Clause 12
Finance Bill
2:30 pm
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
May I begin by welcoming you back to the Chair, Mr. Atkinson?
Clause 12 relates to the levels of tobacco duty, which are superficially not particularly controversial. We do not oppose the increases in duty. However, a number of questions need to be asked about the Government’s approach to the structure of tobacco duty andI hope the Minister will provide some answers in her response. The effect of duty increases on illegal supplies is also a concern, particularly if sterling recovers ground against the euro.
For those less familiar with the structure of tobacco duty, I will briefly run through it—partly because it is more complicated than one might initially expect. I was a smoker for some years and used to await the announcement of the Budget and the number of pence it put on a packet of cigarettes. I imagined that the way it was arrived at was very simplistic; it is actually quite complicated.
There are two specific parts to tobacco duty. The first is called a specific duty, which is a set amount of duty. It translates into duty on a per-packet basis, but is assessed on a number of pounds per 1,000 cigarettes. As we see in clause 12, that is to rise to £114.31 per 1,000 cigarettes, up from £112.07 prior to 22 April. That is a rise of two per cent., which translates to the average packet of cigarettes—an interesting concept that I will come back to—to approximately £2.29 of specific duty.
Added to that is the ad valorem element, which is a percentage of the total price of the retail price of a packet of cigarettes. That was increased in the pre-Budget report from 22 per cent. to 24 per cent. That is important for our considerations, because that percentage is calculated after that has been applied to a packet.
As with the alcohol duties that we debated a couple of weeks ago, the context of clause 12 is last November’s pre-Budget report and the Government’s late-in-the-day efforts to offset the revenue they were going to lose through the cut in VAT by increasing tobacco duties. In the case of tobacco, it raised the ad valorem element of the duty on cigarettes by 2 per cent. to a total of 24 per cent.
The two figures were designed to be roughly equivalent, with the fall in VAT and the rise in ad valorem more or less offsetting each other when fed through to a change in the retail price of a packet of cigarettes. The pre-Budget report left the specific fix element of the duty unaltered and that change corresponded quite well to the VAT loss. However, like the alcohol duties when VAT returns to 17.5 per cent. in January 2010, there will be some important and significant effects on the overall pricing level of cigarettes.
It corresponded with the pre-Budget report because the ad valorem duty, as I have explained, is a proportional tax on the retail price of cigarettes. However, it has a unique feature: because it is a tax on the price of a packet of cigarettes, including the margin for the specific duty under VAT, this is a tax that taxes tax. In other words, the percentage of ad valorem is applied to VAT and other charges. There is therefore a consequent multiplier effect on the amount of tax paid as the cost of a packet of cigarettes increases.
That might seem esoteric, and perhaps not particularly relevant, but it has important consequences for the market price of a packet of cigarettes: the ad valorem duty widens the differential between the tax on cheaper brands and the tax on premium brands. That was true, of course, well before the pre-Budget report came along. The price gap between the cheapest cigarettes and premium brands, such as Marlboro or Rothmans, has increased from less than a pound to nearly two pounds in the last six years—a considerable change so far this decade.
The increasing element to the ad valorem tax has incentivised the new super low-priced brands that have either been around for many years, or those that have entered or re-entered the market, such as Pall Mall.