Customs and Excise have been criticized by the National Audit Office for failure to stem the flow of duty free alcohol on to the UK market. The NAO estimates that between 1993 and 2000 some 668 million pounds of excise duty and VAT was lost by organized criminal gangs literally driving lorries through the customs controls.Duty and VAT on alcohol does not become payable until the products, mainly in this case spirits, enter the UK market. Where the alcohol is destined for countries overseas no duty or VAT is payable. The creation of the Single European Market in 1993 removed restrictions on the movement of goods between EU Member States with the aim of making trade easier. At the same time Customs discontinued their regular physical checks of goods and adopted a risk-based approach both in order to facilitate trade and target their resources better so that staff numbers could be reduced.
These changes and the opportunities they presented were quickly spotted by a number of gangs who legitimately bought large quantities of spirits and completed export documents showing the consignments were destined for countries overseas. Lorries arrived at Customs export stations in Kent with impeccable documentation and were cleared to leave the country through Dover or the Channel Tunnel. After leaving Customs the drivers headed for London and the rest of the UK, not the coast. They knew there was no check on their departure to the continent.
The NAO report reveals that Customs were much slower than the criminals in spotting the new opportunities for fraud. It identifies the weaknesses that led to failure to stem this loss of revenue. There was no overall strategy for dealing with alcohol diversion fraud until 2000 and this encouraged decisions at the operational level without the benefit of a high level approach to guide them. Investigators sometimes ‘let loads run’ in order to gain more evidence for prosecutions rather than disrupting them immediately. Customs also had poor information systems, which meant that the first signs of significant losses from fraud were not fully appreciated.
The NAO recommends that Customs should publish estimates of losses from all indirect taxes to provide a starting point for measuring effectiveness and as a guide to show where resources should be targeted. There should also be an anti-fraud management information system to show the progress of investigations and to provide anti-fraud intelligence.