Up to £260 Million in Tax Owed to HMRC by Fuel Fraudsters

An estimated £190 million in duty and VAT is owed to HMRC by fuel fraudsters in the last year – although this tax gap figure could be as high as £260 million [1]. With as many as 5,821 instances of fuel fraud uncovered so far since 2016, the crime makes up as much as 2% of the UK diesel market, according to HMRC figures obtained by fuel supplier Crown Oil through a Freedom of Information request.

In Northern Ireland, the problem of petroleum piracy is particularly dominant with illicit diesel, which makes up around 6% of the diesel market, and costs HMRC an estimated £40 million in lost duty and VAT.

What’s more, with a system based on random checks and punishments of just £250, diesel renegades are emboldened to take their chances and use cheap, rebated fuel in their vehicles, cheating thousands of pounds in tax from the government if they go uncaught.

What is a tax gap?

A tax gap refers to the estimated difference between the taxes that have been paid to HM Customs and Revenue (HMRC) and actually paid [1]. This discrepancy could be the result of tax avoidance, tax evasion and tax fraud, or simply negligence.

What is fuel fraud?

Road fuel fraud refers to when a fuel is used without paying the appropriate tax. It predominantly occurs in the diesel sector and involves rebated off-road fuels, which are those that are subject to lower taxes as they are intended for industrial use. The most common type of fuel fraud in the UK is red diesel being used in road-going vehicles instead of regular diesel (now known as B7).

Gas oil, also known as red diesel, is legal for use in industrial heaters, generators and agricultural vehicles and is subject to 11% duty compared to a 58% duty levied on regular diesel and unleaded petrol [2]. To identify between the two fuels, red diesel has a red dye added which allows the authorities to detect if the fuel is being used illegally in road-going vehicles.

With large savings made using red diesel illegally and such a profitable trade, an alarming number of operations have developed methods to avoid detection. These include scammers purchasing cheap rebated red diesel and removing the dye to sell it on to blissfully unaware drivers as regular diesel.

Why does fuel have duty added to it?

Fuel duty is added to all fuels in order to help the government raise the funds it needs to run the country – it is the money used for our schools, police, hospitals and much more besides.

Mark Andrews, director, Crown Oil, explained the significance of fuel duties: “Fuel fraud of all kinds denies the Government the vital revenue required for the ever-important tasks we take for granted, ultimately costing the whole country money. If you think this is a victimless crime, think again.”

“More than this, fuel fraud operations such as red diesel dye removal operations are hazardous to the environment as they don’t adhere to the stringent regulations that suppliers and fuel users work so hard to keep to. By recklessly introducing illicit fuel into the market, these scammers are putting customers at risk of using potentially dangerous fuels in their engines and at the same time run a fire or explosion hazard in their pirate operation,” Mark added.

“The duty we pay in our road fuels might seem pricey, but like all other taxes, it is applied in order to fund vital services such as: pensions, the NHS, welfare, education, policing and defence, all of which are pillars of Britain’s society. Not paying fuel tax would simply result in other taxes being increased in order to raise the necessary revenues to run the country,” he concluded.

According to HMRC’s Freedom of Information response, “HMRC conducts a wide range of activities to detect, disrupt and deter the supply and use of illicit fuel across the United Kingdom. HMRC is taking an increasingly data-driven, risk-based approach to tackling all noncompliance, placing greater emphasis on testing compliance further up the supply chain. For example, at retail and storage sites, where we can deliver a greater deterrent and enforcement impact.”

What is the penalty for fuel fraud?

When red diesel is bought by those who want to use it in their vehicles, this fuel fraud is subject to a fine of £250. [3]

For career fuel criminals, a £250 fine in the instance of a random check is a measly sum to pay when drivers use hundreds of litres of diesel a week on their journeys.

However, if your conduct involves dishonesty (i.e. if you are found to knowingly use or sell rebated fuels for road use), a penalty of up to 100% of the duty evaded may be imposed, which will hit large-scale fraudsters hard.

Fuel fraud national statistics

The data provided by HMRC shows that since 2016, there have been 5,821 detections of fuel fraud offences nationally – and although the number is decreasing, in the 2018-2019 financial year, 1,454 instances of fuel fraud were recorded. Since the latest financial year began in April, there have already been 479 instances of fuel frauds. Of these, 4,495 (77%) were vehicles found using illicit fuel.

The figures below, in addition to vehicle detections, include those at commercial premises where fuel is supplied and stored, and illicit sites such as fuel laundering plants.

The below table shows the number of instances where vehicles were caught using illicit fuel (not just red diesel).

Red diesel dye removal operations

Fuel laundering, or red diesel dye removal, is a particularly costly form of fuel fraud, even if relatively rare – with 37 operations detected since 2016. In these operations, scammers attempt to remove the dye and sell it on to unsuspecting drivers, who are completely unaware that  they are putting harmful fuel in their engine and breaking the law

In recent cases that have been caught out, the scammers have had to repay as much as £6.5 million [4] and £520,000 in duty they conned from the government. [5]

Steve Tracey, Assistant Director, Fraud Investigation Service, HMRC, said:

“We remain alert to the often dangerous methods criminals use attempting to remove the government markers from rebated fuel and will continue to work with our multi-agency partners to tackle this crime, one we are determined to detect and disrupt.

“Given that laundering plants have been found close to homes and retail sites they have always posed a serious risk to the public. Fuel launderers abandon harmful waste and transport fuel in vehicles that are unfit for purpose and unsafe. We believe criminals are now experimenting with processes that carry a risk of explosion as they seek to defeat fuel markers and I would urge anyone with information about this extremely dangerous activity to report it to HMRC.”

If you suspect a location of running an illicit fuel operation, contact HMRC online or call the HMRC Fraud Hotline 0800 788 887 to report the fuel fraud.

Sources:
[1] Gov.uk – Measuring tax gaps
[2] Gov.uk – Excise duty hydrocarbon oils rates
[3] Gov.uk – Excise notice 75 fuel for road vehicles
[4] Mynewsdesk.com – Two arrests in fuel fraud raid [Archived Article]*
[5] Mynewsdesk.com – West Yorkshire fuel fraudster jailed [Archived Article]

* Both the live and archived links stopped working – https://web.archive.org/web/20221129081840/https://www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/pressreleases/two-arrests-in-fuel-fraud-raid-2823450