John FitzGerald: Soft borders will mean open season for smugglers

Among the arcane provisions of the Common Agricultural Policy in the 1980s were subsidies paid on exports of agricultural produce, such as cattle, to compensate farmers for fluctuations in exchange rates.

At the time the porous Irish Border facilitated a fraudulent business in over-claiming these subsidies. If a truckload of cattle crossed the Border into Northern Ireland, it could claim subsidies. The lorry could then return south by an unapproved road, re-enter the North, and reclaim a repeat subsidy for the same cows.

Because cattle then did not have passports (they do now), there was no way of checking whether it was their first time entering the UK. By repeating this “carousel” process many times, smugglers could amass a tidy sum.

The closing of this subsidy regime in 1989 ended this lucrative trade. However, the potential for profit from smuggling on the Border may have whetted criminal appetites for other scams, such as the laundering of diesel.

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Since the beginning of international trade and related import duties, borders between different jurisdictions have provided ample opportunities for illegal activity. By harmonising rules and regulations and eliminating customs duties on internal trade, the EU has minimised the opportunity for fraud on trade across internal EU borders.

However, because the revenue from customs duties on goods imported from outside the EU goes to Brussels and not to national governments, there may be limited incentive for the national authorities policing the collection to do a good job. This has opened the door to new forms of smuggling and tax evasion.

One ingenious fraud perpetrated on a large scale by smugglers in the UK used consignments of mobile phones or computer chips to cheat on VAT. This involved the importation of computer chips or phones VAT-free. The items were then sold on by a shell company to other firms, which were charged VAT.

However, the shell company then disappeared, and the VAT never got paid to the UK authorities. The companies that bought the goods could then re-export them and claim back VAT (which had never been paid) on the export.

Bigger scale

This fraud was on a completely different scale than the cattle carousel on the Louth border. The House of Lords estimated a loss of VAT revenue in 2005 of around £4 billion. The extent of the smuggling was so great that it massively distorted UK trade figures.

The National Institute of Economic and Social Research estimated that, in the first half of 2006, the UK trade associated with this smuggling amounted to £23 billion. Reforms were made to stop this fraud, with more than 1,500 people employed by the UK authorities to try and police this loophole.

Today the UK is accused by the European Commission of lax policing of the EU customs regime on imports from outside the EU. The commission is taking proceedings, claiming that the UK has failed to collect £2.7 billion in duties on imports of textiles and footwear from China.

The EU’s case is that the value declared by importers on these goods is just a fraction of their true value, thus avoiding payment of duties, which may also have facilitated VAT fraud in other member states.

The UK is probably no worse at policing revenue collection than other EU countries, but it may have been better at detecting when the system was being cheated. It could well be that there are similar or bigger tax scams elsewhere that have not yet come to light.

Porous regime

The difficulties experienced by the UK to date in policing the EU's external trade border point to a major problem with Brexit. While the UK has suggested hard borders can be avoided by good documentation, their own recent experience would suggest that such a regime would be highly porous.

Given the difficulties experienced in preventing scams, even with the existing regime of harmonised rules and procedures, a divergence in the rules on either side of the Border would open new opportunities for cross-Border fraud.

The suggestion by some Brexiteers that they would avoid a hard border between the Republic and the UK by ignoring Border formalities is dangerous. That could mean open season for smugglers, and the growth of a rich criminal community to exploit the opportunities created. This would represent a serious security risk to both the UK and to the Republic, particularly given the paramilitary links of many in this trade.

Realistically, the only way to have a soft Border that is not vulnerable to large-scale tax fraud would be if the UK continues in the customs union.