver Letwin (West Dorset)

We have had an interesting debate on a most interesting report. Apart from anything else, the debate has brought out the deep truth of a statement that is lodged at various parts of the report. It has not been brought out with particular prominence, but it is there. It is that the range of activity within Customs and Excise is positively daunting. I think that the Select Committee observes that it sees no argument against a merger because the range of activity within each of the two bodies—the Inland Revenue and Customs and Excise—is greater than the difference between the two bodies.

As my hon. Friend the Member for Congleton (Mrs. Winterton) said, in one area of its activities Customs and Excise is a sort of border police force, while in another there is a group of people raising VAT, a standard tax. I marvel at the fact that Customs and Excise can do anything at all given the range of its activities, and that anybody can run it. I hope that it will not be taken by members of the previous management as too great an indictment of their activities that hon. Members criticise them. I doubt whether their critics would have been able to do a better job than they did. We impose on them an incredibly difficult task.

We have a real problem on our hands, and the Select Committee has provided a valuable service in drawing attention to some parts of it. I wonder whether the full scope of the problem emerges from the report. I wonder also—I shall suggest that it is not the case—whether the full scope of the problem arises from the operation of Customs and Excise. I think that a great part of it is attributable to us in Parliament—to government and policy rather than merely to operations.

I do not know whether a merger is appropriate. There has been a long-running debate. The members of the Treasury Sub-Committee have investigated the matter, under the chairmanship of my hon. Friend the Member for West Worcestershire (Sir M. Spicer), and on the whole have suggested that merger would be a good idea. The most important point that the Sub-Committee makes is that neither it nor we are in a proper position to debate the subject: the findings of the one serious investigation that has been conducted by those who are in the know on the inside of Whitehall have not been revealed.

It is a tribute to the tact of my hon. Friend and his Committee colleagues that the report is quite cautious in the way it describes the matter. I think that the failure to reveal the findings of the investigation amounts to something close to contempt of the House. What I take to be a serious piece of administrative investigation was called for by a responsible body, a Select Committee, and it was not yielded up.

I am surprised that the Sub-Committee, through the Chairman of the Select Committee on the Treasury, is not seeking to have the House demand it. I understand that the House would be in a position to make it a contempt not to yield it up. I think that as a general principle our Select Committees are still too timorous about their demands on Whitehall. I understand the constraints within which they operate, but I think that the report should definitely be before us.

It may be that there is some reason why the Government are not willing to yield up the report, even after the embarrassments of the debate. If that is the position, there is only one proper solution, and that is to commission a new full-scale inquiry on the basis of an open book, so that everyone knows what is being done, and to publish its findings. I suspect that until that is done we will not know whether there is merit in the Select Committee's intuition that there should be a merger. We maintain an entirely open mind on that issue until a full-scale inquiry has been conducted.

If the Paymaster General is not willing to yield up the earlier report because, as the Select Committee speculates, it is inadequate, or, indeed, for some other reason, I hope that she will say that she will commission a full-scale and open inquiry. We would then at least have the basis for a proper debate.

The scale of the smuggling problem has emerged clearly in the debate, and it is extremely serious. My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke), with characteristically brilliant allusiveness, took us back through the ages and reminded us that smuggling is not a new phenomenon. It is not since I was a child that I have heard the Kipling verse, but my right hon. Friend is correct to say that people were concerning themselves with smuggling long ago. I think that I can slightly outdo him in historical reach, by saying that smuggling was a very serious problem in Anglo-Saxon times. In those days the witan much concerned themselves with the subject of smuggling. So we have about 1,000 year's worth of experience of serious smuggling.

The fact is that the scale of the smuggling catastrophe—I use that word advisedly—has reached proportions which in some parts of Britain threaten the foundations of ordinary society. I am not speaking of loss of income. Customs and Excise costs about £1,000 million a year to run and it raises about £100,000 million a year in tax. It loses about 2 per cent. of that in forgone revenue—I hesitate to say this, but

Dawn Primarolo

It is a pretty good record.

Mr. Letwin

As the Paymaster General says from a sedentary position, it is a pretty good record. If we asked throughout the world how many people manage to collect that much money spending that little money and with that amount of loss, the answer would be not many.

The mere loss of revenue is a trivial item compared to the effect of smuggling on ordinary society and ordinary people in many areas in the southern part of Britain, and increasingly throughout the rest of Britain. The relationship of government to the governed and the acceptance by the governed of the legitimacy of things that we do in this place and which government imposes upon them, is a critical component of the coherence and stability of our society. It is bad enough when professional crooks bring in large loads of smuggled goods, but perfectly ordinary people are going abroad and, as a matter of course, buying stuff, not declaring it, giving it to friends and relatives or selling it openly in pubs. One such case has been mentioned and that could be replicated by hundreds of thousands of others.

I do not say that the activity has gone so far as to constitute a social crisis, but we have the beginning of the end of the proper relationship between governed and government, and that is a catastrophe. We used to have a country in which we prided ourselves on that relationship working extraordinarily well. We used to smile ruefully about people in Italy who did not pay their taxes. We thought that that was not the sort of thing that happened in Britain.

We now have on our hands enormous criminal activity by perfectly ordinary people who otherwise lead respectable lives. That is a very bad situation. I do not believe that any amount of extra effort by Customs and Excise, machines or anything of the kind—my hon. Friend the Member for Guildford (Mr. St. Aubyn) was right about this—will solve the problem. It can be solved only by trying to redress in some way over time—and with all the difficulties that this implies—the great gap between our levels of excise and those in nearby ports. Otherwise, the problem will remain and no amount of effort by Customs and Excise officers will cure it.

Liz Blackman

How does the hon. Gentleman answer my point that, no matter how great the reduction in tobacco duty, cheaper goods, or goods with no duty, will always be available, and big business will ensure that they fill any gap?

Mr. Letwin

It is obvious that I did not make myself clear. I accept that organised criminal smuggling will probably continue, whatever the level of duty. Smuggling has probably existed for as long as time. However, the propensity of hundreds of thousands—perhaps millions—of otherwise respectable citizens to engage in criminal activity, which is the social disaster that I am describing, arises almost exclusively from the discrepancy in excise rates. That should be a matter of mutual anxiety. It is not a party political issue. We should all be concerned about what we do to ordinary people. I accept the point about big business smuggling, but it was not my point.

Mr. Cousins

I am following the hon. Gentleman's argument closely. I am sure that it has occurred to him that he is calling for harmonisation of tax rates.

Mr. Radice

EU harmonisation—oh dear!

Mr. Letwin

I am calling for action by a sovereign country to deal with difficulties that its citizens face. That is different from the proposition that the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) may support, and that the right hon. Member for North Durham (Mr. Radice) certainly supports: that a foreign power in Brussels should tell us how to do it. The difference is signal.

Mr. St. Aubyn

Is there not all the difference between tax harmonisation imposed by Brussels and tax competition, which is a global phenomenon that no Government can afford to ignore?

Mr. Letwin

My hon. Friend is absolutely right. When we consider the Finance Bill in due course, we shall again debate double tax relief, which shows the extent of the Government's departure from tax competition. However, I shall leave that point aside.

I want to consider a vital point that has emerged not from the debate but from the report: the role of Customs and Excise, not as a policeman, but as a tax gatherer. The Treasury Sub-Committee, piously but rightly, states that we need to move to a simpler system with which it is easier to comply. I use the word "piously" because neither the Sub-Committee nor the Government have devised good measures for putting that into practice. However, the aim is noble.

It is one of Britain's better known secrets that the Conservative party has devised a set of plans for a simpler system. Now that people are again interested in the Opposition because the Government are crumbling around us, it is possible—I put it no more strongly than that—that the Government may pay attention to the admirable plan that we presented some time ago. It has 10 points, because that is how such plans are devised—I pay no attention to that. They are not the only 10 points that are worth considering; perhaps they are not even the 10 most important points, but we should take concrete action. I shall therefore outline 10 easy measures.

First, there should be six weeks at the end of a VAT quarter for every business to complete its VAT returns. I have spoken to dozens of firms and representatives who have made it clear that that is vital. They do not have enough time to complete their forms.

Secondly, we need a new, independent business protection unit so that firms that are about to go under have a sympathetic ear, and can prove to that unit that they will surmount the difficulties and not fail. That is preferable to Customs and Excise acting as the creditor of first resort and the party that pulls the business under when it gets into difficulties. Customs and Excise, after contact with the special unit, should be willing to wait for its money.

Thirdly, there should be a presumption that VAT officers will give binding advice within a specified period and in advance of a contemplated action. People can thus know whether their proposals are legal.

Fourthly, there should be symmetry in payments. I am sure that, like me, hon. Members of all parties frequently receive complaints about that matter. Why does not Customs and Excise pay the same interest rate when it is late with its payments or repayments as taxpayers who pay Customs and Excise late?

Fifthly, the detail in VAT returns needs urgent review. Those returns are unnecessarily onerous.

Sixthly, the disclosure limit for errors is old fashioned. The Government pride themselves on modernising; I do not like that idea, but the Government believe in it. A figure of £2,000, which was set many years ago, is clearly ludicrous and should be increased.

Seventhly, we need a review of, or consultation exercise about, the future of the capital goods scheme. It used to work, but we now live in a world of computers, and the limits do not reflect the cost of computing.

Eighthly, something should be done about the payments-on-account scheme. The option of 12 monthly direct debit payments is available from any utility and most other people with whom one deals, but not Customs and Excise. Why not?

Ninthly, the deregistration threshold should parallel the registration threshold in some way.

Tenthly, and most importantly, there should be no question, except in the most extreme circumstances, of retrospective legislation to alter the ground rules to avoid avoidance schemes. I say that especially in the hearing of the Paymaster General because, of all the holders of her post in British history, she takes the palm as the most assiduous pursuer of avoidance schemes. Let us promise that we will not go backwards and penalise people for past activities that were legitimate when they undertook them. That applies to Customs and Excise legislation as much as to the Inland Revenue legislation that we shall debate when we consider the Finance Bill.

I have reached the end of my remarks and the allotted time. I hope that when the Treasury Sub-Committee considers Customs and Excise again, it will emphasise the critical importance of openness and use every power at its disposal to get the Taylor report published. That report has been mentioned often; it is a mythical item and we do not know its contents any more than we know those of the study on merger. It is a shame and a disgrace that the House has not seen it.

3.56 pm

The Paymaster General (Dawn Primarolo)

We have had a long and detailed debate, using the hook of the vote on Customs and Excise. Many detailed points have been made. In the short time available, I shall not be able to refer to them all. I shall consider the 10 points that the hon. Member for West Dorset (Mr. Letwin) outlined. However, my remarks will concentrate on the main subjects that have been raised.

My right hon. Friend the Member for North Durham (Mr. Radice) briefly set out three broad basic topics, which other hon. Members developed. They were the merger, smuggling and compliance. Compliance broke down into two subjects: the cost of compliance for business and its cost to the Department. Many hon. Members concentrated on the internal systems of Customs and Excise and its ability to respond.

I was grateful to the right hon. Member for Cities of London and Westminster (Mr. Brooke) who, with others, referred to the tens of thousands of people who work in the Department. As the hon. Member for West Dorset pointed out, they collect more than £100 billion—40 per cent. of all tax collected for the Government. They do that very efficiently, at a cost of around 1 per cent. As the hon. Member for West Dorset also said, we concentrated today on what was not collected, but when we consider the record as a whole, it is very good.

The Treasury Sub-Committee is ably led and chaired by the hon. Member for West Worcestershire (Sir M. Spicer). I take its report seriously. I cannot say that I enjoyed reading it, or that I felt entirely relaxed as today's debate unfolded. However, I want to try to give a positive response. I think that we owe that to those who are employed by us, and who discharge certain duties. Moreover, serious issues need to be addressed.

I smiled when the right hon. Member for Cities of London and Westminster gave a rather odd example of the rules some years ago. Until recently, a rule stated that French dogs used for tobacco detection purposes were not allowed on our ferries because of our quarantine arrangements. Fortunately, the matter now seems to have been resolved.

As my hon. Friend the Member for Erewash (Liz Blackman) said, Opposition Members should be extremely careful before criticising the current Government. It was their Government who reduced Customs and Excise staff by at least 3,000. I have been the Minister responsible since the election of 1997. As my hon. Friend the Member for Erewash pointed out, 300 officers dealing with the smuggling of drugs were about to lose their jobs as a result of plans that we inherited from the last Government. We did not proceed with those proposals, let alone the large numbers involved.

Mrs. Ann Winterton

Will the Minister give way?

Dawn Primarolo

Yes, but let me say first that I wish only to put the record straight. I do not want to pick an argument with the hon. Lady or her hon. Friends. I think that everyone who has spoken is concerned about smuggling, whether it involves drugs, tobacco or anything else.

I will give way to the hon. Lady, because I referred to what she said.

Mrs. Ann Winterton

The Minister is very gracious.

I take the Minister's point, but the figures to which she refers were estimates for the period after the general election. When her Government ensured that those 300 officers would remain, what they did not do was increase resources. Savings had to be made elsewhere in the service.

Dawn Primarolo

The hon. Lady is not quite right. We had to save some of the money, because the Department was within its budget, but movements occurred rapidly in the Treasury to deal with the pressure points, according to where we thought they were.

Many hon. Members referred to the Financial Times report that asked whether £1 billion, £2 billion or some other sum was missing, or unaccounted for, in the context of excise control regimes. They also referred to the announcement that I made on Friday. The figure given in the Financial Times is incorrect. Let me tell the House, as clearly as I can, how this happened, how it came to my notice, and how I intend to proceed.

An interim report—an internal report by Customs and Excise—was ordered by the new chairman of Customs and Excise, and was received by me last Friday. It identified serious weaknesses in the Department's control of excise duty collections. The right hon. Member for Cities of London and Westminster repeated today the fears that he expressed when the rules were introduced, on the commencement of the single market. A particular problem relates to the mechanism for releasing spirits and wine that are subject to duty from bonded warehouses.

There have been numerous prosecutions, resulting in about 100 convictions in connection with one major group. Nevertheless, the report concluded that there had been significant revenue losses, which were deemed principally to have happened in the three years following 1995.

In 1998, changes were made to the regime, but it is not clear whether the arrangements are tight enough. I believe that hundreds of millions could potentially be lost. However, having been faced with something so serious, I believed—and I was supported by the chairman of Customs and Excise—that we should act immediately on receipt of the results of the internal inquiry. I decided that we should conduct an external investigation as quickly as possible.

The National Audit Office had been informed, and was already working with Customs and Excise in an attempt to quantify the losses and identify the weaknesses in the control system. I have given an indication—and I have notified Her Majesty's Opposition—of what I would expect the inquiry to cover. I would expect it to cover the policy, legislation, systems and resources within Customs and Excise relating to excise holding and movements, and to determine weaknesses and gaps, including those relating to the efficiency of the system of bonds and guarantees. I would also expect it to discuss how best to establish clear internal accountability for the securing and protecting of departmental revenues. In particular, I would expect it to ask whether there should be a single point of accountability in Customs and Excise for cash revenue management. Finally, I would expect the inquiry to consider how best to ensure that sufficient weight is given to protection of revenues as a key criterion in Customs and Excise handling of fraud investigations.

Any shortcomings in the system, and any information relating to resources—prosecutions are still taking place, as are Customs and Excise responses—will be referred to the investigation at the conclusion of the cases involved. I will ask the leader of the inquiry to keep me informed, and to tell me whether immediate steps are planned. I support the appointment of someone who will be able to deal with the systemic problems that may arise, take a commercial approach, and deal with the issues directly. I will, of course, keep members of the Select Committee informed.

Before turning to the issues of smuggling, merger and compliance, let me make a few general remarks about Customs and Excise. Although we all understand that the focus of today's debate is on particular areas of Customs and Excise, it is important—for the benefit of those who follow our proceedings, especially those working for the department concerned—to acknowledge what the department has done well. As I have said, it has collected more than 40 per cent. of central Government revenue, at a cost of about 1 per cent. Key agencies are reducing the bulk supply of drugs to the United Kingdom market, and tackling the major trafficking problems.

The Department is a major element in the Government's anti-drugs strategy. Its intelligence-led deployment of officers in the United Kingdom and abroad prevented some £1.24 billion worth of drugs from reaching the UK last year. It has also dismantled and disrupted trafficking organisations.

I do not want to undermine the credibility of the hon. Member for West Dorset among his hon. Friends, but, as he said, we are talking about a Department that deals with the protection of society—in the context of drugs and smuggling—with the collection of VAT, and with the whole excise duty regime.

As a Minister, I consider that what is crucial is that I understand what the Department does best, what it should do, what it may be doing that it should not do—what is inappropriately located there—and to build on that understanding. It is the policy objectives that I should pursue. I said to the Committee on the question of merger that I believed, as the Minister responsible, that the vast resources and time used to put Departments together was a diversion—if Members will excuse the pun—from the true objectives, which must be to ensure that the Department reaches its objectives.

I am not saying for a minute—no one could, at the end of the debate—that no things need correcting in the Department. We need to look seriously at that. The new chairman of Customs and Excise has come from the private sector. A third of those on the new board are new members. A third come from the private sector. The remaining third have experience in the Department. It must drive change forward.

I welcome the comments by members of the Select Committee on the Treasury that they intend to return to the issue and to look again at Customs. The exercise that they have conducted already has been extremely useful, even though I did not entirely agree with some of their conclusions. Nothing is ever closed. The constant striving to ensure that the Department does its work properly is crucial.

The Department faces huge challenges, particularly in relation to smuggling. Comments were made about the scanners, the increased resources and how we are tackling the problem. It is important to say that the pressures on the Department, and what it faces, are never more starkly seen than in Dover. There were 1.7 million freight movements through the port last year and that is increasing. It is a truly herculean task for Customs and Excise staff to keep a balance between trade flowing swiftly through the port and countering smuggling. Organised criminal gangs now dominate the smuggling of drugs, spirits, cigarettes and, most tragically, as we are seeing, people.

The 54 people from southern China who died in a container that was searched at Dover earlier this month were discovered by Customs officers. Hon. Members will perhaps be able to imagine the distress of those officers on discovering such a sad and tragic cargo. I have nothing but admiration for their professionalism in that front-line work, but the challenge to us with regard to smuggling is this. Hon. Members have sought to characterise it as a duty problem. As my hon. Friend the Member for Erewash and many others have pointed out, even without any duty at all, that activity would continue. If we dealt with duty, that would continue. We must deal with the criminals and what their activity does to our communities and to legitimate businesses. The job will continue to be more difficult.

Obviously, there is always confusion between what is called the white van trade—those who go opportunistically—and other smuggling. The first review that the Government undertook—the alcohol and tobacco fraud inquiry—gave more resources, provided more Customs officers and targeted specifically the white van trade, compared with the systematic and criminal importation of vast amounts of tobacco. That requires a different response. The £209 million will provide that.

The scanners are there. Some of them will be mobile, some will be static. We had to go through a process of ensuring that we handled the tenders correctly. We have to publish details of who contracts for them. That equipment is there primarily to find smuggled goods. The immigration service believes that there are more efficient ways of detecting the smuggling of people. None the less, there will need to be agreement because undoubtedly, at times, people will still be found. That is a subject for discussion between the Home Office and the Department.

On the wider questions of VAT compliance and what needs to be done, I take on board everything that the Committee has said. We are rooting out inefficiency, making the system efficient, minimising burdens on business and streamlining as much as possible how we operate as a Department to deliver the resources. All of that is under way. There are many examples—which I cannot now give, but I have a feeling that I will be in front of the Select Committee again on the subject anyway—of closer working and how it is developing and blossoming. It shows how we can bring the Departments together culturally and how we can ensure that we drive that forward.

I apologise that there are still questions of—

It being three hours after the commencement of proceedings on the motion, the debate was concluded, pursuant to Resolution [27 June]

Question deferred, pursuant to paragraphs (4) and (5) of Standing Order No. 54 (Consideration of estimates &c.).