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Fraud: EU Committee Report

Volume 693: debated on Monday 2 July 2007

rose to move, That this House takes note of the report of the European Union Committee on Stopping the Carousel: Missing Trader Fraud in the European Union (20th Report, HL Paper 101).

The noble Baroness said: My Lords, I rise to tell the House how to construct a multi-million pound fraud. This has been made possible by a European Union-wide agreement concluded in 1992, known as the Edinburgh agreement. We, enforcement authorities and indeed fraudsters were all initially slow to grasp the full range of its possibilities but, in 1999-2000, this fraud cost the taxpayer somewhere between £1.5 billion and £2.4 billion. Between 2005-06 it rose to somewhere between £3.5 billion and £4.75 billion, an amount which would go a long way towards funding the 2012 Olympics.

This has been a difficult subject on which to get a grip. The inquiry for this report started under my distinguished predecessor, the noble Lord, Lord Radice, in July 2006. However, like Her Majesty’s Revenue and Customs, we have been chasing a moving target. The original purpose of the report was to look at ways where countries could co-operate more closely in sharing information, but that issue turned out to be only a small part of the problem.

When I took over the chairmanship of Sub-Committee A, we considered setting up a shell company to see if we could indeed readily commit this fraud. In the end, wiser counsel prevailed, and we decided to rely on the guidance of our special adviser, Tony Jackson from the Chartered Institute of Taxation, to whom our grateful thanks are due; HMRC, which went well beyond the call of duty, appearing several times before the committee and providing us with useful papers; and witnesses, including many small UK firms that took the trouble to write to us. I must also thank my Clerk, Simon Blackburn, and Petros Fassoulas, the committee adviser, both of whom have been indefatigable in their efforts.

In describing this fraud and how it is committed, I need to remind the House that a major feature of VAT is that companies and firms collect the tax—currently at 17.5 per cent—on behalf of the Government. Companies and firms to whom a VAT rebate is due have the legal right to claim that rebate from the Government irrespective of whether the first company or firm has actually remitted the VAT it has collected to the Government. It is the Government’s problem to make sure that VAT collected on their behalf is gathered in to the Treasury coffers.

Therein lies the opportunity for fraudsters and the problem for Government. Before 1992, where company A, resident in the UK, bought goods from a company in France or anywhere else outside the UK, company A had to pay VAT at the point those goods entered the country. Safe transmission of 17.5 per cent of the order value into the Treasury was ensured at that point. Company A, having received the goods in the UK, would then sell them on to company B, which would be entitled to make a claim for VAT. With the money from the first transaction safe in its coffers, HMRC would pay company B’s legitimate claims.

Compare and contrast the situation after 1992 when EU countries agreed that, in the interests of fostering trade, VAT should not be payable when a company in one EU country bought goods from a company that was also in the EU. Company A, still resident in the UK, can now buy goods from a company in France without paying VAT. When said company A sells on to company B, A will charge VAT at 17.5 per cent and should then remit the money to HMRC since it is collecting the VAT on behalf of the Government. Company B remains entitled to claim back the VAT it has paid—at which point, while company A still has the money it has collected as VAT and company B has a claim for that money, company A disappears, leaving the Government facing a claim from company B, with no money from company A with which to pay it. This is why it is sometimes called missing trader fraud.

I am deliberately making this simpler than it is. It is important to understand that this fraud usually involves an elaborate chain of traders and often comes round in a circle between the same fraudulent traders several times, hence “carousel fraud”, which is the other name for the fraud. Some traders in the chain may not be involved in the fraud at all but be smaller traders who were offered goods at what seemed to them like a good price. There are many variations on the basic theme, but what they have in common is that they are designed with the objective of creating confusion and concealing the fraud from HMRC’s view. What they also have in common is a trader who has collected large amounts of VAT on the Government’s behalf and then vanished.

They are very large amounts of VAT, rising to between £3.5 billion and £4.75 billion for 2005-06. The figures for 2006-07 are not yet available, so we must rely on HMRC’s contention that it is being successful in combating this fraud to some degree, but at a very substantial cost in effort, manpower and painful consequences for smaller traders.

This fraud is enabled by a systemic weakness in the Community cross-border trade. Witnesses told us that this problem of the system being vulnerable to fraud was well understood in 1992, but that it was perceived that there was no alternative if trade within the European Union was to develop as all hoped. The noble Lord, Lord Kerr of Kinlochard, my colleague on the committee who was there at the time leading the negotiations for the UK, will tell your Lordships more this evening about the considerations actuating the contracting parties 15 years ago, I hope.

Her Majesty’s Revenue and Customs has not, of course, sat idle while these vast sums have been stolen, but it is operating under handicap. One party can import goods free of VAT and, before vanishing, can sell them on immediately to another party who can claim the full amount from HMRC. The situation is, as one witness said, like standing in front of a jeweller’s window in which there is no glass, trying to prevent passers-by helping themselves.

In these circumstances, HMRC has fought back by various means, principally by introducing a system of extended verification which subjects all claims for VAT to a process of examination and scrutiny to ensure that all the VAT due in respect of any transaction has been paid. It has also co-operated with the Metropolitan Police and the Serious Organised Crime Agency, and to date has brought two successful prosecutions against fraudsters, with others pending. HMRC is clear that it is dealing with professional criminal gangs that are also involved in other criminal activity, including money-laundering and smuggling, but have turned their attention to this fraud because of the substantial money involved.

While HMRC has reduced the level of money lost to the Exchequer, it is taking the full attention of 1,550 HMRC employees, and has gone a long way to paralysing trade in the communities most affected. In evidence, we heard of companies that had been waiting 12 months for a VAT repayment, and of some that had been forced out of business by the effect on cash flow of being unable to access VAT repayments.

HMRC also sought to promote more sharing of data and information between member states, but this is an elaborate process and the UK is to some extent handicapped by the requirements of the Data Protection Act from playing a full part, or persuading others to do so. In the EU, 27 law enforcement agencies need to be fully involved to make the system effective, and this is very difficult to achieve.

We concluded, in the light of all this, that while the amounts being lost were being reduced, the effort being deployed was unsustainable in other than the very short term. However, at the time we took evidence, HMRC was in the process of negotiating a change in European Union rules which was finally achieved on 1 June this year. It hoped that this would prove a more permanent and less strenuous solution. This was to allow the United Kingdom to impose a “reverse charge” to tax on two classes of goods—mobile phones and computer chips—in which fraud and attempted fraud had been particularly rife. The reverse charge is not dissimilar to a sales tax. From 1 June, a company wishing to deal in mobile phones or computer chips cannot import VAT-free, but must charge itself VAT on the invoice so that HMRC collects the tax due as the goods enter the UK. Missing trader fraud involving these two commodities is no longer possible, and we were told that HMRC believed that the imminence of this change accounted in part for the sharp fall in fraud involving mobile phones or computer chips earlier in the year.

The United Kingdom secured the derogation that enables HMRC to impose a reverse charge for only two years. More seriously, witnesses told us that the fraud, being as profitable and as straightforward as it is, will migrate to other goods and, worryingly, services both in the UK, which was of course the primary focus of this report, and in other European countries.

The inescapable conclusion was that extended verification was an effective if blunt instrument that could not be deployed at its present intensity other than in the short term, and that the imposition of a reverse charge on mobile phones and computer chips was also only a short-term measure that would last as long as it took fraudsters to shift their operations to other goods and services. We therefore turned our attention to looking for a longer term solution. It seemed to us that we needed to shore up the weaknesses in the current VAT system. VAT is a useful and robust tax that is deployed by almost all developed countries, with the exception of the United States, and there is no good case for recommending a change to another sort of tax. Modifying the reverse charge system and practising it selectively in the UK could easily lead to a reverse charge being levied on several different goods—or even on all goods and services, as Austria currently proposes. The member states of the European Union would then have in effect a sales tax. This tax is markedly less robust than VAT because, unlike VAT, it all has to be collected on the final transaction rather than at different points in the chain, which renders VAT as we know it both fairer and easier to collect. Moving to a sales tax would be a retrograde step, and we would not recommend it.

In essence, we recommended that the UK should seek to lead the debate on a new system for cross-border VAT payments, and we suggested some options. Work is of course being done in the Commission, and the UK is not the only member state suffering serious losses to fraud as a result of the current system, but we want the Treasury and Customs to do some new thinking and to publish a review of the options, including the ones that we have identified. Specifically, we concluded that the most promising options involved some form of an origin system. Under such a system, VAT would be charged at the rate of the exporting country, and the purchaser would be able to claim a refund of the VAT paid in his own country. Our old friend, company A, would order goods from a supplier in Luxembourg, but would have to pay VAT at 15 per cent because that is the rate charged in Luxembourg. Company A could then charge company B VAT at 17.5 per cent as he sold the goods on. HMRC would have to collect the VAT from the Luxembourg Treasury, which would require the creation of a clearing house to facilitate VAT transfers between revenue authorities.

It may not surprise your Lordships to know that Treasury witnesses did not favour a change to an origin system, adducing the concern that there could be difficulties in ensuring that member states received the tax that they were due through the clearing house. They told us that around £40 billion of VAT was associated with goods traded between the UK and the other member states, and said that they believed that the system would carry considerable risk. We found this a little difficult to accept, given that substantially larger sums are allocated without incident or problem by clearing and settlement systems associated with securities trading. The Treasury also suggested, uncharitably in our view, that revenue authorities in other member states would not be motivated to collect tax revenue that they would pass to another member state.

We concluded that the most promising change might be to a variant called the flat-rate origin system, which would involve all cross-border transactions carrying a 15 per cent flat-rate tax, wherever they originated, with a clearing house used to make sure that tax was received in the country of consumption. There are objections to this system, but it has the merit of being simple for both importers and exporters. It would involve setting up a clearing house, but this is no longer rocket science; the technology is now well understood and very efficient. Above all, it would not involve, as the present system does, a standing invitation to professional criminals to help themselves. I beg to move.

Moved, That this House takes note of the report of the European Union Committee on Stopping the Carousel: Missing Trader Fraud in the European Union (20th Report, HL Paper 101).

My Lords, the speech that I am about to deliver is made solely for the benefit of our country and the EU. First, I congratulate the noble Baroness, Lady Cohen, the chairman of our sub-committee, who has presented very well the problems that have faced us. All of us on the sub-committee are grateful to her for her leadership.

Although we have some quite elderly Peers in this House, no one is old enough to remember the South Sea bubble and the huge number of investors who lost their money in the 1700s, although they may have read about it. We have, however, had several confidence tricksters in the more recent past. One whom I remember well was Emil Savundra, who had an insurance company called Fire, Auto and Marine, which was designed and set up to be fraudulent. Then there was Bernie Cornfield, who ran a fraud called the Dover plan and wrote a book called Do You Sincerely Want to be Rich?. We had a major fraud that was based principally in London and surrounded BCCI, a bank engaged in money-laundering. Even more recently, huge fraud was perpetrated by Enron, the American giant, which resulted in considerable changes to corporate governance, and continuous boiler-room share transactions have preyed on old people and greedy people hoping to make a profit from worthless shares.

All these frauds defrauded greedy and naive people and created a great deal of scandal in a comparatively short time. Edmund Burke said:

“Among a people generally corrupt, liberty cannot long exist”.

So it should be. Missing trader fraud, commonly known as carousel fraud, is none of those things. It does not directly defraud individuals, but it directly defrauds nation states. It has spread its tentacles throughout government, and hardly any country has not been affected by it. The sub-committee, of which I am a member, has carried out an inquiry and, along with several colleagues of mine, we have come to certain undeniable conclusions. Those of you who have not read the report should do so, as carousel fraud is certainly the most sophisticated and widespread fraud ever perpetrated on a number of countries. Our own country, Britain, admits to the loss of about £19 billion in the past eight years. The sub-committee reckons that a lot more has actually been lost, but no one can know for certain. France has not admitted the exact amount that it has lost, but certain reliable sources have said that it has lost the equivalent of €12 billion in the past year alone.

Italy, Germany and Spain all have large economies and are all being severely hit by this fraud. The larger the country, the more it loses. The only countries that are partially escaping this fraud are very small and have a GNP that is low enough for them to be able to deal promptly with any attempt at fraud. The Scandinavian countries—Denmark, Finland, Norway and Sweden—have been fortunate in escaping the worst effects of this fraud, but countries such as Belgium, Holland and Portugal have all been substantially affected. We in the sub-committee believe that, because the fraud is so widespread and the amounts of money involved are so great, no Government will admit to the exact figures that their Exchequer is losing, and that when they strike out to try to stop the fraud, they succeed only in diverting it.

Let me explain. Because of the large number of VAT frauds—this fraud is all about VAT—our Government decided that they would withhold VAT refunds to almost every mobile phone company. Mobile phones were and still are the principal product used to embezzle the Government, so our Government decided to withhold all payments to any trader in mobile phones. Several genuine companies and honest sole traders have gone bankrupt because the Government would not repay them their VAT. However, we must understand that the Government wanted to bring this fraud to an end and thought that stopping VAT refunds would have the desired effect. In some cases no payments have been made for over a year, and the Government hoped that this would halt the problem. It does no such thing.

The Government have also introduced a reverse charge, which your Lordships will read about in our report as being one of the methods we have suggested to stop the fraud. I will come to the argument later that in the case that I put forward there is only one true way to stop the fraud, but in the mean time I will continue with what I reckon has resulted in the diversion of the fraud. Already crooked traders are starting to deal with other products. They are dealing in cosmetics, white goods and clothing. All those are smallish products but of a high value, very much in the same way as mobile phones. This was why mobile phones were the first chosen instrument to defeat the VAT regulations. There is no doubt that the Government—and every Government—want to try to stop fraud, and I commend them for trying. They have taken on an extra 1,500 staff to deal with the problem, which is costing the Exchequer billions every year. How much better would it be if those moneys were being spent on schools, hospitals and similar things which would improve the quality of life in Britain? Maybe it would even reduce the rate of tax.

Many of your Lordships will remember the fraud that occurred concerning the dollar premium. For those of your Lordships not conversant with this fraud, it was an actual fraud on the Government. People dealt in the dollar premium, for which one got a 28 per cent rebate, and one rather prominent businessman left Britain never to return. That was a fraud on the Government which was much more confined in size and scope than missing trader fraud. Your Lordships may wonder what proposals I have for trying to contain and solve the problem. I have always been keen on a procedure which we used to call, in business, rattling the cage. What this means is that when and where one knows that a fraud is being committed, but one is not actually sure how it is being done or about the mechanics of it, one should send in a team that will investigate the fraud from every conceivable angle.

I know that the Government have employed a huge number of extra people to deal with this fraud, but I think, with respect, that many of these are clerks checking VAT returns. I advocate—very loudly—that the police or the Serious Fraud Office, or both, raid premises at Heathrow Airport, where it is known that freight forwarders have been sending plane-loads of mobile phones abroad at least three times a week. It is not only Heathrow, but equally applies to freight forwarders all over Britain. As I said earlier, this fraud will migrate to other areas and, because the Government have been refusing repayments of VAT to mobile traders, this area of fraud may be coming to an end. But, in order for the fraud to migrate into other goods, all that will happen will be that the freight forwarders at Heathrow and throughout the country will deal in different goods. It is imperative that these are raided, papers are taken away and the trail of where these goods go is followed and dealt with in a proper and efficient manner.

A bank in the Caribbean was closed as a result of questionable transactions. How many more banks are used to transfer huge amounts of money? Obviously the 1,500 extra staff employed are engaged in various areas of investigating this fraud, but one of the things that we have not been able to establish in our committee is how many of them are working at desks following paper trails, how many of them are in the field examining records in board rooms, offices and financial departments, and how many are involved in visiting banks to check the flow of funds inwards and outwards. These are questions that I would like answered. I would also like to know how many other banks have been investigated. Many banks throughout the world are of a somewhat shadowy nature and engage in money-laundering and doubtful transactions with doubtful companies. It would be helpful to know how many premises have been raided, how many prosecutions are pending at the moment, and how many individuals or companies are before the courts. That information will help present a picture of correct deployment of personnel.

I go back to my suggestion of rattling the cage. Our committee knows through evidence that a number of freight forwarders have been engaged in transactions, some of which must be placed in the dubious category. How many freight forwarders have been raided, and how many of these have yielded information helpful to the apprehending of criminal gangs? It has been estimated that there are up to 100 highly organised criminal gangs spread across Europe engaged in missing trader fraud, but we do not know how many enthusiastic amateurs have jumped on to the merry-go-round and are engaged in fraud, though perhaps not as well controlled as those involved in sophisticated criminal gangs. My strong recommendation to the Government is that they raid freight forwarders, follow the paper trails in offices, and investigate banks to see where the flow of money is coming from, and where it goes.

I know that it is highly difficult to stop this fraud and that the Government are genuinely doing their best. I know that VAT rates are different throughout the EU and that it will be difficult to get the VAT rates agreed in all the different countries. Rattling the cage will catch a few criminals—perhaps the less sophisticated ones—but one has to hope that Governments will treat the matter extremely seriously, and that Governments throughout the EU will come together in an effort to get rid of this dreadful problem. I hope our Government will take whatever action they can as a matter of great urgency.

My Lords, as a member of Sub-Committee A, I join the noble Lord, Lord Steinberg, in paying tribute to the noble Baroness, Lady Cohen, for running our debates on the inquiry with a rod of iron. She is primarily responsible for the very high quality of the product. I commend the report to the House. As we worked on the inquiry we found that the subject was larger than we had first thought. Most of us concluded that, while we might have some doubts about the means of extended verification being used by HMRC to deal with the fraud, we had no doubt about the necessity for strong action to deal with what was undoubtedly a substantial organised criminal attack, deliberately defrauding the Exchequer and hence honest taxpayers through manipulating the system for charging VAT on mobile phones and computer chips traded across frontiers.

The sub-committee concluded that HMRC was right to claim that it was succeeding and that the scale of the fraud in respect of such goods was diminishing. We also thought the Government right to seek EU agreement to a derogation permitting reverse charging in respect of mobile phones and computer chips. That has ended the fraud in this country on these goods. We were delighted about that, although we noted that the scope of the derogation was rather shorter than the Government had wanted, more restricted and only two years rather than the three originally sought. But we became more and more uneasy—or at least I did—as the inquiry went on. Many of us felt that we had stumbled on to a larger issue. The reverse charge derogation is extremely effective but merely transfers the problem elsewhere in the European Union. So its renewal in two years’ time is by no means a foregone conclusion.

Given the scale of the prize available to the criminal—we were told that the incidence of this fraud in this country reached £3 billion in 2005-06—and the enormous complexity of the defensive extended verification procedures required to combat it, it seemed to us inevitable that, with mobile phones and computer chips blocked off for the present, the fraud would migrate and mutate to something else. The Government did not dissent. They told us that the next vulnerable sectors would be iPods and satellite navigation systems. They talked then of cosmetics, pharmaceuticals, precious metals and computer software, and even, possibly, razor blades or golf clubs; that is, any sector where the traded goods crossing the frontier are high in value and low in volume.

We saw little chance of the Government being able, by a series of successive reverse charges, to pass the buck. We applauded the enforcement efforts, but we thought that the criminal always would be probably a step ahead. The authorities would go on being valiant in trying to plug gaps in the dyke, but we began to wonder whether it might not be better to drain the lake, which is why the second half of our report looks at options for change to the overall EU system as it applies to cross-border trade. In my view, the Government have reacted rather encouragingly to our recommendations. In their reply, they have accepted that there is a systemic weakness in the VAT treatment of cross-border trade and have confirmed that they are actively engaged in exploring, with other EU member states, a number of options for change.

We highlight a number of options in our report, but I want to touch simply on two which seem to be the most promising. The first option would be to move away from today’s destination system, whereby VAT is collected in the country where the goods are finally sold, to an origin system, whereby it is collected in the country where the goods are first produced and then distributed through a clearing-house. That would undoubtedly eliminate missing trader fraud. As the noble Baroness, Lady Cohen, said, that was indeed the system which was first proposed and which the United Kingdom hotly opposed in the early 1990s. The noble Lord, Lord Lamont, who is in his place, was eloquent in attacking this system. I worked for him at the time. I could not match his eloquence, but I attacked as his dog of war.

The Commission proposed an option system, which was defeated not just by the eloquence of the noble Lord, Lord Lamont, but by the general acceptance around the council table that the clearing house system would be immensely complicated. That is why we ended up with the destination system, which is still known in Brussels as the “provisional” system. It was always envisaged that it would be replaced in due course by an origin system. As the French say, nothing is more permanent than the provisional.

The noble Baroness, Lady Cohen, said that I should explain why I sinned so greatly. We were trying to build a single market and were getting rid of an enormous number of checks at frontiers, paperwork and documentation, and we succeeded. The 1992 programme brought about a tremendous liberalisation of intra-EU trade, but I now believe, like Lord Keynes, that when the facts change, you had better change your views. I have changed my views on an origin or destination system. The facts have changed. Modern technology now copes perfectly well with a clearing house on the scale envisaged. It seemed horrifically complex at the time. When one thinks of inter-bank clearing systems or, as the noble Baroness, Lady Cohen, said, securities trading, it is perfectly possible to envisage a clearing house system which would work.

Moreover, the Commission now suggests that the VAT which would be remitted through the clearing house should not be at the rates charged in the country of destination but at a flat rate which would be the same wherever the destination. As the noble Baroness, Lady Cohen, said, it could be the EU average rate of 15 per cent or the median rate of 18 per cent. It does not matter. The clearing house would deal with only one rate, which would be a huge simplification of the systems and would greatly benefit traders.

I pay tribute to the excellent evidence given to us by the Institute of Chartered Accountants. It came down firmly in favour of a solution on those lines. Government witnesses were rather more cagey and I think that I traced three streams of scepticism. First, there was scepticism about such dependence on IT, which I can understand. Secondly, I thought that I detected a feeling that it would be rash to rely on other member states to be active in the collection of VAT on goods destined for export, because the VAT so collected would be distributed through the clearing house to the country of import—that is, another country. That seemed to me to be a rather unworthy suggestion. Co-operation between national and fiscal authorities in the EU has always been rather good. The current system leaves the Revenue and the honest taxpayer at the mercy of the criminal. Given the choice, I would rather trust the tax man.

The third objection we heard is based on a misunderstanding. It has been suggested that an origin system plus a clearing house might infringe national fiscal sovereignty. This is untrue. Lest noble Lords think my judgment has been coloured by seven years in Brussels, do not take my word for it; take the words of the Institute of Chartered Accountants, which is no crazy Euro-phile. Its evidence states that,

“the harmonisation of rates of tax in member states is not essential in order to operate the origin system”.

The proposed system would not in any way limit our ability to set our own rates of VAT or to continue our zero-rating of particularly sensitive goods. Neither standard rates nor harmonised coverage would be required. Fiscal sovereignty would not be impugned. The difference from the present system would be that the huge rewards available to the criminal would disappear.

If a move to an origin system is thought too dramatic—it certainly would take time and there would be a very high transitional cost—one could envisage a refinement of the destination system which might be equally effective in eliminating fraud. We learnt from the Commission’s evidence—I pay tribute to Commissioner Kovacs and his team for their constructive co-operation with our inquiry—that it has just such a solution on the stocks. It, too, would involve simplification. Instead of obliging the trader to register in the country to which he was exporting his goods, and to pay VAT at the rate applicable in that country, the Commission now envisages a one-stop shop where the trader would account for all his liabilities in all other member states, online, in his own language, in his country of establishment. It would not be a clearing house but a self-clearing system. This solution, too, would eliminate or massively reduce the scope for missing trader fraud. It, too, would not threaten fiscal sovereignty and would be dependent on effective IT.

I am not an IT expert any more than I am a tax expert, as has already become clear in this debate, but my plea to the Minister is that he urge his new Treasury colleagues to approach both options I have described with an open mind, in a spirit of inquiry about their practicality. The key question is not whether this was something we opposed 15 years ago; it is whether it would work today and prevent fraud tomorrow.

There is sometimes too much theology in these matters. Remember Alexander Pope, who said:

“For forms of government; let fools contest:

Whate'er is best administered is best”.

The Government deserve our support for their success in getting on top of missing trader fraud in mobile phones and computer chips. I hope that they will be just as successful, although rather more speedily, when the fraud switches to another sector, as it no doubt will. Perhaps it already has. I thank the Government for admitting that there is a systemic weakness which the criminal will always seek to exploit. So the long-term solution is a change of system. The Commission will produce its reform ideas later in the year. I hope that the Government then will come back to the House with their reactions. If they do not agree with the Commission’s proposals, I hope that they will bring forward alternative suggestions for reform.

My Lords, I rise also as a member of Sub-Committee A of the European Select Committee, but unlike those who have spoken already, I am a very recent member. This report was almost complete by the time I joined. In the few meetings that I had the pleasure of attending, it was a case of running hard to catch up with all the work that the other members had done. I echo the congratulations to the noble Baroness, Lady Cohen, on bringing together this extremely complex matter in this report and on the way in which she has explained the basic issues to the House tonight, issues which were taken up in the contributions by the two noble Lords who spoke afterwards.

The report was published on 25 May, and just a month later a response, dated 25 June, came from Dawn Primarolo on behalf of the Government. Next to her letter is the official government response to the report. There is some progress in that response, although perhaps not as much as we would have liked. As has been mentioned, the Government acknowledge that we are dealing with a systemic problem:

“MTIC fraud is a sustained and organised criminal attack on the system that exploits a weakness in the VAT treatment of cross border trade in order to commit fraud”.

That acknowledgement is hugely important. Clearly at the moment the Government are engaged in an enforcement exercise involving 1,500 staff and costing £95 million a year. However effective that enforcement effort may be at what it is focusing on at the moment, the more effective it is at focusing on that, the more the problem will shift elsewhere. There is a huge range of goods which are light, easily moved and of high value to which this fraud can attach. So if it is acknowledged that there is a systemic problem, the obvious answer is to look again at the system, as was acknowledged in evidence given to us on page 98 of our report. Mr Eland, speaking for HMRC, said:

“All I would like to say, speaking from an operational perspective if I may, is that yes, it is always the best solution to change the rules so that things cannot happen in the first place. Any enforcement activity is always going to be following on after the event or in response to a failure, if you like, of those rules, so getting the rules right, I agree, is obviously what we want to do”.

I am delighted to hear that and to repeat what is in an abbreviated form in the main body of the report.

It is now acknowledged that the rules have to change. We examined in the report and set out briefly in the final chapter the options for change. We looked first at a generalised reverse charge or sales tax, then at the origin system, then at a flat-rate origin system and then at the origin system or flat-rate origin system without clearing house—of course, clearing house was considered in that context as well. We deliberately did not recommend a single solution; clearly, individual members of the committee will lead in different directions on this. We were hoping for a detailed response from the Government to these options. There is a certain amount of disappointment on our part at the response received because it is so brief.

The noble Baroness, Lady Cohen, expressed her view on a generalised reverse charge, which would be like a sales tax, and on the limitations of sales tax. One of the limitations of sales tax was outlined to us in a very stark way in the evidence we received, and I cannot resist the temptation to quote Mr Brown, from Her Majesty’s Treasury. He said:

“One of the reasons why more countries have been attracted by value added tax as opposed to sales tax is that the fractionated nature of the payment regime means that there is an element of self-policing within the tax system and that that basically provides you with greater taxing power than you would otherwise have. Very few of the sales taxes which operate get into double figures. We do see value added tax at rates of 20 per cent which appear to be sustainable”.

That lays it out very simply, very clearly. If you go for a sales tax—which will eliminate missing trader intra-Community fraud completely and save billions of pounds—it will be difficult to persuade the consumer to pay a sales tax of 20-plus per cent, whereas with the fractionated VAT adding up from each transaction and collected in stages, the poor consumer ends up paying 20-plus per cent. He does not notice it so much, except perhaps when he wonders why consumer goods are so much cheaper across the Atlantic than they are here. Part of the reason—although not all of it—why things are cheaper is that they do not have VAT but they have a sales tax. There are other reasons, and I do not want to simplify a highly complicated matter, but I could not resist the temptation of sharing with your Lordships the Treasury’s very stark view of the disadvantages of a sales tax.

In the Government’s response there is not, as I said, a detailed consideration of the options. We are, however, informed that:

“The UK and our European partners are looking at these radical approaches, and indeed the Commission is carrying out a study, due to report to the Council by the end of this year, on both the generalised reverse charge and the flat rate taxation of cross border trade with a clearing house system”.

So two of the options that we mentioned are being discussed, and the Commission will report to the Council at the end of the year. I find this entirely unsatisfactory. There is within the United Kingdom a dissatisfaction with the way in which the European Community so often works. It appears to be beyond our reach and beyond our ability to influence. Things then appear over the horizon quite quickly and take the form of a diktat or directive in which we then find that we have very little say when it comes to legislating here. While I understand the reason for that view, I am not sure that it is always accurate. I find sometimes when one moves about Europe that there is greater openness within European institutions and processes than exists within our own process, and I think this is another case of that.

The Treasury acknowledged in its response to us that it has a systemic problem. The obvious thing to do is to look at ways of curing that systemic problem, and to have a debate in which Members of this House and, through them, the public could become aware of what the problems and options are and could contribute. This is part of what we hoped we would generate by producing this report. We hoped that it would be a springboard for a debate, but the Treasury does not want a debate. It just mentions that there is an issue and says, “We will not talk about it until after we have consulted or completed a process that is taking place in Europe beyond our view and beyond our opportunity to influence. We will wait until the matter comes before the Council for a decision, then we will take whatever decision we think is appropriate and we will come back and tell you”.

Maybe I am extrapolating unfairly from one case, but the real cause of dissatisfaction with the processes within Europe lies in how those processes are handled by our own Government, who do not consult properly their own people, representatives and Parliament but prefer to go to Europe, take a decision and then come back and tell us. That really is not good enough. Maybe I am exaggerating; but the Government, who themselves complain about what they say is the public’s inaccurate view about European processes, could provide for greater transparency. I look forward to the Minister, in his reply, meeting all the desires that I have expressed with regard to generating and carrying through a debate well in advance of any decision in the Council.

My Lords, I put down my name to speak in this debate, but somehow it did not get on to the speakers’ list. I join in the debate as a member of the sub-committee under the exemplary chairmanship of the noble Baroness, Lady Cohen, and I would like to take this opportunity to thank our clerk and professional advisers and congratulate them on their outstanding work in the preparation of the report.

I wish to focus briefly on what I believe are two important issues raised by the report. First, while we must acknowledge the success of the Government and HMRC in reducing the extent of missing trader fraud in the computer chip and mobile phone trade over the past two years, that has been offset by serious damage caused to legitimate traders in the sector, particularly small companies. Applications for VAT registration, for example, are now taking up to three months for approval, and worse still the process of “extended verification” that is used to check all claims for the refund of VAT is taking up to a year. Many small companies have suffered, and in one of many cases reported to us, a company had repayment claims of more than £8 million in VAT withheld for more than a year, and was forced into voluntary administration. Clearly the damage to legitimate business is an unsatisfactory situation and one that cannot be allowed to continue indefinitely.

That brings me to the second important and related issue I wish to stress, one which has also been discussed by the other noble Lords in the debate. Both the extended verification process and the “reverse charge” derogation introduced on 1 June 2007 relate only to the mobile phone and computer chip businesses, and obviously only to UK trade. Clearly the fraud can be switched to other trades or even services, and to other member countries of the European Union, many of which are already experiencing the fraud. It is thus a European problem and the report urges the Government to start discussions with the European Commission and other member states, and to look more sympathetically at a radical change to the VAT system.

In their response, the Government acknowledge that discussions are already taking place and that the Commission is carrying out a study and is due to report to the Council by the end of this year. The Government insist that any change to the VAT system must fit three criteria: that the right tax ends up in the right place; that the potential for fraud and non-compliance is minimised; and that business is not overly burdened. Those are sensible criteria and the Government take the view that the report’s recommendation for a common, flat rate of 15 per cent on intra-Community trade with or without a clearing house is a possible solution, but would meet the three criteria only if accompanied by a clearing house.

As I have said, this is a European problem and one that Europe must resolve. The report has certainly stimulated discussion and our committee will be monitoring progress with interest in the months to come.

My Lords, not being a member of the sub-committee and with the massed ranks of the Liberal Democrats behind me, I should like to congratulate the noble Baroness, Lady Cohen, on a very succinct report. Its best attribute is that it has lots of diagrams. Despite her excellent introductory speech, diagrams and pictures pave the way to accessibility and help people to understand the issue. To echo a point already made, a striking aspect of this problem is that it has come out of the success of the single market. But that was 15 years ago, and during my time of being involved in European affairs—the past 10 to 12 years—it has been a known problem of some magnitude and yet one that we are still left with.

While the report is of very high quality, it makes for a depressing read as it outlines the size of the problem, the simplicity of the crime, and the difficulty in finding solutions. If this sort of crime occurred as single incidents involving each of the hundred or so gangs that get involved in it each year, it would still result in a huge amount of crime. Before the recent tightening-up of the regime, the sums mentioned in the report work out at £50 to £60 per person in the UK. The noble Baroness mentioned the Olympics, but the problem is of equivalent size with the social housing budget of this country, the Royal Navy carriers project currently under way, and is actually similar in size to our annual net contribution to the European Union. A very large amount of money is involved; indeed, it is so large that it is difficult to conceptualise. That is presumably why it does not appear on the front pages of our tabloids each day, as would any other crime committed on a similar scale.

On simplicity, it was staggering to read in the report that although we know about mobile phones and computer chips, along with reverse charging on certain precious commodities, this criminal activity accounts for something like 10 per cent of our total legitimate trade figure. It is a white collar fraud crime of amazing proportions. The noble Lord, Lord Steinberg, is not in his place right now, but he mentioned money-laundering and the banks. I used to be in the financial services sector and I remember spending huge amounts of time with individuals, private citizens, in order to get them to comply with money-laundering rules by asking them to prove who they were as a company secretary or director by showing their passport, driving licence and latest utility bills. We would go through all this, and if we were even slightly concerned about anything we would refer it on to what is now known as SOCA, but at the time was the ICS. We had the impression that all our money-laundering prevention procedures, including those of the banks for the money must pass through their systems, failed in this area.

The solutions are a source of even more frustration. The report has two themes, one of which competently goes through how the system is tweaked at the moment, while the other moves on to highlight how we might start to tackle this crime using either the origin system or, potentially, harmonisation. However, we do not have solutions to the problems of how to implement those proposals. More than that, even if we did come up with a perfect system, particularly for the United Kingdom, we do not have a way to deliver it because taxation is not an area for qualified majority voting. So to achieve this fundamental change in the VAT system, we would have to have 27 out of 27 member states agreeing in unanimity to changes in the system. So we have problems both in finding solutions and how to apply them. Even if the report from the Commission due at the end of the year comes up with the best solution, can the Government say how we are going politically to deliver it to the Council of Ministers?

I should like to put one or two further questions to the Minister. First, what priority is this likely to be given under the Portuguese presidency, and have the Portuguese mentioned it in their programme for the EU over the next six months? I would particularly like to find out how many prosecutions there have been involving carousel fraud and whether those have involved anyone other than the minnows. Have any of the main players been prosecuted, and what have the penalties or sentences been?

What strikes me about the whole subject is the size of the crime. Back when I was 11 years old in 1963 and on holiday in Devon, the Great Train Robbery took place. It was a case of shock-horror when £2.6 million was taken from that mail train in Bedfordshire. Those criminals were eventually apprehended. They each received 30 years’ imprisonment. Some escaped; some, I think, are still serving their sentences. Twenty years later, in 1983, we had the Brink’s-Mat robbery, the size of which—£26 million—was quite staggering then. Both crimes have gone down in UK criminal history and folklore. Yet here we have an annual fraud of between £3 billion and £4 billion, perpetrated by as many—or as few—as 100 masterminds. We hear so little about it, and have so little hope of a solution.

My Lords, I join in congratulating the committee on its excellent and comprehensive report. It really is a top-class document. Estimates of the size of the fraud vary, but the report states that there is no evidence that the evasion rate is any higher for VAT than for other forms of tax. We should bear that in mind when looking at the problem, so that any remedies are proportionate.

The report quite rightly states that matters cannot be left as they are and that something needs to be done. In her evidence, the right honourable Dawn Primarolo said that action taken so far had been effective in causing,

“a massive drop to the point where it is now minuscule”.

Additionally, permission to derogate has now been received for the reverse charge for certain categories of goods. This will continue the downward pressure. Certainly, time should be spent on seeing how the steps already taken turn out. The derogation will have to be renegotiated in two years, giving an in-built date for reviewing the situation. Perhaps if the fraud has migrated to other countries, they will be more anxious to co-operate and may not—as on the occasion of asking for the present derogation—demand a pound of flesh in the form of the UK making further concessions on our rebate.

The problems of mutation and migration will exist whatever happens, even if they appear in a different guise. It is the nature of taxation that there will always be people who seek to evade it. Inevitably, if one door closes, another will open. That may sound defeatist but it is not meant to be. It is an argument for giving the present steps a chance to work, and examining the results before making wholesale changes that may result in different sorts of fraud taking place.

In the event that further changes need to be made, the end-user tax certainly merits a great deal of further consideration. I disagree with the statement that there will be an extra burden on the retailer in the case of an end-user tax. The retailer will still be selling the same quantity of goods, but instead of remitting to Her Majesty’s Revenue and Customs the VAT on goods sold, less the VAT he has paid to his supplier, he will simply send the VAT on the goods sold: one step fewer, administratively, than at present. Additionally, he will have an improved cash flow, as he will not have to finance VAT on the goods that he has purchased for resale. Administrative costs will be lower and the elimination of the chain would make fraud more difficult. That tax would be collected in one hit, rather than bit by bit, should be no objection, as that is how virtually all tax is collected.

I support the arguments of Her Majesty’s Revenue and Customs against the origin system favoured by some noble Lords today. I will not repeat those arguments, but they should be listened to most seriously. I share the report’s concerns about potential hardship for businesses and enterprise, highlighted so eloquently both by my noble friend Lord Steinberg and the noble Lord, Lord Cobbold. It is clear from the evidence in the report that the extended verification system has created considerable difficulties for British companies. It is all very well for there to be a process whereby, in the case of hardship, delayed VAT repayments are made. I have no doubt that—and I say this from personal experience—Her Majesty’s Revenue and Customs will be sympathetic and helpful, but if security or bank guarantees are required for traders to receive delayed repayments, there will certainly be instances where security cannot be given. Companies facing hardship do not usually have surplus or unsecured assets. What happens then? Do they go under, as the noble Lord, Lord Cobbold, pointed out has already been happening?

Add to that joint and several guarantees, and it becomes all too easy for the innocent to be swept up with the guilty. The comment by the Institute of Chartered Accountants, that joint and several guarantees would be difficult to enforce, completely misses the point. The combined effect of the cost of having to defend yourself if accused—however innocent you may be—and the untold stress and time taken up by defence and being many months in arrears on VAT payments, could easily bankrupt almost any business. One arrives at a situation where Her Majesty’s Revenue and Customs effectively has the discretion to put any but the strongest companies out of business.

I hope that the application of reverse VAT will substantially change these problems for innocent traders, as they will not have had to finance VAT on purchases. That is another benefit of the end-user tax. If the Government are reluctant to look more closely at end-user tax, there is one simple solution to carousel fraud, which the Minister might like to ponder: make VAT payable between companies in different countries in the European Union, just as if they were all in the same country. It worked before 1992 with different rates of VAT, so there is no reason why it should not work now. A single market need not mean a single tax system. With one stroke—albeit from 27 different pens—carousel fraud would be eliminated.

My Lords, this has been a most interesting debate on the back of an extremely incisive report, for which we all owe thanks to the committee chaired by my noble friend Lady Cohen. It has identified a very real problem. I am happy to relate, as members of the committee who participated in the debate acknowledged, that the Government have been active in response. I recognise that there are anxieties that the response has not been comprehensive enough. Certainly, the committee identified an area of concern, to which the Government have made very significant responses indeed.

We are all aware of the threat. The impact on VAT receipts was estimated at between £2 billion and £3 billion in 2005-06. The measures the Government have taken to stem these losses have been reflected in this debate. We introduced the reverse charge for mobile phones and computer chips from 1 June. I hear what the noble Lord says: mutation—a word to conjure with—will occur with regard to the goods.

I shall respond to the point made by the noble Lords, Lord Steinberg and Lord Cobbold, about the resources used by the Treasury and the Revenue and Customs in dealing with these issues. If a company switches from mobile phones to another significant white good, that may be an indicator to the Revenue and Customs of the mutation to which noble Lords have referred. I emphasise that we are not unaware of these possibilities and will pursue them with vigour. There have been significant numbers of prosecutions of fraudsters in recent years. In August last year, the Revenue and Customs carried out the biggest ever operation targeting VAT fraud. Officers searched more than 160 premises across the UK. To date 18 people have been arrested and charged and we are continuing with these inquiries. There have been notable successes and I assure the noble Lord, Lord Teverson, who, along with the noble Lord, Lord Steinberg, earlier in the debate, also commented on this point, that we are devoting resources to these inquiries and they are producing results.

I am grateful to noble Lords who have indicated how sharply the authorities need to respond to changes in fraud. We have taken a multi-faceted approach and introduced both criminal and civil measures. Where we have the evidence we use every opportunity to tackle this matter. Freight forwarders, who were introduced into the debate by the noble Lord, Lord Steinberg, are regularly inspected by HMRC. We are active, but we are also conscious that this is a very significant problem, as the noble Baroness, Lady Cohen, so accurately defined it.

We appreciate that the committee set out to produce a number of potential solutions. I also recognise the point made by the noble Lord, Lord Cobbold, and nearly all other contributors to the debate—certainly the noble Lord, Lord Howard of Rising, emphasised this—that we cannot make the solution more difficult for business than the fraud. We need to protect the Revenue and we need to deal with criminality, but we should bear in mind the impact the measures may have on business. We are concerned that we meet both objectives of ensuring that people pay what they ought to pay through the VAT system and, at the same time, guaranteeing a climate in which legal and lawful businesses can pursue their objectives with a limited amount of difficulty. We have to keep a balance between tackling serious fraud and supporting business.

We aim to process all applications for registration and repayment as efficiently as possible. We are committed to improving the taxpayers’ experience in all their dealings with individuals and businesses and to minimising any negative impacts on business; we are out to refine processes and procedures. But noble Lords have identified in the report an area of fraud which needs to be tackled with strong and condign measures. There is bound to be an impact on business and there is some tension in that position which is not altogether remediable.

Checks have caused delays for some applicants. In 2006-07, 7,100 applications for registration were refused on the grounds that they were suspect and 2,500 were registered with specific conditions, such as financial security. This is against a background of 280,000 applications, so one has to keep a sense of scale between the areas where action needs to be taken and constraints imposed and the very large number of applications.

The noble Lords, Lord Cobbold and Lord Howard of Rising, stressed the issue of repayments rather than registration. As regards registration, the average time we expect to take to clear an application is 38 days. That will be too long for some noble Lords but it reflects an effective and appropriate target. It is not as good a performance as we aspire to and we are taking steps to deal with the current delays. An additional 102 staff have been devoted to VAT registration but, as I said, we need to keep this in perspective.

On repayments, HMRC processes some 8 million VAT returns and approximately 2 million of these are for VAT repayments. Of the 2 million returned each year, about 10 per cent fail credibility checks and are selected for further checking. A tiny fraction of these claims are suspected of being linked to fraud and are therefore subjected to the highly targeted process of extended or in-depth verification. We have to keep the number of returns which cause anxiety in perspective.

The committee has identified the cost to the Exchequer and the Revenue of the fraud which is going on; that is why we welcome the report. I appreciated the contribution of the noble Lord, Lord Kerr, who saw this as a Europe-wide issue; the Government had clearly recognised in their response to the committee report how important this is and how we have to work with our European partners to analyse alternative ways to combat fraud. I shall come on to the fact that the committee took matters further and not only identified the problem—that would not suffice for the noble Baroness, Lady Cohen, given her role in the committee—but looked at potential solutions, on which I shall comment in particular.

We should remember the criteria we must employ for potential solutions: the right tax has to end up at the right place. Noble Lords have suggested different areas and different stages in the process in which taxation might take place, but the important principle is that the right tax has to end up at the right place. By that I mean the VAT must accrue to the member state of consumption. The solutions must be effective in tackling existing fraud and not vulnerable, as noble Lords have emphasised, to new forms of fraud and non-compliance, which is the danger of the concept of mutation. The solutions should not place an unacceptable burden on business and noble Lords have been at pains to emphasise that we need to strike a balance.

With these criteria in mind, let us look at some of the solutions proposed. First, there are the radical solutions of applying a reverse charge to all goods and services or applying VAT to all intra-community trade. Both of these radical solutions may indeed have an impact on carousel fraud in its current form, the first by deferring the payment of the VAT to the very end of the transaction chain, the point where the goods or services are sold to the final consumer; and the second by greatly reducing the amount of VAT that could be stolen on intra-community supplies.

But both solutions come at a cost. The report accepts that a wide reverse charge would have the effect of turning VAT into a sales tax. I think it was the noble Lord, Lord Trimble, who advocated the virtues of a sales tax. The weakness of a sales tax is not that the consumer will not pay but that all of the tax falls at the end of the supply chain, where the seller is tempted to withhold all of the tax. A VAT seller, of course, can only withhold a fraction of the tax. Fraud then takes place against the whole of the tax charge when the fraudulent individual moves into action. At least with VAT, it is a case of fractions. Therefore, it is not as if a sales tax is not attended by some difficulties. The report is not about the normal processes of business and its relationship to the Revenue but about those who seek to break the law and to distort the proper amount that they should pay. Therefore, the point about sales tax is not readily accepted by the Government.

The taxation of intra-community trade also presents us with problems. In order to tax intra-community trade, it must first be decided where it is going to be taxed, and that could be either the member state where the customer is established or the member state where the supplier is established. To tax the goods in the member state where the customer is established would mean that businesses making cross-border sales would be required to account for VAT in every member state in which they make a sale. This is worrying for two reasons. First, it places an onerous burden on business and secondly it means that member states would be faced with the task of attempting to recover VAT from non-established businesses, which is no simple matter.

If taxation of cross-border trade in the member state of the customer throws up some difficulties, another possibility would be to tax cross-border supplies in the member state of the supplier. However, member states have long-standing concerns that to charge tax at the rate of the member state of the supplier would lead to tax harmonisation. Noble Lords may approach that issue with composure. However, that is not the case in many parts of the political community. If there were not harmonisation, all that would happen would be that businesses would relocate to the member state with the lowest VAT rate.

Member states have, indeed, given this issue a lot of consideration, and have recognised that a possible solution to this harmonisation issue could be to tax cross-border trade at a single, fixed rate; for instance, 15 per cent. A minor problem for the United Kingdom is that, with harmonisation at 15 per cent, we would lose about €8.6 billion, based on figures for 2006. Therefore, we cannot pretend that these issues are easy to resolve. It would not just be Britain. A number of other member states would also lose out with such harmonisation. There might be relatively few winners. Against that background how on earth could we look forward to obtaining agreement on the issue easily within the Community? So the setting up of a mechanism to redistribute the revenue to the member state of consumption is vital, and it is with this thought in mind that the European Commission and member states are taking this work forward.

The report enjoins the British Government and the European Community to give serious thought to this very acute problem. The Government have not dismissed any of these radical solutions and have been actively participating in discussions with our European partners on finding an effective solution to the fraud. The European Commission is committed to producing a report on the feasibility of these solutions by the end of the current year. I hear what noble Lords said about our not having very much time because the derogation lasts for two years only. I think that the noble Lord, Lord Kerr, emphasised that point. That reflects the importance of the matter. Action needs to be taken but these are not short-term issues.

That is why we are actively participating in work with our EU partners and the Commission on the second group of solutions—those which seek to improve the working of the current system—because the radical solutions may be difficult to obtain in the immediate future. This includes a wide range of initiatives, such as improving data flows about intra-Community trade and making it easier for member states to exchange information between each other. The Commission is again committed to reporting to the Council its findings, along with any necessary proposals, by the end of the year. We have, of course, been participating vigorously in these discussions.

The Government fully acknowledge the report’s most important proposition—that the Community needs to recognise VAT carousel fraud as a major problem. I say to my noble friend Lady Cohen that that message has struck home and requires an active response from government. However, through the measures we have taken, both within the UK and within the auspices of the developing EU strategy, we believe that we are building the tools necessary to defeat this fraud. We are committed to tackling this issue while at the same time sustaining a business-friendly environment. A balance has to be struck between tackling this appalling abuse, which is so costly to European countries—we recognise the cost to us—and not making the burdens on businesses so onerous that, as several noble Lords emphasised, they can be brought down by the measures taken to control fraud.

We have found the report invaluable in identifying the issues. We are grateful that it put forward solutions, although at this point we have reservations about them. We have reservations about the practicality of obtaining Community agreement on them and about whether they would necessarily make the situation better. However, it is rare for us to have a report which identifies an issue and proposes both short-term and radical solutions. I am grateful to the committee and to my noble friend for having introduced the report.

My Lords, before the Minister sits down, I should apologise for being absent for a short time but I did not hear him comment on banking. Banking is a line of inquiry which should be followed much more vigorously than a lot of the others. As the Minister is probably aware, in the Netherlands Antilles, the First Curacao International Bank was closed down because of fraudulent deposits and payouts. I should be interested to know, as, I am sure, would my colleagues, whether other banks—the Minister does not necessarily have to give me their names—are being investigated. Through their bank accounts surely you would be able to, as I said, rattle the cage a bit more and get some more information.

My Lords, I hear what the noble Lord says about rattling the cage but he is rattling the cage of my time. I am meant to respond to this debate in 20 minutes and he has already eaten up a minute and a half of that after he has brought that point into the debate. I apologise for not having spoken specifically about the banking sector, but when we say that the Revenue uses all the weapons which it can to tackle this issue, of course the banking system has a role to play within that. I cannot comment on the particular bank that he identified but I assure him that we are so concerned about this issue, as, indeed, are our partners in Europe, that the forces of law and order will take every measure they can to bring the perpetrators of these fraudulent activities to book.

My Lords, this has been a fascinating debate, on a subject of great intrinsic interest. It is not often that I find myself—I hope—illuminating an issue that has cost this country close to £20 billion over the past eight years. That is money which, had it been available to the Exchequer, could have funded many public goods. I am grateful to everyone who has spoken in the debate.

Our report was greatly assisted by the presence of one of the architects of the 1992 agreement in the person of the noble Lord, Lord Kerr. It must be unusual to hear such clear and well reasoned arguments for why a change of heart on the part of the Government of the United Kingdom is now both necessary and urgently needed. I am a little disappointed by the Government’s response. Having accepted that there is a systemic problem, the Government surely should be prepared, having willed the end, to will the means to resolve the problem. I hope that some urgent efforts will be made to find a solution. I also offer by way of warning the comment that my committee will do another report fairly shortly when we see what progress is being made.

On Question, Motion agreed to.