Landfill Tax Fraud

David Davis Excerpts

Thursday 12th January 2023 Commons Chamber

[Mr David Davis (Haltemprice and Howden) (Con)]

As we have come to expect, the right hon. Member for North Durham (Mr Jones) made a wise, insightful and pretty comprehensive speech. He is right to say that we have both struggled, over more than a decade, to get the Government and their agencies to take this issue seriously. He has covered ground thoroughly, but let me see if I can reinforce his points without too much repetition.

The right hon. Gentleman spoke of the Public Accounts Committee’s estimate of the near billion-pound cost to the Exchequer each year—he quite rightly referred to it as a finger-in-the-ear exercise. I have been a PAC Chairman, and I know how that sometimes happens. That is an under-estimate. We have signals all over the place of how big this really is. Last weekend’s Sunday Express said that £200 million in landfill tax had gone uncollected in 2019-20 alone—that is, again, an under-estimate, even in HMRC’s own figures.

The right hon. Gentleman said pretty plainly—and I agree—that HMRC does not want to big up this issue and make a big thing out of it, but it admits that at least £850 million has not been collected in five years. It has gone straight into the pockets of some of our most dangerous criminals. If £1 billion was not collected from, let us say, the bankers, legal people or some other such group, there would be uproar. But here, it is not being collected from criminals, and the matter just goes by.

The right hon. Gentleman made the point about the money being funnelled into criminal enterprises, and he was quite measured in his language. He referred to the type of criminals we are talking about—the Niramax directors and associate directors, one of whom, as he said, was jailed for 15 years for manslaughter. Frankly, I was quite surprised that the charge was not murder, because it was a man behaving in a random way over a personal argument and deciding to kill the other person who was involved. That is the sort of character we are talking about. An associate director went to prison first for a machete attack and then later on for drugs. That reinforces the point that the right hon. Gentleman made about drugs, prostitution and all the nasty underbelly of society—all the nasty criminal activity—being funded and supported by the problem we are talking about. We need to bear in mind more generally when we discuss waste crime that these are not just small-time wheelers and dealers. They are not the Harold Steptoes of today; they are very big wheels, in criminal terms, and very nasty people indeed.

Waste crime has blighted many of our constituencies—it has certainly blighted Haltemprice and Howden—for many years. That is where the concern first came from in my case, as I think it did in most others. Some time ago, in the middle of battles over the Gilberdyke site in my constituency, one of the sites that Niramax has an interest in, someone from south-west England involved in legitimate waste disposal asked to see me. Since it was such a big and recurrent issue, I said, “Yes, okay, come to see me.” He came to my home and, in essence, told me that the north-east of England was rife with waste crime and was known for it. That was what he argued to me. He did not know whether it was an accident of history or whether it was because the Environment Agency was somehow corrupt or involved, or for whatever reason not doing its job.

That was five years or more ago. To be frank, the story was so extraordinary that I thought it was an exaggeration. I am sorry to say that I was wrong. That person was describing pretty accurately what we have discovered in our joint endeavours over time. For too long, the Environment Agency has not been meeting its legal and community obligations, and HMRC has not been enforcing its. I must be clear that not all operators in the waste industry are criminal enterprises—that is anything but the case—but the clear inaction of our agencies has emboldened the dangerous individuals that do run such criminal enterprises.

[Mr Kevan Jones]

I agree with the right hon. Gentleman that not all operators involved in the sector are criminals, but there is evidence that in some cases—that of Niramax and others—contracts were procured by using threats and intimidation after people had signed up to contracts to freeze out legitimate operators and lock in people who were perpetrating waste crime.

[Mr David Davis]

The right hon. Gentleman is right, and I will come back to the incentives—both criminal and legal—that are built in against legal operators.

The right hon. Gentleman also spoke about the powerlessness of communities. Again, I can exemplify that point. We thought we had scored a victory by taking the Niramax associate Transwaste to court over the Gilberdyke site and winning our case that it had breached a whole load of conditions. We won the case, but did my constituents see any improvements? No. Were the problems addressed in court fixed or enforced by the agencies? No. Did the behaviour of the operators improve? No. The courts proved powerless and so the community certainly felt powerless, again because there was no proper enforcement. That goes back to the point that the right hon. Gentleman made in response to the hon. Member for Bristol East (Kerry McCarthy) that this is not primarily about changing the regulations or the law, but about changing the mode of operation of the agencies involved.

Precisely because they cheat and evade payment of landfill tax, criminal companies can undercut other businesses, picking up waste and charging a pittance for it, knowing they will make up for it in illegal returns. In the case of Gilberdyke, locals reported that lorries were flooding the area from Wembley, south Wales, south-west Scotland and Manchester. It is expensive to transport this stuff. Why would it be transported that far unless there were some enormous unfair—not to mention illegal—advantage for the operators? That is what is going on there.

Some of my constituents who are very qualified people monitored that site and estimated that between £50 million and £60 million in landfill tax was being evaded while those lorries were flooding the area. That is at one site alone. This activity involves the destruction of my constituents’ quality of life and the destruction of the local environment, all in pursuit of illegal profits, yet so little action is being taken.

The right hon. Member for North Durham quoted the Public Accounts Committee saying about the Department for Environment, Food and Rural Affairs in October last year that

“the approach to large parts of waste crime is closer to decriminalisation.”

I make the point, as a past Chairman of the PAC, that the PAC is careful about what it says about Government operations. It is careful that it is factually based, and it bases everything on the National Audit Office reports and so on. For the PAC to accuse an agency or Department of effectively decriminalising something as serious as this is in itself an enormously powerful and worrying statement. That quote will strike a chord with those of us who have had to observe the appalling weak record of enforcement of the Environment Agency, even with legal operators, frankly. We are not talking about legal operators today, but even with legal operators, the Environment Agency is weak, let alone those who need to be cracked down on. That fact, again, is reinforced by the data. The number of prosecutions for waste crime generally—not tax evasion, but waste crime generally—have fallen by more than 90% since 2007-08. As the right hon. Gentleman said, there have been no prosecutions whatever for landfill tax fraud.

With Operation Nosedive—like the right hon. Gentleman, I wondered about the name, where it came from, and whether it was making a prediction about its own success—I have to say that its failure was written in from the beginning. It was a failure from the start. HMRC, the Environment Agency and the Crown Prosecution Service were simply not working together properly to investigate and prosecute the gangsters. They simply were not doing the job as a coherent group of people. The NAO told me that HMRC and the CPS admitted as much, and that is why no prosecutions were taken forward. The problem is that this failure and the ongoing increases in the rate of landfill tax mean that illegal profits are only increasing. Given how landfill tax is structured, if evasion is not stopped, then every time landfill tax goes up to improve the environment, the criminal is actually incentivised more by a bigger comparative advantage against the legitimate operators.

[Aaron Bell]

The story of Niramax seems to foreshadow much of my experience in Newcastle. The Minister will appreciate, as an economist, that Gresham’s law says that bad money drives out good, and is that not exactly what is happening in the waste sector? Legitimate firms are being driven out of the sector, with the result that more and more criminals are acting in the sector, making it harder for people to dispose of their waste legitimately, even if they want to.

[Mr Davis]

That is absolutely correct. I am sure Gresham did not have in mind blackmail and threats as well, which also come into it when the operation becomes criminal rather than legal. The joint failure of HMRC and the Environment Agency led to theft from the public purse—it is as simple as that—the devastation of public spaces, and the undermining of public confidence in this whole policy area. Ostensibly, the issue is that HMRC is focused on the collection of tax, while the Environment Agency is following a remit to manage waste. That is the excuse given, if you like. Frankly, it is extraordinary that the Environment Agency would not collect data on a tax designed to incentivise good waste operation. That is its purpose, so why on earth is the Environment Agency not monitoring that carefully? If it is not working, it is a failure of its own remit.

[Kerry McCarthy]

I am finding what the right hon. Gentleman has to say very interesting. In the past, I have asked questions about the Environment Agency’s role. It is meant to have a role in enforcing the waste hierarchy, in which things going to landfill should be at the bottom. The Environment Agency should be incentivising recycling, reuse or not creating waste in the first place. Does he agree that we need a fundamental overhaul so that the Environment Agency is properly resourced and there are incentives and disincentives so that the waste hierarchy is proper observed?

[Mr Davis]

I agree with the aims the hon. Lady describes, but I am not sure whether this is a resource issue for the Environment Agency—I think there is a resource issue in other areas. If the Environment Agency does its job right first time, that is it dealt with. To bring it down to the microcosm of a single waste tip, if it does not enforce the first, second or third complaint, it will have hundreds and thousands of complaints, and its time will be sucked into dealing with them. To some extent there may be a resource issue, but a bigger issue is, straightforwardly, to do with management and the determination to make the industry obey the rules and to spot such things as tax evasion. If tax evasion takes place, the whole structure she describes disappears. The cheap operator who is not paying taxes gets all the business, and therefore nothing is pushed to a better waste outcome. I take her point, but in many ways management is more important.

[Mr Kevan Jones]

On that point, does the right hon. Gentleman agree that the big disconnect is between the policy that everyone wants to support—more recycling—and not only how it is enforced but how it is monitored? The best example is Scotland’s zero waste strategy. It sounds great, but waste is being shipped across the border to the north-east of England and other sites in the UK, and there is no monitoring of that. Exporting waste from Scotland to landfill sites in the rest of the UK will not meet the environmental standards that the policy aims to achieve.

[Mr Davis]

I agree. Exporting from Scotland to England will not help at all, so the right hon. Gentleman is exactly right.

We have a ridiculous co-ordination problem in the midst of all this. The NAO told me that Operation Nosedive failed for a variety of reasons, but ultimately it was felt that defence lawyers for the criminals would be able to exploit all the weaknesses of co-ordination and data in the system. Frankly, it is galling that criminal charges could have been held back by the bureaucracy and box-ticking approach of Government Departments effectively, which were stepping on each other’s toes rather than working together.

Waste crime and landfill tax fraud are cheating the taxpayer out of hundreds of millions of pounds a year, and it is time we got serious about that. Thanks to the NAO, we know that every single year, waste crime in general costs £900 million—the PAC said £1 billion—which is a very, very large number. We should not lose track of the fact that that is an annual cost. And that is without, as it turns out, the costs in Scotland, Wales and Northern Ireland. We do not have the hon. Member for Strangford (Jim Shannon) in his place to raise a point about Northern Ireland, but there are costs there, too. In the current climate, I can only imagine the uproar if that occurred in any other situation.

The right hon. Member for North Durham touched on the importance of HMRC’s joint unit for waste crime. The Government would like to claim it has been a success—indeed, after the first year they said it was a success—but I have to tell Members that I cannot see a single sign of success. It is shameful, frankly. This is where I agree with the hon. Member for Bristol East (Kerry McCarthy) that this is a resource issue. We absolutely need to ensure that, unlike at HMRC before, there is the right legal advice at every stage, the right data at every stage and the right investigative capability at every stage, so that, rather than saving £10,000 here and £10,000 there only to lose £3.5 million on a failed case or £1 billion a year on the system as it is, we actually deal with the issue. The current strategy is penny wise and pound foolish, and in that respect she and I agree.

[Matt Rodda (Reading East) (Lab)]

The right hon. Gentleman is making an excellent speech. Does he agree that the same principle applies—on a much smaller scale, admittedly—to local authorities, which are often inundated with nuisance fly-tipping? I realise that that is on a different scale to the issues he is describing, but it can nevertheless be very distressing for residents and small businesses across many parts of England.

[Mr Davis]

The hon. Gentleman is right. There is almost a generic problem with local authorities. They very often face problems that look intimidatingly large to them, and the temptation always is to penny-pinch—to spend just a little money to see if they can stop it. They fail, and the problem invariably grows. We see that time and again, particularly in this area. This is a separate issue really, but concerns about fly-tipping among the public are as great as they are about waste crime in general. The hon. Gentleman is dead right. My advice to local authorities is always to try and nip it in the bud, because if they are seen as a weak responder, the crime will come to them. That is what will happen.

[Matt Rodda]

I was not seeking to be overly critical of local authorities. I was trying to illustrate the wider point about the Government’s funding of them and some of their powers. We have had an issue with waste on many plots of land in the areas that I represent. Some of that is deposited by people just passing through. The powers seem to be a real challenge for local authorities. Perhaps he will say something about that.

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[Mr Davis]

The hon. Gentleman is reaching beyond my level of expertise, frankly. My view is that this clearly is a systemic problem. There is either a funding shortage or a power or capability shortage. One or the other needs to be corrected, because the current system is not working. Anyone who lives in a rural area will see that we are dealing with a permanent nightmare—a running sore. I agree with the hon. Gentleman about its being systemic.

To come back to the waste crime issue, there is not just lack of funding or joined-up Government, but a lack of understanding of the problem. The NAO found that DEFRA and the Environment Agency are simply not collecting the data. They need to fully realise the extent of waste crime across the board. The NAO said:

“the waste crime data they currently collect do not give an accurate picture of actual incidence of waste crime because of under-reporting”.

That comes back to the finger-in-the-air guess of £1 billion. It is obviously bigger than that because the issues are being undermeasured. I cannot see how our agencies can get a grip of the problem if they do not even measure the size of it.

When I told one of my constituents about this debate, he told me how little faith he has in the Environment Agency. Frankly, I share his concerns. Before I came into the Chamber, I was sitting outside talking to colleagues. Four colleagues in a row said, “Yes, we have the same problem.” They are not here now, as they are off back to their constituencies, but they all have the same systemic problem that comes back time and again.

For too long, waste crime has gone unnoticed by Environment Agency officers. That begs the question, what is going on? Are they indolent? Are they incompetent? Are they involved? Are they being bribed? No. The simple truth is that they do not have the tools they need to do the job. We have created a system where our agencies are prevented from acting for fear of that action making the problem worse. If they want to take action on a company, they are terrified that they will bankrupt it and suddenly the taxpayer will be left funding the clean-up. There will either not be a clean-up or they will have to find millions upon millions of pounds. None of that needs to happen.

In summary, what we need is for the warrants, or the reserves required on the balance sheets of new waste operators, to be big enough to cover the cost of a clean- up in the event that they go bankrupt. Whether that is an insurance system, a reserve system or a warranty system, I do not know, but it has to be something like 10 times as big as what we currently have. The new joint waste crime unit needs dedicated funding from central Government of sufficient size.

We have a perfect environment. We have had the failure of Nosedive. We can see all the points of failure: unusually for HMRC, they are identified in the public domain, so we can design what is required for the joint unit. We need the Environment Agency to get out on the ground and collect the data it needs to help HMRC prosecute these gangsters. We need to ensure that they all get proper legal advice. One of the reasons Nosedive failed was that, if I remember correctly, three different lawyers were given to them by the Crown Prosecution Service over time. Eventually, when they hired a private lawyer, they got proper advice and decided they could not pursue it. That is saving tens of thousands to lose £3.5 million and to lose billions—it is penny wise and pound foolish. If the Government think this costs too much, they should just think of the consequences of failure.

I appreciate that the Minister will not be able to give instant answers today, but I ask him to go back to his Department and simply ask, why not? The right hon. Member for North Durham and I have proposed a variety of measures that will pay for themselves 1,000 times over, so why not take the action necessary? Why not save the taxpayer money and, most importantly of all, save our constituents from the disasters these people visit on us?

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[Aaron Bell]

The right hon. Gentleman is absolutely right. With illegal landfill sites in particular, we can almost rely on there being a suspicious arson attack. Getting the fire services involved is often the quickest way to get these problems resolved, because operators know that they and not the Environment Agency will ultimately be the ones involved in cleaning up. My constituency also has a notorious illegal waste dump at Doddlespool farm; I do not want to detain the House for too long, but we have seen all these things going on, with all sorts of impacts on the environment from vermin and all the rest of it.

Fly-tipping is forecast to have probably the greatest overall financial impact, although it is very difficult to get the numbers. The national tax gap for HMRC overall is estimated at 5.1%, but the landfill tax gap was 17.1% in 2020-21 and in previous years it has been more than 20%. That is equivalent to £125 million, which is only a part of the overall billion-pound estimate of the cost of waste crime. That does not even really take into account the cost of fly-tipping; it is about tax that should have been collected but has not. Things that are completely illegal fall somewhat outside the tax gap calculations, as I understand it.

[Mr David Davis]

My hon. Friend has talked of perverse incentives. As far as I am aware—and, as I have said, I served as Chairman of the Public Accounts Committee for five years—this is the clearest example of a strong incentive for good policy turning into a strong perverse incentive against that good policy, off the back of enforcement. When the Treasury assesses how much it puts into enforcement, ought it not to take that full spectrum of effect into account?

[Aaron Bell]

I could not agree more. I cannot remember who it was who mentioned the Environment Agency earlier, but there has been a cultural problem with enforcement, and I should like to see HMRC step up and assist. There is a long tradition of the taxman being the man who catches perpetrators of organised and serious crime in the end, but it is not happening with waste crime. I shall say more about that later.

In a statement to the House on the 18th report of the Public Accounts Committee, my hon. Friend the Member for The Cotswolds (Sir Geoffrey Clifton-Brown) said that Jim Harra had assured the Committee that the tax gap was so large because the scope of landfill tax had been widened to include illegal waste sites. However, if fly-tipping were taken into account, it might be even larger. The summary of the report stated:

“Waste crime is known to be greatly under-reported, so the true scale and impact of the problem are even larger than official data suggest.”

As my right hon. Friend the Member for Haltemprice and Howden just pointed out, that is just the financial cost; we are not remotely taking into account the cost in terms of the impact on people’s quality of life. Perhaps if we do get a class action lawsuit, some financial numbers will be attributed to that in Newcastle-under-Lyme.

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[James Cartlidge]

As I understand it, the figure is public—[Hon. Members: “It is now!”]—following robust campaigning by colleagues present in the Chamber.

Turning to the linked point about decriminalisation, I emphasise that most of HMRC’s work to tackle fraud makes use of civil powers. HMRC does use criminal powers selectively to focus on criminal investigations at the top end of the highest harm and the most complex organised crime and serious fraud. Just to underline that, in 2021 HMRC closed 700 illegal waste sites, including 200 high-risk sites—I say HMRC, but it might have involved the Environment Agency as well. Significant action was taken, but it was primarily civil in nature.

My hon. Friend the Member for Newcastle-under-Lyme continues to raise Walleys Quarry—

[Mr David Davis]

Will the Minister give way before he moves on?

[James Cartlidge]

I am now on Walleys Quarry, so I will stick with that. My hon. Friend the Member for Newcastle-under-Lyme will have anticipated that I cannot comment on ongoing investigations, but I can confirm that, as I understand it, the Environment Agency continues to regulate the operator closely and to consider appropriate action, in accordance with its enforcement and sanctions policy. While it sounds like there has been some progress, my hon. Friend is being a stalwart constituency MP and is a credit to his constituents. It is difficult for Ministers to go into the data at the Dispatch Box. He made points about the mental health impact and so on, and I sympathise with those who have experienced the impact at first hand.

I will now give way to my right hon. Friend.

[Mr Davis]

In a way, the Minister’s comments on Walleys Quarry reinforce the point. He says it is a difficult area to enforce in tax terms. I do not actually agree. I think a great deal more could have been done on the ground with Operation Nosedive in terms of physical investigation. Such things would not normally be undertaken, but that should have happened for something as big as this.

I reiterate the point I made earlier to my hon. Friend the Member for Newcastle-under-Lyme (Aaron Bell). The costs of the failure to enforce are financially enormous and socially disastrous, and serve to completely invert the purpose of the policy. The hon. Member for Cambridge (Daniel Zeichner) quoted the industry association and talked about an environmental catastrophe waiting to happen. No, it is an environmental catastrophe waiting to be discovered, because much of it lies underground in our constituencies. This is an area where a huge amount of resource is at play, and a huge amount of effort should be put into dealing with it.

[James Cartlidge]

I understand where my right hon. Friend is coming from. Speaking generally about all these cases and issues—I will go through all the points that have been raised as best I can, because he also talked about joint working and co-ordination—there is point of principle that we have to accept. We have a tax with a rate that incentivises a behaviour that is a positive policy goal, and that has been achieved to an extraordinary degree in the substantial reduction in waste going to landfill. Precisely because of that mechanism of a financial disincentive, there are some rogue actors—there will always be some—who want to take advantage.

All right hon. and hon. Members raised the point about data. I can confirm that the Government are committed to publishing an annual framework of indicators to track progress towards the objectives set out in the resource and waste strategy, including indicators of illegal waste sites, fly-tipping and littering.

The right hon. Member for North Durham and my hon. Friend the Member for Newcastle-under-Lyme both made points about what constitutes a fit and proper person. DEFRA recently consulted on reforms to the carrier, broker, dealer regime, and those transporting or making decisions about waste must demonstrate that they are competent to make those decisions. DEFRA anticipates phased implementation of the reforms from 2023-24.