Unrevised transcript of evidence taken before

The Select Committee on European Union

Justice, Institutions and Consumer Protection (Sub-Committee E)

Inquiry on

FIGHT AGAINST FRAUD ON THE EU'S FINANCES

Evidence Session No. 12 Heard in Public Questions 208 - 226

WEDNESDAY 16 JANUARY 2013

4.10 pm

Witnesses: Mr David Gauke MP, Mr Jonathan Athow and Mr Ian Stewart

USE OF THE TRANSCRIPT

1. This is an uncorrected transcript of evidence taken in public and webcaston www.parliamentlive.tv.

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3. Members and witnesses are asked to send corrections to the Clerk of theCommittee within 7 days of receipt.

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Members present

Lord Bowness (Chairman) Lord Anderson of Swansea Baroness Corston Lord Dykes Viscount Eccles Lord Elystan-Morgan Lord Hodgson of Astley Abbotts Baroness O’Loan Lord Rowlands Earl of Sandwich Lord Stoneham of Droxford ________________

Examination of Witnesses

Mr David Gauke MP, Exchequer Secretary to the Treasury, Mr Jonathan Athow,

Director of Knowledge, Analysis and Intelligence, HMRC, and Mr Ian Stewart, Director of

VAT, HMRC.

Q208 The Chairman: Mr Gauke, good afternoon and thank you very much for coming

to this meeting of the Justice, Institutions and Consumer Protection Sub-Committee of the

House of Lords European Union Committee. As you know, we have been conducting our

Fight Against Fraud on the EU Finances inquiry. As a matter purely of form, I will point out

to you publicly and on the record that our various interests are recorded in the Register and

that any relevant interests will be declared at the time. The session is on the record and is

being webcast live. It will be accessible via the parliamentary website. As you know, we will

send you a transcript so that you can check for and correct any inaccuracies—but it will go

straight on the parliamentary website immediately after this session. Again for the record,

perhaps you would formally introduce yourself and your colleagues before we move on to

questions.

David Gauke MP: Certainly. First of all, apologies for running a few minutes late; we had a

four o’clock vote. I am David Gauke, Exchequer Secretary to the Treasury. With me are

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two officials from HMRC. Jonathan Athow is director of KAI: Knowledge, Analysis and

Intelligence. Ian Stewart is a specialist on VAT matters. Both will be able to help me this

afternoon on technical issues relating to VAT and, more widely, to fraud.

The Chairman: Thank you. We do not want to labour the point, but an answer on this

would be helpful. The Committee was somewhat puzzled about why we were not able to

have the benefit of a briefing from officials earlier in the process of our inquiry. I think that

that was agreed in principle, but officials withdrew. I am not putting the blame on you,

Minister, because you are here, but you will know that it is somewhat unusual, in inquiries of

this kind, that the Chairman of a Select Committee had to write to the Chancellor, Mr

Osborne, before we were able to arrange your visit to see us, with your officials. I wonder

what it was about this inquiry that made all this so difficult.

David Gauke MP: I certainly do not want there to have been any discourtesy to this

Committee. I am sorry if that impression was given. The explanation as I understand it is that

this Committee is looking at fraud affecting EU finances. The advice that officials gave was

that VAT fraud was not so much a fraud on EU finances as on UK finances. That was the

point that HMRC officials were trying to convey. Of course we take VAT fraud very

seriously, but we did not see it principally as a matter relating to the EU. Of course there is

an impact on EU finances, but 97% of the money goes to the UK Exchequer. That was the

intention of the communication. I am sorry if any discourtesy was perceived as a

consequence.

The Chairman: We will come to the question of VAT fraud in a minute.

Q209 Lord Anderson of Swansea: Minister, was the refusal to appear taken to, and

approved by, Ministers?

David Gauke MP: As far as I can recall I was not aware of it, but I would have to check.

Lord Anderson of Swansea: Is it not a little unusual, and contrary to normal practice?

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David Gauke MP: As I say—

Lord Anderson of Swansea: Let me finish, please. Is it not contrary to normal practice

for civil servants to take a decision on whether to appear before a parliamentary

Committee?

David Gauke MP: As I say, I would have to check—

Lord Anderson of Swansea: Should you not have checked beforehand?

David Gauke MP: —the precise circumstances. The point that was made by officials was

that VAT fraud is not a fraud on EU finances. That was why the advice was that a focus on

that issue—

Lord Anderson of Swansea: The advice to you?

David Gauke MP: The advice to this Committee, as I understand it, was that that was

outside the scope of the investigation. However, as you can see, I am here, the officials are

here and we are keen to assist the Committee in whatever way we can.

Lord Anderson of Swansea: But with respect, you are in charge of the department. Are

you content with the fact that your civil servants took a decision in relation to an

appearance before a Select Committee without reference to you?

David Gauke MP: The position was that they provided advice in good faith as to the

relevance—

Lord Anderson of Swansea: But not advice to you?

David Gauke MP: The advice was to the Committee. To some extent perhaps there has

been, if not a misunderstanding, then crossed wires. As I understand it, officials were saying

that this was not a matter of EU finances. Clearly the Committee was not satisfied with that

view and interpretation. But there was no hard and fast refusal to have anything to do with

the Committee—as is demonstrated by the fact that I am here and the officials are here.

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Lord Anderson of Swansea: There was a refusal. Will you ensure that in future you or

another Minister is consulted before there is what could be construed as an insult to a

Committee?

David Gauke MP: Well, I certainly would not want it to be construed that there was any

insult to the Committee. I will take that away. No insult was intended. As I said, my

understanding was that officials were seeking to persuade the Committee that this was

outside the scope of the investigation. If that has come across as a refusal to engage with the

Committee, I am sorry.

The Chairman: We will move on to VAT fraud after Lady Corston’s question.

Baroness Corston: Thank you, Lord Chairman. In 21 years in Parliament I have never

come across such a refusal. Was not Mrs Thatcher right when she said that officials advise

but Ministers decide? What is happening in the Treasury that allowed such a decision to be

taken? Surely any elected or appointed Member of Parliament knows how important it is to

refuse to appear before a Select Committee—because certainly I for one took this as an

outright refusal.

David Gauke MP: As I said, I am sorry that that has been the perception.

Lord Anderson of Swansea: It was not perception but actuality.

David Gauke MP: It is the case that VAT fraud is essentially a domestic matter. This is an

investigation into EU finances. Officials made that view clear, but there are officials and a

Minister here today to discuss this matter.

The Chairman: We will move on, Minister. I am afraid that some of the questions, despite

what you said, relate to VAT. Perhaps when they have been asked you will begin to

understand why we wanted to pursue them. All I will say in conclusion to our opening

exchanges is that perhaps 40 minutes of briefing with your officials could have saved you

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however long it will take this afternoon to prove the point that you are seeking to make,

about which we are not yet satisfied, that there is no connection between the two.

David Gauke MP: I think that we will all agree on that point by the end of the afternoon.

Q210 Viscount Eccles: I cannot resist wanting to know, at least before the end of the

session, whether the department’s opinion is still that VAT is outside the scope of our

inquiry. It is quite an important point. If it is going to be argued that it is, it should be

properly argued so that we can see the argument. However, at the moment my question is

that VAT fraud seems to be pretty prevalent. Of course, it involves more than a single

transaction. Often it involves more than one member state. Could you explain this type of

fraud and the Treasury’s attitude to it?

David Gauke MP: You are right to say that VAT fraud is significant. HMRC estimates that

in totality it makes up about £5 billion a year. To put that in context, that falls within an

overall tax gap of something like £32 billion a year, so it is a significant amount. There are

various aspects to VAT fraud. Some of it is simply failure to declare particular transactions,

but some of it—I suspect that this is the focus of the Committee—is on Missing Trader

Intra-Community fraud, of which there are broadly two types. One is carousel fraud. I think

that the Committee has had a briefing outlining that. I will ask Ian to say a word or two to

describe it more fully. Essentially it is a circle of transactions whereby one participant claims

for recovery of the VAT that they have apparently incurred, but no VAT is ultimately paid to

the Exchequer. The second type of MTIC fraud is acquisition fraud, which is not circuitous as

such but does mean that no VAT is ultimately paid on a transaction when it should be. That

issue has been a problem for some years. At its peak, HMRC estimates that it was costing

something like £3 billion to £4 billion a year—this was around 2006. The most up-to-date

estimate is that it is continuing to cost us between £0.5 billion and £1 billion a year. Clearly,

significant progress has been made in tackling MTIC fraud through measures such as the

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reverse charge. Again, we can talk about the details of what that involves. Clearly it is an

important sum of money, and in the context of very difficult public finances the Government

are absolutely determined to address tax evasion and avoidance. That is why we have put

additional resources into HMRC to tackle these areas. Clearly VAT fraud is an important

part of that. Perhaps Ian wants to add something. I do not know how much more detail you

want on the working of carousel fraud.

Ian Stewart: You have given a very good summary. I would be happy to take more detailed

questions on carousel fraud.

Q211 Baroness O'Loan: Mr Gauke, I think I heard the answer to this question in what

you said, but just for the record I will ask it. Do the Government consider VAT fraud to be

fraud against the EU’s budget?

David Gauke MP: No, we do not. Perhaps I should explain why. A complicated formula is

in place to calculate a percentage of the harmonised, adjusted amount of collected VAT. It is

0.3% of this figure. In more practical terms, that is between 2% and 3% of the total VAT

take. That is what it has been in recent years. The argument that I would make to the

Committee is that it would be wrong to see VAT as being an EU tax that is paid directly

to—

Baroness O'Loan: We know it is not that.

David Gauke MP: —the EU, or that it is predominantly there to fund the very small

proportion of the VAT take that goes to the European Union. It is not by any means the

largest element of the total UK contribution to the EU.

Baroness O'Loan: Perhaps I could ask you a specific question. In monetary terms, what

does that 2% to 3% of the VAT take amount to?

Jonathan Athow: For example, in 2011 the own-resources payment was £2.2 billion. It has

stayed roughly at that level. In some years it has been lower and in some a little bit higher.

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Baroness O'Loan: So that very low percentage that you described which does not go to

the EU as a consequence of the fraud that occurs is not fraud against the EU?

David Gauke MP: Well, I think that there is a danger that we view VAT fraud as being

predominantly or significantly an EU matter when the responsibility to address this, and the

consequences of VAT fraud, are felt overwhelmingly by member states—obviously the UK in

our case.

Baroness O'Loan: In that context, does not the EU as the body that is not receiving

money which it might otherwise receive in any way require you to account for the fact that

you are not dealing with the fraud to such an extent that it is being deprived of income that

it might otherwise have, which would then feed back into other revenue streams?

David Gauke MP: Obviously the EU, and more specifically the Commission, has an interest

in VAT in terms of VAT law. What we can do with VAT on a legal basis is constrained by

the directives. Also, clearly there are circumstances where co-operation between member

states in dealing with VAT, and specifically with VAT fraud, is important. We engage in that.

Clearly when something like 97% of the cost of VAT fraud is borne by member states, this is

principally a matter for them.

Baroness O'Loan: To my simple mind, £2.2 billion—3%—is still a significant amount of

money. It may not be a significant sum of money in terms of overall government spending

but—again for the record—whose responsibility is it to combat this fraud?

David Gauke MP: HMRC’s.

Baroness O'Loan: Is there any responsibility in any other part of the European Union,

apart from member-state responsibility?

David Gauke MP: It is essentially the responsibility of member states. In the UK that is the

responsibility of HM Revenue and Customs.

Baroness O'Loan: So why is the fight against fraud being lost?

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David Gauke MP: I am not sure that I would accept that. I have highlighted the numbers

relating to MTIC fraud. Clearly, moving from losing £3 billion to £4 million a year to losing

£0.5 billion to £1 billion a year is significant progress. That is not to say that we should be

complacent or rest on our laurels and not think about what we can do to go further, but it is

significant progress in the right direction which has occurred under Governments of

different colours. This Government are certainly determined to address further the issue of

tax evasion and tax fraud. That is why we have put in additional resources to HMRC to

address that. So you are right to press us to be vigilant because it is a concern. Clearly the

incentives on a member state to address VAT fraud are very considerable. There is a large

sum of money; even with the progress made in recent years it remains £5 billion. That is

something that we want to address.

Baroness O'Loan: It is a very significant sum of money.

David Gauke MP: Absolutely.

Baroness O'Loan: Therefore it is a significant sum of money that does not go to the EU.

That is the reason the Committee is interested; it is part of a much bigger whole in terms of

EU fraud.

David Gauke MP: I would underline the point that 97% of it is lost from the UK Exchequer.

That is a significant issue for us.

Q212 The Chairman: Minister, a number of my colleagues want to pursue this matter.

Perhaps I may ask what may be a simpleton’s question. Nobody is suggesting that dealing

with VAT fraud is not an HMRC matter or should be dealt with by the European

Commission or anybody else. What we are trying to get to grips with is whether fraud leads

to a situation whereby the European Union gets less money than it otherwise would. It

seems to me that you are saying that that is the case but because it is only 3% of the whole

you are not that fussed about it.

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David Gauke MP: I am not saying that I am not fussed, but would one categorise VAT fraud

as predominantly fraud on a member state or fraud on the EU?

The Chairman: With great respect, it depends on which organisation you happen to be

talking about. If you are talking about the EU and its income, and it is not getting 3% of

whatever, effectively it is a fraud on its resources. Perhaps I am thinking too simply.

David Gauke MP: I will answer your question very clearly. Is there a financial consequence

of VAT fraud for the EU? The answer is yes. But it would be wrong to describe VAT fraud as

principally, overwhelmingly or in major respects an EU fraud, and therefore—I am not saying

that this is what the Committee is saying—essentially a matter for the EU. Clearly that is not

the case. But there is a financial consequence for the EU.

The Chairman: I will let my colleagues speak for themselves, but I do not think that any of

them are running on beyond the position that you state.

Lord Anderson of Swansea: I should know this. What proportion of the total

contribution to EU funds is accounted for by VAT receipts?

Jonathan Athow: It is £2.2 billion out of just over £15 billion.

Lord Anderson of Swansea: So it is substantial proportion. Therefore there is a

legitimate EU interest in the collection of that amount.

David Gauke MP: Well, it has a consequence for the EU. Obviously there is a much bigger

interest for member states.

Q213 Lord Dykes: Minister, you can relax on this because it is definitely about EU

aspects of VAT. If we consider again the proposed directive to protect the Union’s financial

interests by means of the criminal law, you will remember that the definition covers “all

revenues and expenditures covered by, acquired through or due to … the Union budget”.

Do you now expect that VAT will fall within the definition of the EU’s financial interests in

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the directive on protecting the EU’s financial interests, or will only part of it—the EU part—

come into that?

David Gauke MP: We should be a bit cautious about competence creep in this area.

Lord Dykes: You do not mean generally in advance of the speech on Friday?

David Gauke MP: I am not going to anticipate what the Prime Minister will say on Friday.

Obviously we welcome attempts to reduce VAT fraud. We welcome attempts to protect

EU funds. We all want to reduce fraud against its budget. With regard to the proposals in

the directive, the operation of the VAT system is very much a matter for national

competence. We are concerned that the proposal has the capacity to expand the EU’s

competence in the sphere of tax. It has been the long-standing position of this country that

we want to defend our sovereignty in this area.

Lord Dykes: Would it not be true to say that if you have the overarching application of the

criminal law aspect through the EU, it helps you as a national entity in your fight against fraud

at the margin?

David Gauke MP: There is a point of principle here. Member states are responsible for the

control and operation of the VAT system. This particular proposal has the potential to

expand the EU’s role and competence into this type of fraud work. We think that there are

some fundamental concerns about that. Of course there is scope for significant co-operation

between tax authorities within the EU to address fraud. Indeed, a lot of work is ongoing in

this area. But we have a nervousness about these proposals.

Lord Dykes: Are HMG planning to oppose this directive?

David Gauke MP: We do have significant concerns about giving competence to EU

institutions to investigate VAT fraud cases, for example. That is a concern that I do not think

will be easily overcome, so we will see how that particular proposal develops. I do not think

that we are alone in having concerns about that.

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Lord Dykes: Which other member states are concerned?

David Gauke MP: I do not want to say too much more on that at this point. There is a

point of principle about the fact that VAT fraud should be investigated by HMRC rather than

any other body. There is a role for European Union institutions in scrutinising and

questioning particular systems, providing advice to HMRC in comparing best practice and so

on. But the investigation of particular cases has to be a matter for HMRC and our judicial

system, rather than being done at a European level.

Lord Dykes: It appears to me that no other member state is supporting this position but

that you as HMG plan to oppose the directive.

David Gauke MP: It is right to say that we do not think that the current proposal is

acceptable, but I am not going to provide a commentary on the position of every other

member state.

The Chairman: We are still holding it under scrutiny, so—who knows?—we might send

you another invitation.

David Gauke MP: I look forward to that.

The Chairman: I know that supplementary questions have arisen from the questions put

by Lady O’Loan and Lord Dykes.

Q214 Lord Stoneham of Droxford: You mentioned a figure of £5 billion. Do you have

any assessment of how much of that fraud is transferred across borders? That would give us

some idea of the capability of HMRC to follow up cases at home as opposed to having to

deal with other Governments and Administrations.

David Gauke MP: Jonathan may be able to help with that. The MTIC element is the £0.5

billion to £1 billion a year. There are other elements to do with the hidden economy or tax

evasion. I do not wish to pick on a particular type of person, but it could be a tradesman

who takes cash in hand and does not declare a transaction.

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Jonathan Athow: Broadly speaking, we think that of that £5 billion, around £3 billion relates

to either the hidden economy or evasion, primarily here, although we cannot rule out the

possibility that there might be an international element of people not declaring work they do

across borders. The rest is related to what we call criminal attacks, of which MTIC fraud is

part. That gives you what is probably an upper limit.

Lord Stoneham of Droxford: Do you classify that as international or domestic?

Jonathan Athow: Certainly the MTIC element would be international, but elements of that

fraud will be within in the UK. For example, it would also include the VAT consequences of

certain excise frauds. Some of those frauds happen across borders and some happen within

the UK. It gives you an upper boundary.

Lord Stoneham of Droxford: Are you talking about, say, a 40% cross-border element?

Jonathan Athow: It is very difficult to work out exactly. Sometimes fraud will relate to

goods that were intended for export but never left the country. Do you classify that as

international or not? It is a difficult issue. The £2 billion would give you an upper limit on the

element of criminal attacks. Many of them will have an international element, but I cannot

say that all of them will.

Q215 Lord Elystan-Morgan: My question is not unassociated with one lower down in

the order. Perhaps I may put it in this way. In relation to what you say in the context of VAT

fraud and how it should be hedged in as far as the United Kingdom is concerned, is that not

in many respects a betrayal of the trust that every member of the European Union has in the

totality of the Union? In other words, fraud is a massive abuse of the Union. As to its exact

range, we do not know. My colleagues here cannot begin to guess the exact nature and

extent of that fraud. It should be regarded as a matter of trusteeship for each and every

member of the European Union to allow that to be tackled at two levels: at European Union

level and at national level. To build a hedge nationally would be a breach of that trust. I put it

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as highly as I can in order to dramatise a point that I think is one of immense force. What I

would like to hear, putting VAT fraud aside for a moment, is an intelligent guess as to the

totality of fraud that the EU suffers, and how much of that may emanate from the United

Kingdom?

David Gauke MP: There has been some analysis done. Again, I will ask Jonathan to provide

detailed numbers about the percentage of VAT that is lost through fraud or other activity. In

some cases it runs significantly higher in some member states than in the UK. If I remember

rightly, the tax gap for VAT is around 10% in the UK. Not all of that is fraud; if a business

goes under, it might owe HMRC unpaid VAT.

Lord Elystan-Morgan: I am referring to fraud—perhaps I may use a phrase from the Book

of Common Prayer—“in all its works”.

David Gauke MP: Yes. Some of the tax gap is clearly not fraud. A business may go under

owing VAT to HMRC. I would not describe that as fraud. The figure is around 10% in the

UK. In some member states the estimate is as high as 20%. That is clearly significant. The

point that I would make about VAT fraud—and indeed all fraud—is that it has to be a

significant concern for every country. Some countries have a bigger problem than others. By

international standards, UK is probably in a better place than others. We have a relatively

strong culture of people paying their taxes. None the less, it is a substantial sum of money

and, when they have to make difficult decisions in public finances, any responsible

Government would want to do everything they can to reduce that sum. That applies to VAT

as much as to anything else. VAT as a tax is inherently more likely to have a tax gap than, for

example, PAYE, which is deducted at source. It is quite difficult to evade PAYE. VAT has a

lot to be said for it as a tax. It is economically pretty efficient. But whichever way you design

it, there are risks of fraud.

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Ian Stewart: Perhaps it would be possible to add to the Minister’s reply. On the point about

HMRC having a hedge—I think that that was the word you used—in the way we address

fraud, an important point to make that although HMRC is responsible for countering MTIC

fraud in the UK, we use exchange of information provisions with other member states. We

work very closely with other member states. With the carousel fraud that the Minister

talked about, with goods going to the UK and other member states, we need to understand

what is happening. I do not want the Committee to get the impression that HMRC is doing

this in a silo. We work very closely with other member states. A network called Eurofisc

was set up about two years ago. It is all about helping member states exchange information.

Europol and Eurojust also give us assistance on the criminal side. We work very closely with

other member states on countering VAT fraud.

Q216 Lord Rowlands: Looking at this colourful chart, it is clear that those who

perpetrate carousel fraud are enjoying the benefits of what is basically an open system of

trading, with virtually no borders. In that case, while appreciating the jealous guardianship of

national competence, you need a European dimension to tackle this fraud. Based on what we

have heard so far, the criminals seem to be smarter and better co-ordinated than those who

are combating the fraud. Besides the things that you mentioned such as sharing and

exchanging information, which has been going on for some time, are there any other new

initiatives in the pipeline to take on the very serious loss of money through carousel fraud

and make the system more effective than it appears to be so far?

Ian Stewart: I can tell you about one initiative that will come into effect in April this year. It

was announced in the previous Budget. It is a new online system for vehicles that are being

brought into the UK. There was quite a lot of acquisition fraud on the vehicles that were

being brought in. We are designing a new system which will mean that an individual or a

business bringing a vehicle into the UK will not be able to register it with the DVLA unless

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we are satisfied that the VAT has either been paid, if it is an individual, or, in the case of a

VAT business, that it is going to be paid. DVLA will have access to the new online system.

Lord Rowlands: Are all 27 member states signed up to this process?

Ian Stewart: No, this is for the UK only. This is for vehicles coming into the UK. At the

moment, if you buy a new vehicle in another member state and bring it to the UK, UK VAT

should be paid here. But there has been acquisition fraud where VAT has not been paid. We

find that fraudsters bring in the vehicles, register them with the DVLA to get all the relevant

documentation and then sell them on to legitimate buyers. In future they will not be able to

register the car with the DVLA until we have told the DVLA either that the VAT has been

paid or that we expect it to be paid. That will seriously disrupt that kind of fraud. That is an

example of something that is coming along in April. In the past, we introduced legislative

change, for example the reverse charge on emissions allowances—carbon credits. That

legislative change was aimed at stopping the MTIC fraud in carbon credits, and it has been

very successful.

Lord Rowlands: While I support strongly your jealous safeguarding of national competence

in respect of VAT, I feel that we need some kind of European dimension to tackle a fraud

that the European Union is making easier to perpetrate. It is because we have open borders

and can move goods around with ease that carousel fraud has become so prevalent.

Ian Stewart: I think that the European Commission and member states recognise that fraud

is a problem in all member states. The Commission produced a White Paper some time ago

that set out a number of ideas for how fraud might be countered going forward. One of the

suggestions they raised was a different collection system for VAT. If you can collect VAT up-

front, that would prevent a lot of fraud. That is the kind of big topic that the Commission

and member states will certainly look at in the coming years.

Lord Rowlands: Minister, do you think that that would be a way forward?

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David Gauke MP: Yes. Clearly there is scope for co-operation between tax authorities and

for the sharing of information on developing new means by which we can address this

problem, which is significant not just in the UK but across the European Union. We are keen

to encourage that; it is a practical response to a significant issue for all member states.

Lord Rowlands: Take the money up-front?

David Gauke MP: Absolutely; there are circumstances where that is the right thing to do.

The Chairman: We ought to move on now. Lord Hodgson may want to deal with the

agricultural element of this question.

Q217 Lord Hodgson of Astley Abbotts: It is interesting that sometimes the Revenue

is slightly precious. The review on the Charities Act that I did for your colleagues indicated

how difficult it was for the Charity Commission to get HMRC to make sure that a charity

that applied for Gift Aid had a charity number before Gift Aid status was granted. That was

just an internal UK “keep-off-our-turf” approach. When I see that here, in this country, and I

hear my colleagues asking questions like this, it leads me to believe that there is more likely

to be a big problem with transnational sovereignty than with just interdepartmental

sovereignty within Whitehall.

David Gauke MP: Perhaps I should respond to the Charity Commission point on another

occasion.

Lord Hodgson of Astley Abbotts: I mention it as evidence of an attitude of mind that I

think others here have been trying to tease out in their questions. We have heard that in the

UK fraud against the EU’s budget is most commonly perpetrated against agricultural funds

and VAT. In its annual report looking at fraud, the European Commission stated that the

UK, in relation to agricultural funds, continued “to report a very low number of irregularities

as fraudulent”. Professor Spencer, who gave evidence to us, told us that it was “widely

suspected that the different rates of reported fraud from the Member States indicated a

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difference in the level of inactivity”—his word—“in looking for fraud”. Can we explore the

Government’s commitment to discover fraud against the EU budget?

David Gauke MP: There was an issue with regard to fraud reporting because of the Rural

Payments Agency system and its incompatibility with the irregularity management system in

2009. That created a backlog of cases. That was the reason why very low numbers of

fraudulent irregularities were reported. I understand that that situation has now been

resolved and that the backlog of cases has been addressed. We are now on track in our

reporting obligations. In terms of those low numbers, I do not know whether anything has

yet been published that would support what I have just said, but my understanding is that the

backlog is being or has been addressed.

Q218 Lord Stoneham of Droxford: In the UK, who is responsible for leading the fight

against EU fraud and irregularity?

David Gauke MP: It is important to break down the various elements. If we are looking at

agricultural funds, Defra leads. If we are looking at structural funds, in those circumstances

BIS looks at that. If you are asking who has overarching responsibility, the interaction with

OLAF is through the Treasury. The Treasury has that strategic role as the organisation that

interacts with OLAF, but at a practical level there are different heads of expenditure and

various government departments are engaged with that.

Lord Stoneham of Droxford: Does the Treasury co-ordinate this information between

departments?

David Gauke MP: As far as information is concerned, I do not know to what extent the

Treasury has a significant role in dealing with that. Individual departments fulfil their

particular obligations. It is more a matter at EU level to collate that at member state level in

terms of what is coming in from a particular department, or on a particular aspect of EU

expenditure, looking at that across headings and across member states.

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Lord Hodgson of Astley Abbotts: So Defra makes reports direct to the EU?

David Gauke MP: Yes, that is my understanding.

Lord Hodgson of Astley Abbotts: And other departments will make reports straight to

the EU?

David Gauke MP: Yes.

Lord Hodgson of Astley Abbotts: And never the twain will know what the other is

doing?

David Gauke MP: In areas of EU finance, the purpose of looking at it across the piece is

more one for EU institutions than for the Commission. We have that information in reports

provided by other departments, but I am not sure that we produce a document with all

those numbers together.

Q219 Lord Rowlands: While there is an obligation for member states to co-operate

with OLAF, there is no requirement on them to take action following a referral from OLAF.

Do you think that there should be?

David Gauke MP: The difficulty, if there was a requirement to take action following what

OLAF said, would be that we could find ourselves cutting across our existing legal systems.

We have a national judiciary and a national criminal framework in each member state.

Obviously they can differ between member states. There are also differences in the criteria

used by member states when deciding whether an offence should be investigated or

prosecuted. Within the UK, we take EU fraud extremely seriously. If there is evidence that

fraud has been committed, we will take action. But I am not particularly attracted to

permitting OLAF to direct UK institutions to perform in a particular way. That is not how

the system should operate.

Lord Rowlands: That is where problems arise. Again, I understand your position. When

we were in Brussels, a Commission official said, “Given that national prosecution authorities

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are often overwhelmed by the work they have, the fact that the fraud is not affecting the

national budget means that there will be a tendency to make fraud of that kind a lesser

priority”. Do you think that because of these arrangements a situation is likely to arise

where priority is not given to European fraud because the national budget is not affected?

David Gauke MP: I do not think so. We take fraud in all its forms very seriously and clearly

this is applicable outside the VAT area. We are looking more broadly here. In the context of

other frauds, for a start, where you have a fraudster, the likelihood of them being interested

only in one form of fraud is very low.

Lord Rowlands: They are not specialist European fraudsters.

David Gauke MP: Exactly. You put it well. They do not specialise in European fraud and

leave everything else alone. The authorities in the UK—and, I am sure, elsewhere—take all

these matters seriously in any event. Secondly, even if I were to accept your point about a

lack of incentive, a fraudster is a fraudster and we want to deal with them because they put

all sorts of things at risk.

Q220 Lord Anderson of Swansea: Minister, there is no question of a direction by

OLAF. It does its work and refers it to you. Whether you take action in respect of that

referral, should it not be a matter of course that you give—not just as a matter of courtesy

but of good practice—a report to OLAF on what has happened in respect of its referral?

David Gauke MP: One could look at what we do to provide feedback to OLAF in terms of

action taken following its referrals. I do not have any particular objection to that. The

important thing, on which we are in agreement, is that ultimately the decision on what

action is taken, for example on criminal prosecutions, is a domestic matter.

Lord Anderson of Swansea: There may be no action for good reason. The question is

whether in your judgment it should be a matter of practice to tell OLAF what you have or

have not done.

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David Gauke MP: I am happy to take that one away. It partly depends on various practical

points relating to the nature of the burden that it would impose, and what level of detail

could be provided to OLAF in a way that does not divert resources from other activities. I

do not have any principled objection to providing that. We need to deal with that in as

practical a way as possible. I am aware that HMRC, for example, provides feedback to OLAF

with regard to Customs referrals. In those circumstances, feedback is provided to OLAF.

Lord Anderson of Swansea: But not on VAT?

David Gauke MP: Ian, do you have anything to add on VAT?

Ian Stewart: On Customs duties, we get referrals from OLAF and, as the Minister said, we

give feedback on them. On VAT we do not get referrals from OLAF. We share information

with OLAF and sometimes receive information, but it is a different process for VAT.

Q221 Lord Dykes: I am surprised at your anxieties about OLAF wishing to give

directions to national Governments. I do not think that there is any indication of that. It is

anxious to help national prosecuting authorities in each country follow up these cases; that is

why it sends out information. Also, it is not a question of being inundated with material from

OLAF. Surely it is basic courtesy to respond and let OLAF know what the follow-up will be

in terms of a national prosecuting authority fraud case, even if it is transnational. Presumably

you would confirm that you would take OLAF evidence and material if it was followed

through by the national prosecuting authority as a case in court?

David Gauke MP: The point I made about direction was in response to the point rightly

made by Lord Anderson that we would not expect the UK authorities to take direction

from OLAF. I was simply agreeing with that. Where it is appropriate and practical to provide

feedback to OLAF, we should do so. As I said, HMRC does that in the context of referrals

relating to Customs. On your point about when OLAF provides evidence of fraud, clearly

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that evidence would be of use in any criminal proceedings—or proceedings of any type—

within the UK. So I see no reason why that evidence would not be made use of.

Q222 The Chairman: When we were in Brussels and talking to OLAF officials, Minister,

there was no question of directions. They made the observation that it would be very helpful

if there was one place in the UK to which they could make their referrals. The system you

described seems to be very ad hoc. Would you not support OLAF’s suggestion? I am sure

that you have seen the evidence that was given to our inquiry by other people who also

think that there may be some benefit in that.

David Gauke MP: We would consider that. At a practical level, for the reasons I mentioned

earlier, there are different types of EU expenditure, for example, that are scrutinised by

different government departments. We could have a debate about whether the information

is allocated by OLAF to the relevant government departments or allocated by an agency

within the UK. I do not have a dogmatic view about the best way of addressing that.

The Chairman: I appreciate that, but the question is whether it would be helpful. One can

perhaps have some sympathy with OLAF, which is dealing with 27 systems in 27 countries—

and we have three legal jurisdictions in one country. I do not know how many additions you

can make to the figure of 27 as a consequence of that.

David Gauke MP: I can see the argument that a UK entity may be best placed to determine

where information provided by OLAF is allocated, but we would want to consider the full

consequences of that before making any commitment.

Lord Stoneham of Droxford: The Government’s written submission to this inquiry

emphasised the necessity of OLAF’s independence, which is underwritten by its supervisory

committee. Are the Government concerned by the apparent breakdown that we discovered

in the relationship between OLAF and its supervisory committee? If so, what should be

done?

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David Gauke MP: The supervisory committee has an important role, which has been

clearly set out. Certainly we would want the two institutions to work closely together to

achieve their common goal of tackling EU fraud. Although I was very interested in the

evidence that this Committee obtained, my understanding is that the Government as a

whole was not aware of the breakdown of that relationship. However, I note the comments

that you make.

Lord Stoneham of Droxford: Some might say that they were at each other’s throats

when we were there.

David Gauke MP: Right. It is an important relationship. We want to ensure that OLAF’s

independence is not compromised in any way by the supervisory committee and EU

institutions. Our position has been very strong on that. I note your comments. They do have

an important role to play and we would expect them to work constructively together. But

as I said, we want to ensure that OLAF remains independent.

Q223 Lord Anderson of Swansea: Minister, we heard evidence of competence

diffusion within the EU in respect of fraud. One of our witnesses, Professor Spencer, argued

that “too many people and too many agencies” supervise the same problem, leading to

“muddle and confusion”. Do you agree?

David Gauke MP: The Commission has acknowledged that the roles of the EU agencies

need to be reviewed. Last month it published a road map on this, which looks at how those

agencies should be set up and managed. The Foreign Office is in the process of consulting

departments on the specific proposals in the road map, including for agencies with fraud

prevention competencies. Once the consultation is completed, the UK Government will play

an active role in advising other government departments on its implementation.

I have not really answered your question, to be fair. The point is that there is clearly a

concern about the somewhat tangled web here. The Commission is looking at this and has

23

published a road map, and we are looking at its proposals very carefully to see what the right

response is.

Lord Anderson of Swansea: And the purpose of the published road map is to streamline

procedures and competencies?

David Gauke MP: Yes. I think it is fair to say that we are very supportive of efforts to

simplify and streamline EU institutions to deliver a more efficient and effective EU. I do not

want to get drawn too much into the particular details, as I say, because we are looking

carefully at the Commission’s road map. We think it is right to look at this issue because, as

you say, there are an awful lot of organisations and agencies here, and if there is scope for

improved efficiency and effectiveness we would certainly support that.

Lord Rowlands: Is there a case for an anti-fraud tsar to drive this programme through

rather than this diffuse and, to be honest, disorganised attack on fraud in the European

Union?

David Gauke MP: As I say, we want to look very carefully at the particular proposals. On

the question whether an anti-fraud tsar is the right answer here, there is an argument for

that, but I think we want to look carefully at the particular proposals and see whether there

is too much complexity here and if we can simplify it. Your suggestion, of course, is very

much a simplification, but we can look at whether that is the right simplification. Across

government we are looking at the implications of the proposals to see if there is a way in

which we can make this more efficient and effective, because of course we all want to do

more to deal with EU fraud.

Q224 The Chairman: Lord Elystan-Morgan, we skipped over your question because we

moved on to OLAF. I do not know whether there is any element of it that you wanted to

put which the Minister has not covered.

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Lord Elystan-Morgan: Can I ask this all-embracing question, Chairman? I think the

impression that we the Members of this Sub-Committee had when we heard Professor

Spencer’s evidence last year was this: as far as the European Union itself was concerned,

there seemed very little determination or enthusiasm for combating fraud as such. In so far

as there were institutions, they were locked in internecine strife against each other. As far as

the United Kingdom is concerned, again, there was a lack of cohesion, co-ordination and

total determination. Between OLAF and the individual 27 members, there is of course an

obligation on these states to co-operate with OLAF but no obligation to act and no

obligation, formally and officially, to inform OLAF of what they are doing or not doing. In

other words—and I do not expect you to agree with this—is there not massive evidence of

a lack of determination all round?

David Gauke MP: From my point of view, and I am only really in a position to discuss the

approach of the UK, we take fraud in all its forms very seriously. I look at the work that is

done at HMRC, which is obviously the part of government that I have day to day dealings

with, and I can say that there is a very strong determination to deal with fraud and, indeed,

significant evidence of progress being made on that particular front. I am sure I speak for

other parts of government as well, whether it be Defra or BIS, that we all take fraud

seriously. I think there is frustration among all member states at the level of fraud on the EU,

and we all have a part to play in trying to address that. I do not accept the view that in the

UK there is not the energy, desire and determination to deal with fraud on EU institutions. I

think it is unfair and a waste of taxpayers’ money, and in the circumstances that we are in at

the moment, where there is rightly a particular sensitivity to waste in government spending,

whether it be at the EU, national or local level, we all want to play a role in trying to reduce

that.

Q225 Baroness O'Loan: OLAF refers cases to the United Kingdom. Is that correct?

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David Gauke MP: Yes.

Baroness O'Loan: Do you know how many cases have been referred in the last five years?

Can I just ask you a couple more questions? Do you know how many have led to an

investigation? Do you know how many of those have led to prosecution? Do you know how

many of those led to convictions?

David Gauke MP: I am not sure that I have those numbers here.

Baroness O'Loan: Can you even tell us how many were referred by OLAF?

David Gauke MP: I do not think that we have those numbers here, but we can certainly

write to the Committee.

The Chairman: I would be most grateful if Lady O’Loan could just make sure that you

have a note of the three questions—the three figures.

Baroness O'Loan: My questions were: how many cases have been referred by OLAF in

the past five years? How many investigations have resulted? What percentage led to

prosecutions? What percentage of those prosecutions led to convictions? Numbers, please.

Lord Dykes: A lot of these figures are in the addendum.

Q226 The Chairman: Yes, I know, but it would be interesting to know if our figures

agree, would it not? Good. Thank you for that.

Can I just ask in closing, and I appreciate that you may feel that this is a difficult question to

answer other than in one particular way, a question that relates to the question of the

European Public Prosecutor’s Office? Many of our witnesses have suggested that in terms of

dealing with fraud against EU finances, and bearing in mind the different jurisdictions and

procedures, whether the Prosecutor’s Office took the form of an individual or was an office

with a number of people with responsibility for dealing with it, this is needed and would be

helpful. I think the Government, in their submissions to us, put the onus on the Commission

to make out the argument as to whether it was a good idea. Bearing in mind we have not

26

seen a proposal—when we went to Brussels, the Commission was very clear that it did not

have a proposal that it could put before anybody—we as a Government have actually ruled

it out in the coalition agreement and made it a very difficult thing to achieve, even if you

thought that the proposal was a great one, because you have to pass an Act of Parliament

and have a referendum. Why are we in the position of having made up our minds in advance

on something that we do not even know the form of?

David Gauke MP: I think that if we had a European Public Prosecutor’s Office, that would

fundamentally cut across our common-law system for the roles of the police, prosecutors

and the judiciary. The majority of other EU member states have a very different criminal

justice system from ours, and we do not believe that there is a convincing case that this is

the right solution and is necessary to help to tackle fraud against the Community budget.

We have the tools and powers in place to fight fraud, and our view is that this would be a

disruptive institutional change and not the right way forward. So both on the grounds of

practicality and principle, we believe that this would be the wrong step.

The Chairman: I have to say, if you will allow me the observation, that it sounds more a

question of principle than of observation as to whether it is practical or how it would work,

especially since nobody has even articulated their proposal yet.

David Gauke MP: I am not denying that there is a very big point of principle here.

The Chairman: Minister, is there anything else that you want to say to us or think we

should have asked you?

David Gauke MP: No. Thank you for your questions. I hope it has been helpful. As I said at

the beginning, I know that no discourtesy was intended and I hope that Jonathan, Ian and I

have been able to provide you with as much information as possible. For those other

aspects, we will of course contact you and provide as much information as we can.

27

Lord Anderson of Swansea: Can we have your assurance, Minister, that a decision of

that nature will not in future be taken by civil servants?

David Gauke MP: I think that point has been made strongly, and I suspect there will be a

keen desire to ensure that Ministers are consulted on anything that could be perceived in

the way in which this clearly has been.

The Chairman: Thank you very much indeed.

David Gauke MP: Thank you.