From funding wars to its final, losing battle: oldest law agency is bowing out

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The curtain came down on Britain's oldest law enforcement agency, steeped in 350 years of colourful history, when Gordon Brown announced the creation of an as-yet-unnamed new, super department for tax collection yesterday.

The merger of the Inland Revenue and Customs & Excise departments will bring vast savings, with10,500 jobs and 3,500 redeployed. But Mr Brown will also hope it can put an end to 10 years of embarrassment for the two outgoing departments.

Customs and Excise can boast proud beginnings, dating back to the Board of Excise set up in 1671 by Charles II to fund battles against the Dutch. The first excise duties on home-produced goods were levied 30 years earlier by Cromwell, to fund his own fight against Charles I. Merger with the Customs department - a band of men practiced in the pursuit of smugglers - did not come until 1909.

But it has been in recent years the Customs service has made most headlines, for the wrong reasons. A series of prosecutions for the evasion of more than £600m duty on alcohol have failed in the past few years amid allegations of misbehaviour by investigators.

The attorney general, Lord Goldsmith, appointed a High Court judge to look into Customs' investigation techniques after the collapse of a prosecution in Liverpool in November 2002, when 15 men accused of evading duty of £84m walked free.

The case was abandoned after a pre-trial hearing in which it was alleged that customs investigators had acted as agents provocateurs and that defence lawyers and the court had not been told that Alfred Allington, the owner of a bonded warehouse, London City Bond, was a "participating informant" who was told to encourage the frauds.

The Liverpool case was followed by the collapse of the trial of three men accused of £500,000 of duty fraud in Glasgow. Then a customs prosecution at Kingston Crown Court failed.

The Office for National Statistics also said last year that it had found extra imports worth 2 per cent of GDP a year because Customs and Excise had not discovered a scam by which mobile phones were being reimported by criminals who were claiming VAT each time. In some cases, the same goods were imported up to 35 times.

Doubts about the efficacy of the Customs service have not been dispelled of late. Only this week, details have emerged of a test case in which the service has been accused of abandoning its appeals tribunals system before seizing the assets of people it claims owe duty. Berg & Co, solicitors for Peter Schroeder, 41, from Newcastle upon Tyne, are awaiting a Court of Appeal verdict against the seizure of his assets.

The Revenue has faced problems of its own. After the review last year which has led to yesterday's merger, the Paymaster General Dawn Primarolo revealed evidence of the sale of Revenue buildings to a company based in a tax haven, problems surrounding the introduction of tax credits and a failure to warn taxpayers that they may need to top up their pension contributions.

The new merged department is expected to be structured, as far as possible, around customers and functions rather than taxes, and to identify economies of scale and scope by developing new national services and reviewing the local office network. The executive chairman of the department, currently being sought by a headhunting agency, has a big job putting the problems right and merging two departments with vastly different cultures. But if it is a success, it could prove to be a masterstroke, providing efficiency and effectiveness - and perhaps consigning the unhappy past to the history books.

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