Clause 6
Finance Bill
10:00 am
Brooks Newmark (Braintree, Conservative)
As always, I turn to the explanatory notes when considering clauses. Paragraphs 4 and 5, which are in the background note section, are important because they show the thrust of the Government’s objective, and I shall reflect on them later when questioning the Minister.
The background note begins by saying:
“Keeping tobacco prices high is one of a number of measures set out in the Government White Paper on tobacco, Smoking Kills, intended to help existing smokers quit the habit”.
The Government are seeking, in part at least, to change behaviour. I appreciate that there are other ways of trying to change behaviour, but clearly this is a linchpin in changing behaviour. The background note continues:
“Research has consistently shown that the price of cigarettes affects demand. Cigarette prices in the UK are now at historically high levels.”
That goes back to the Minister’s discussion with my hon. Friend the Member for Windsor about price elasticity, what that does and how it impacts on demand. In normal cases I would agree that a higher price has an impact on demand. Unfortunately, it does not take into account—I shall go into this later—the increase in the illicit trade of cigarettes, particularly hand-rolled cigarettes. I want to probe a little further the assumptions about changing behaviour, price elasticity and the impact on the increase in supply of illicit tobacco.
I begin by noting that despite consistent increases in tobacco duty, revenue has been broadly flat for the past few years, given that the out-turn in 2002-03 was the same as the projection for 2007-08. Table C8 onpage 281 of the Red Book shows that tobacco duties were £8 billion in 2005-06 and £8.1 billion in 2006-07, and are projected to be £8.1 billion in 2007-08, so the increase has been relatively flat.
If duty rates are indexed to maintain the real price of tobacco, does the Treasury attribute the real-terms decline in receipts to there being fewer smokers or more cunning smugglers? Is the purpose of tobacco duty to raise revenue or to change behaviour, or a bit of both?
There are mixed messages here, as elsewhere. The Government say that smoking kills half of all smokers. Organised criminal gangs who smuggle tobacco provide a cheap and unregulated supply, which undermines the Government’s policy of using tax to maintain the high price of tobacco and to help to reduce smoking, especially among the young. That implies that the illicit trade has a measurable impact on public health. Is the Government’s anti-smuggling strategy focused on improving public health or safeguarding revenue, and what is their priority? Increasing tax has the potential to stimulate illicit trade and to provide better access for youngsters to indulge in tobacco products; hence the two objectives seem to be slightly contradictory.
The growth area in the illicit tobacco trade is in counterfeiting, which has both revenue and public health consequences. Last year, HMRC and the Treasury published findings that between 85 per cent. and 100 per cent. of cheap cigarettes sold in London were counterfeit. What is the latest estimate of the impact of counterfeiting on both public health and revenue? I shall be interested to hear whether the Minister has done some homework on that.
Last year, HMRC and the Treasury published a document with the tongue-twisting title, “New responses to new challenges—Reinforcing the Tackling Tobacco Smuggling Strategy”. Given that the Government admit that smugglers constantly change their strategy to avoid anti-avoidance measures, can the Minister offer the Committee an update on HMRC’s evolving strategy one year on?
HMRC goes on to argue that illicit market share is falling, although it admits to a statistical uncertainty, and it has moved to a definition of the illicit market based on a range between upper and lower estimates. That range, I read, is between 10 per cent. and 19 per cent. for 2004-05. Is the Treasury satisfied that data from consumer surveys and estimates with a spread of 9 per cent. are adequate for revenue forecasting purposes?
The Comptroller and Auditor General has to audit the tobacco duty revenue forecast based on data on the illicit market share dating from 2003-04 because of a lack of more recent firm data. I believe that that was outlined in the Budget 2007. The revised National Audit Office audited assumption assumes that the underlying duty paid on cigarettes will be 3 per cent. lower than the estimated out-turn for the current year. Again, I want to ask the Minister whether the Treasury is confident that no further downward revision of revenue forecast will be necessary.
In March 2006, the HMRC-Treasury paper admitted:
“Tobacco smuggling costs £2.9bn per year in lost revenue—the equivalent to 1p off the basic rate of income tax”.
That is equivalent to 35 per cent. of tobacco tax receipts; I get that number mathematically by 2.9 billion divided over 8.1 billion. How does that compare with HMRC’s estimate of the illicit market share as being between 10 per cent. and 19 per cent.? Would the cost of lost revenue as a percentage of total receipts not be a more useful way of judging the scale of the problem?
Is HMRC on track to meet the target for reducing the illicit market share to 13 per cent. by 2007-08, as outlined by the Government? This year’s Finance Bill contains plenty of anti-avoidance measures to protect receipts in other areas. Did Treasury officials consider the case for further legislation to tackle tobacco smuggling? Would tighter border controls help to tackle tobacco tax evasion? Would the reclaimed tobacco revenue not go some way towards paying for the new border police force suggested by the Leader of the Opposition, among others?
I read in HMRC’s report of 2005-06 that one in four cigarettes smoked in Britain is hand rolled, yet half of the hand-rolling tobacco used in the UK is thought to be illicit, costing £880 million in lost revenue in 2003-04. In fact, the major example of tax-motivated behaviour change has been the doubling of the number of those using hand-rolling tobacco since 1990. Given the continued growth in the market for hand-rolling tobacco and the level of tax evasion associated with it, is that the right kind of behaviour change for the Government to encourage?
Imperial Tobacco has said that its experience of a smoking ban in Scotland, introduced just a year ago, and the experience in other markets, such as Ireland, confirms its view that smokers will continue to smoke. Any initial dip in consumption diminishes over time. Does the Treasury concur with that assessment and how did it reach its revised forecast that the ban would lead to a loss of revenue of just £100 million in 2007-08 and £500 million in 2008-09? Finally, is it anticipated that further revisions to the projection will be necessary?