Customs and excise duties do not often feature in this blog, perhaps because I am a non-driving, non-smoking teetotaller (cue old jokes about “Will you live longer?” “No it will just seem like it”). Nonetheless they are a significant revenue-raiser, and at a time when maintenance of tax revenues is particularly vital to the UK’s financial wellbeing, any suggestion of shortcomings in collection of duties is a matter of legitimate concern.

The Public Accounts Committee had a number of criticisms of HMRC, some of which appear to be more valid than others. Of particular concern is an alleged lack of information on both the scale of duty evasion and the returns from HMRC counter-action. In particular, the most recent HMRC estimate of the alcohol’ tax gap’, in September 2011, offered no data on the estimated scale of wine duty fraud, although it suggested an upper estimate of a total £1.2 billion, more than half of this relating to beer and a significantly smaller amount to spirits.

HMRC is also criticised for not making best use of intelligence and technology, for imperfect liaison with the UK Border Force and for having an inadequate understanding of legitimate export markets.

HMRC introduced a new strategy to tackle alcohol smuggling in 2010, and claims this is improving results. The headline claim in the story as it appeared on the BBC News website is actually of least concern to me, which is that there were no more than 6 successful prosecutions for alcohol smuggling in each of the years 2006 to 2010, and that the PAC felt that more alcohol smugglers should be prosecuted. Knowing as I do a fair amount about HMRC’s prosecution strategy when it comes to tax evasion, the figures do not surprise me as much as they appear to have surprised the PAC.

The general prosecution strategy of HMRC is to go for civil settlements in the vast majority of cases (with alcohol smuggling cases this would involve payment of duty, a penalty and interest and confiscation of the smuggled goods), reserving criminal prosecution for particularly high profile cases. That profile might relate to celebrity status, a position of public trust, the scale of the smuggling, falsification of documents, a history of civil settlements for previous smuggling activities or a particular degree of ingenuity or novelty in carrying out the crime.

Criminal prosecution for tax and duty offences is very expensive, time-consuming and notoriously uncertain in outcome (Ken Dodd, Harry Redknapp etc), and is thus reserved by HMRC for cases where they have a strong expectation of winning and the case is likely to be headline news, thus achieving the desired deterrent effect.

This is reflected in the comments of HMRC chief executive Lin Homer:

“HMRC’s performance in tackling alcohol fraud is measured by the combined impact of both civil and criminal proceedings on alcohol duty evasion – which increased significantly when the strategy was introduced. Prosecutions are a strong deterrent and HMRC continues to investigate cases criminally where this will maximise impact on the fraud”.

I assume Ms Homer means that the impact increased rather than the incidence of evasion!

I fear that the bottom line here is, as so often, cuts in HMRC staffing, which have been, and continue to be, both deep and concentrated unduly on the upper end of the pay and experience scale. Expecting HMRC to simultaneously increase tax revenue, cut costs and improve ‘customer experience’ – how I hate being referred to as a ‘customer’ of HMRC; a true customer has a choice of suppliers – comes under the heading of a pious hope; you can hope all you like but it isn’t going to happen. I suspect all they are managing at the moment is the cost cutting bit, whereas some judicious deployment of resources on anti-avoidance and anti-evasion activity would. I suspect, prove to be much more  effective overall. Some discrimination in pruning is always advisable, my gardening friends tell me, and that certainly applies to HMRC.

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