(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 6

Finance Bill – in a Public Bill Committee on 10th May 2007.

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Rates of tobacco products duty

Question proposed [this day],That the clause stand part of the Bill.

Question again proposed.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

Welcome back to the proceedings, Mr. Gale. At the end of the previous sitting, I was about to ask the Financial Secretary what discussions the Government have held with other Governments that already use track-and-trace technology and with third sector organisations in the UK, such as ASH.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

It is a pleasure to see you back in the Chair, Mr. Gale. I want to pursue the point relating to hand-rolled tobacco raised by my hon. Friend the Member for Braintree, particularly with regard to the difference between the duty on hand-rolled tobacco and that on manufactured cigarettes. I have been approached in respect of the matter, as I suspect other members of the Committee have been, by Philip Morris Ltd. Unlike most of its competitors, Philip Morris does not produce any hand-rolled tobacco, although it is a substantial producer of manufactured cigarettes. It has therefore taken an unusual position for a business because it is in favour of higher taxes to equalise the position of hand-rolled tobacco with that of manufactured cigarettes.

The figures that Philip Morris presented to me raise an interesting point. It provided them before the increases in the last Budget, but those changes did not fundamentally change the position. According to the figures, the tax on a packet of 20 manufactured cigarettes was £4.07, whereas the tax on an equivalent amount of hand-rolled tobacco was £2.15. That is clearly a substantial difference, which must be one of the causes of the substantial increase in the use of hand-rolled tobacco as a percentage of overall tobacco use in this country, to which my hon. Friend referred. As he said, the proportion appears to have doubled.

I have seen two sets of Government figures. Both show that in 1990 the use of hand-rolled tobacco represented 11 per cent. of tobacco use. That has increased to either 22 per cent., according to an answer given by the Minister of State, Department of Health, the hon. Member for Don Valley (Caroline Flint), to a written parliamentary question, or 24 per cent., according to the Treasury’s pamphlet “New Responses to New Challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, which was published in March 2006. There is clearly a substantial increase in the relative use of hand-rolled tobacco. It is worth pointing out that in the 16 to 24-year-old age group, the use of such tobacco among males increased from 10 per cent. in 1990 to 25 per cent. in 2005, and from 2 to 12 per cent. among females in the same period.

I assume that those increases are largely driven by the different taxation system. I suspect that the Government have a good reason for having lower taxation for hand-rolled tobacco, namely smuggling. I should be grateful if the Financial Secretary could confirm that.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

To carry on my hon. Friend’s theme, the White Paper “Smoking Kills”, to which I referred, said that the Government’s objectives were to help existing smokers to quit the habit and to help children and young people to avoid becoming addicted in the first place. If, as he suggests, more and more people, particularly children, are using hand-rolled tobacco as an alternative to filtered cigarettes, is not hand-rolling tobacco much more dangerous than filtered cigarettes to the health of children and adults?

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

I am grateful for that intervention. My hon. Friend may well be right; I do not know whether hand-rolled tobacco is essentially more dangerous to people than manufactured cigarettes, but none the less it appears to be a growing market. We come back to the tension that sometimes exists, which my hon. Friend the Member for Windsor explored with regard to alcohol. Sometimes there is tension between raising revenue and discouraging a certain type of behaviour. I believe that the reason why the Government have kept hand-rolled tobacco duties at a lower level is because of the fear of smuggling. As my hon. Friend the Member for Braintree pointed out, something like half the consumption of hand-rolled tobacco is from smuggling sources. It would appear that it is easier to smuggle hand-rolled tobaccos simply because of the way in which it is packaged, and in many other European countries the rates of duty on hand-rolled tobacco, as with ourselves, are somewhat lower than for manufactured cigarettes. In relative and absolute terms, the difference is even greater, so there is a difficulty.

However, there are one or two problems, and I would be grateful if any figures are available to clarify matters. Given the relative increase in the use of hand-rolled tobacco over the last 16 or 17 years or so, what cost to the Treasury has resulted in that increase of use? Going forward, has the Treasury considered, given the different taxation systems that apply, that that relative use may increase even further, thus reducing revenues? I was also struck by the figure quoted by a number of hon. Members that the cost to the Exchequer of  smuggling cigarettes was something like £2.9 billion. Does that figure take into account the fact that the duty on hand-rolled tobacco is kept low, presumably to try to reduce smuggling? I assume that it does not. No criticism is meant by that, but the problem would appear, in some respects, to be worse, given that steps are being taken to reduce it.

The Treasury’s paper on tackling tobacco smuggling refers to how, in 2000, the Government believed that the range of actions taken could be successful in reducing smuggling both of cigarettes and of hand-rolled tobacco. It states:

“However, as HMRC’s knowledge and understanding of the market has improved, it has become clear that the market for smuggling methods for HRT are different from those for cigarettes and different responses are needed.”

Specific policies were announced within that paper, which was produced a year ago, and a specific operational target was set out for hand-rolled tobacco, reducing the size of the UK illicit market by the equivalent of around 20 per cent. by 2007-08. We are now halfway through that period, and I would be grateful if the Financial Secretary could give us some information on what progress has been made.

It is also worth pointing out Sweden has abolished the distinction between the two levels of duty. They have now, in effect, a unified rate, and I do not know whether the Treasury has made any study to see what the consequence of that has been, and whether that has resulted in an increase or decrease in smuggling. As I also mentioned, there is an issue to do with a differential rate throughout the European Union, and I would be grateful to know whether the Government are in discussions with our fellow European countries on that to see whether any thought has been given to a co-ordinated approach to raising duties.

I also give the Financial Secretary an opportunity to scotch one myth, if indeed it is one. The duty on hand-rolled tobacco is lower because traditionally it was seen as being consumed by the poorest sections of society and the Government did not want to impose costs on them. I wonder whether the attitude of the Home Secretary in thinking that tobacco provides some pleasure in an otherwise unpleasurable life in certain sections of society influences Government policy. I am not saying that it does. I should be grateful if the Financial Secretary could confirm that smuggling has caused us to have a rate of duty that appears to encourage more and more people to smoke hand-rolled tobacco. It is one area in which the Government’s anti-smoking policy appears to be failing.

Photo of Colin Breed Colin Breed Shadow Minister, Treasury

We will not oppose the duty increases; indeed, we support them. I want to add to the case made by the hon. Member for Wycombe and others in respect of smuggling and counterfeit products, which make up what can be called the illicit market.

I will come to the obvious aspect of tax losses in a moment, but the duties have two other effects. They undermine one sector of the retail trade—the small-time tobacconists, which have lost a lot of their business to supermarkets. They are also losing out because of smuggled branded and counterfeit products, which still get into the country. Another, subliminal, effect is that it erodes people’s integrity if they find no difficulty in purchasing  cigarettes and tobacco products which they know to be avoiding tax, and think nothing of it. That should not be encouraged, and we need to recognise the effect that it can have on people’s views of citizenship and so on.

On tax losses, the Minister will know that I tabled some questions to him recently which ultimately referred me, very helpfully, to the “Measuring Indirect Tax Losses— 2006” report and, specifically, to tables 3.3 and 3.4, on cigarettes and hand-rolled tobacco. I will not go into the details of individual figures, but the report helpfully provides some mid-point estimates—the figures are obviously not accurate, and guesstimates have to be made.

The mid-point range of the illicit market share in cigarettes has changed from 21 per cent. in 2001 to 14 per cent. 2004-05, the latest year for which figures are available. The underlying estimates of the revenues necessarily have a rather large range: from £2.1 billion to £3.3 billion in 2001 and from £1.2 billion to £2.5 billion in 2004-05. Whatever the mid-points of those figures ultimately turn out to be, they are very significant. The losses on hand-rolling tobacco were estimated to be in the range of £500 million to £850 million in 2000-01 and £680 million to £970 million in 2004-05, which are not insignificant figures.

I hope that the problem of smuggled and counterfeit products, the potential losses of revenue and the other consequences that I mentioned will exercise the minds of the Treasury. The smuggled market in Britain is beginning to be brought under control, but it is still a significant problem. It has been compared with that in countries such as Turkey. It has a market five times the size of the United Kingdom’s and is clearly geographically far more vulnerable, but it has the problem under much tighter control. There is a growing sense that the UK needs to put a solution in place as soon as possible.

Reference has been made to track-and-trace technology, which I understand is a proven solution to the problem of smuggled and counterfeit goods. It is a means of putting a covert marking on to products to enable enforcement orders to determine the point of diversion at which the product enters the illicit market. Voluntary measures, such as the memorandum of understanding, are insufficient on their own. They need strict compliance systems and legally enforceable sanctions if they are to be effective.

So far, the Treasury and Her Majesty’s Revenue and Customs have been unable to provide a sufficiently compelling explanation as to why the UK is the only member state not to have signed up to the agreement with the European Commission, referred to as the Philip Morris agreement. What is the reason?

Let me turn to the counterfeit market, which is becoming a greater problem. By definition, counterfeit goods will not be the same as the branded products. Thus, if there is a health problem in relation to branded tobacco products, there could be an even greater one in relation to counterfeit products that are not manufactured under the conditions that apply to branded products. The issue is substantially more complex than smuggling. However, it is the loss of potential tax revenue that needs to be at the forefront of our thinking today. There  is broad agreement that voluntary arrangements are insufficient; there is a clear need for real protection. Every country that has implemented track-and-trace technology or its equivalent has seen a successful outcome as a direct consequence. In most cases, its introduction has been led by the Ministry of Finance or whatever the equivalent is in the country concerned.

Smuggling and counterfeit are both continuing problems. I note that in the 2006 Budget, the Chancellor published “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, which announced new measures further to strengthen the anti-smuggling strategy, including working with tobacco manufacturers to tighten controls along the supply chain. I shall be interested to learn what results that has produced. What meetings, discussions and agreements have taken place with the manufacturers and what controls have been tightened along the supply chain? The effective remedies probably boil down to three things: effective enforcement, international co-operation and tough penalties. Getting just one right will not do. We need action on all three if we are to stem tax losses and protect what is left of the retail sector of confectioners, tobacconists and newsagents, and the health of people who smoke counterfeit products.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow 1:15 pm, 10th May 2007

It is a pleasure to serve under your chairmanship, Mr. Gale.

As a self-confessed, lifelong anti-smoking crusader, I could not resist the temptation to contribute to this part of the Committee’s proceedings, and to welcome the increases in duty. In my perusal of all the clauses, I have not been able to find any reference to the welcome measure announced in the Red Book of a reduction in the rate of VAT on smoking cessation products. I understand that there will be a reduction from the normal rate to a concessionary rate of 5 per cent., but for only one year from 1 July according to the Red Book. That is welcome, and sets a useful precedent for similar reductions in VAT to encourage good environmental behaviour—I shall come to that on later clauses.

Will the Financial Secretary explain why there is no reference to that reduction in the Bill? In case we do not have a further opportunity to discuss the matter, will he also explain why it will be in place for only one year? That seems perverse, particularly when it has been established through freedom of information requests that almost half of primary care trusts in this country cut their stop-smoking budgets in real terms during the financial year just ended. That VAT measure may provide some modest relief to help to restore the position, and it is an important means of reducing the amount of smoking by encouraging people to take up devices such as nicotine patches to help them to beat the habit, which I am sure we all want to see.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

I want to try to establish again the Treasury’s direction of thought. What is the objective of the changes in duty? We have heard about the balance between smuggling, law and order, and illicit and legitimate cigarettes. Is the objective to stop smuggling—I am sure that the answer is, to a certain degree, yes—or is it revenue raising? We all accept that there is an element of revenue raising, which is understandable, but is there also a health objective to reduce the number of smokers in Britain  by increasing the price and deterring consumption? Is there a demand-reduction goal?

The answer may be that there are three, four, five or six objectives, but if it is a combination of multiple objectives, will the Financial Secretary tell us how his Department deals with the conflict in objectives? To give a hypothetical example, if the anti-smuggling measures worked, all cigarettes were purchased legitimately and duty was being paid, the amount of duty would rise. But if there were a reduction in the amount of duty—this goes back to elasticity of supply—how would he resolve the conflict between raising revenue to the Exchequer by encouraging more smoking and the health objective of reducing the number of smokers? I want to probe the Government’s thinking to find out how that conflict resolution would take place when there are multiple objectives in the clause.

Photo of John Healey John Healey The Financial Secretary to the Treasury

Welcome back to our proceedings, Mr. Gale.

The hon. Member for South-East Cornwall made a reflective contribution. He mentioned a concern that I am well aware of because I see the Tobacco Alliance every year in the run-up to the Budget, but which no one else has mentioned—the impact of smuggling and bootlegging on independent tobacconists and corner shops. I am conscious of how they are profoundly undermined by illegal tobacco and bootleg sales. Nevertheless, part of the pressure on them is a result of our shopping habits and the change in the way we lead our lives. It is not due just to tobacco duty or the level of smuggling.

The hon. Gentleman quoted a number of statistics that we published alongside the pre-Budget report just before Christmas on the level of the illegal market in the UK. The mid-point of the illicit market in 2004-05—he was not certain about this—was 14 per cent., which is down from 21 per cent. four years earlier when we launched our anti-tobacco smuggling strategy. If we had not taken action, it would probably have risen to 36 per cent.

Members are right to question the Government on whether the measures that we are taking are sufficient, whether they are having the necessary impact and how they are working—that applies particularly to the new ones. The hon. Gentleman called for legally enforceable sanctions and tough penalties in voluntary memorandums of understanding with UK tobacco manufacturers. I think that he served on last year’s Finance Bill. It might have slipped his mind, but at that stage we legislated for a framework that gave the Government the ability to raise penalties of up to £5 million on tobacco companies that do not follow the agreements and obligations when controlling their supply chains. I am glad to say that we have not had cause to use those yet, but we will not hesitate to invoke those penalties if necessary. I am sure that he accepts that they could be an important weapon in our armoury.

The hon. Gentleman is right also about counterfeits being a growing problem. According to the latest figures, in 2005-06, 51 per cent. of large-scale seizures made by HMRC were of counterfeits. I continue to believe, and to argue, that the UK’s memorandums of understanding are better than that struck between the EU and Philip Morris, because the latter does not cover counterfeit tobacco and cigarettes.

I shall turn briefly to the point made by the hon. Member for Ludlow. If he is a lifelong anti-smoking crusader, I congratulate him—this must be an important year for him. I am sure that he is pleased at the prospect of the smoking ban in July.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

To clarify, I voted against the smoking ban in public places. I agonised over that decision, as the Minister will understand, because it put into conflict two vital principles—the freedom of the individual and the desire to reduce smoking. I am afraid that the freedom of the individual won out on that occasion.

Photo of John Healey John Healey The Financial Secretary to the Treasury

It is interesting to hear how the hon. Gentleman wrestled with his principles. To rephrase, no doubt he welcomes what everyone anticipates—a reduction in levels of smoking as a result of the ban. Many on the Government Benches supported the measure, even if he did not when it came before the House. The provisions for reducing VAT this year on products that help people to give up smoking and to reinforce and support the ban are not in the Bill because we will introduce them under secondary legislation. Those regulatory powers are in legislation.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I wanted only to make a short quip: the Minister said that hon. Members supported the legislation, but was that before or after they went down to the smoking room?

Photo of John Healey John Healey The Financial Secretary to the Treasury

As they say, some of my best friends are smokers. I know that it will not be easy for them in the coming months.

The hon. Members for Windsor, for Braintree and for South-West Hertfordshire tussled with what is undoubtedly a complex interaction—between duty, demand, revenues and levels of smuggling—and a complex set of considerations when weighing up the situation. The model that we use, which we developed with assistance from independent academic experts and had peer-reviewed by them, was published in December 2004. If the hon. Member for Braintree is interested in receiving a copy, I will ensure that he gets one. It shows that the inflation increase that we propose in this Bill will not increase smuggling, that the prices and duty levels of cigarettes are historically high in the UK and that the cigarette duty rates are close to revenue maximisation point.

The hon. Member for Wycombe kindly quoted my making this case during the consideration of last year’s Finance Bill, so I need not repeat myself. The effect of the measure means that any big rise in the rates of tobacco duty will reduce revenue and increase smuggling, so that is a central consideration for us as we weigh up these duty decisions. He is right to believe that my view and assessment of that has not changed.

Since 2000, the tax on hand-rolling tobacco has been increased by the same rate as the duty on cigarettes. As with cigarettes, our modelling and analysis suggests that a real increase in the duty on hand-rolling tobacco would significantly increase the smuggling problem and undermine our wider Government health objectives.  The duty level on hand-rolling tobacco is higher here than in Sweden, and it is also close to revenue maximisation point.

That is the context in which we considered the duty decisions in the run-up to the Budget in March. The clause would increase the rate of duty on cigarettes, cigars, hand-rolling tobacco and other smoking and chewing tobacco in line with inflation. We are conscious in all this that smoking kills more than 100,000 people a year and is the single greatest cause of preventable early deaths in this country. Therefore, the increase supports the wider Government aim of reducing smoking levels by maintaining the real price of cigarettes.

As a result of the real-terms duty increases both under this Government in previous years and under earlier Governments, tobacco prices in the UK are now at record high levels. The duty decision will maintain that real price and will continue to encourage people to smoke less or to quit. It should also therefore continue to help to discourage children and young people from taking up the habit in the first place, and it sits alongside what I think all members of the Committee might recognise as a significant investment in national health services to support people who are trying to give up smoking.

In 2006, my own area of Rotherham’s stop smoking service saw more than 2,500 people, half of whom quit smoking as a result. As we approach the prospect of the smoking ban—this may also be the experience of other members of the Committee—there have been increasing calls on that service. I hope that it will be able to help an increasing number of people to give up the habit.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury 1:30 pm, 10th May 2007

I am entirely supportive of the comments that the Financial Secretary is making about how the duties are used to support Government policy in helping to cut smoking. I am not sure how they are consistent with the comments that he made about alcohol, especially those relating to particular types of alcohol, such as special brew lagers. Such lagers are clearly linked to people with specific problems. Why does he feel that the same principles that he just explained in relation to tobacco should not and do not apply in specific cases relating to alcohol?

Photo of John Healey John Healey The Financial Secretary to the Treasury

I have two things to say on that. I am sorry that the hon. Lady was not present for this morning’s debate, because it was quite a detailed debate about the elasticities and inelasticities of demand, and how they differ for beer, cigarettes, cars and houses. That is the economic reality. The other fact is that within our beer duty regime we tax according to the strength of beer and lager, so that strong lagers are taxed more heavily than weak ones. So an element of the system of tax on beer and lager already reflects the concerns that she has.

Alongside our duty decisions there is the prospective smoking ban in public places in July, the NHS stop smoking services and the fact that, in October, we shall raise the minimum age at which young people can buy tobacco from 16 to 18. I want to pay tribute in passing, Mr. Gale, to my hon. Friend the Member for Barnsley, East and Mexborough (Jeff Ennis), whose constituency  sits between mine and that of your co-Chairman. He has been one of the leading advocates and campaigners for just such a rise.

We are very conscious when we set the duty levels about the potential impact on smuggling. We are confident that this inflation-only increase will not lead to a rise in smuggling. The impact of the anti-smuggling strategy since we introduced it in 2000 has been quite significant. It first of all stabilised and then drove down the illicit market share. It is clear that we need to do more on hand-rolling tobacco, as we announced in the Budget last year. We are also tightening up the provisions we put in place through the memorandum of understanding and the legislation last year. I was asked specifically about the Philip Morris International agreement. Apart from the fact that that was negotiated between the European Commission and 10 of the member states, as was pointed out to the Committee earlier, in part by dropping legal proceedings against the company in the US, the main strengths of our legislation to control the supply chain contrast with the Philip Morris agreement in various respects.

First, our arrangements apply to all tobacco manufacturers, not just to Philip Morris. Secondly, the Philip Morris agreement excludes any tobacco products on which duty is paid in another member state. Nearly all hand-rolling tobacco in the UK comes from other parts of the EU and has duty paid in those countries, so it would not be touched in this case. Thirdly, unlike in many other member states, Philip Morris has only about a 5 per cent. share of the market in the UK. Fourthly, as I explained to the hon. Member for South-East Cornwall, our penalties can range up to £5 million if companies under our arrangements are not following their obligations. Finally, as I have also pointed out, the Philip Morris agreement does not cover counterfeit tobacco, and counterfeit is clearly a growing problem about which we and manufacturers are concerned.

In relation to questions of track and trace and markets, we announced at the Budget—I hope that members of the Committee will not have missed it, but judging by some of their comments they may have done—that we had reached an agreement with the tobacco manufacturers in this country voluntarily to introduce covert markings on packs of tobacco products. That will enable the counterfeit products to be identified and traced more effectively. I expect those markings to begin to be introduced on packets during the course of the year. The hon. Member for Wycombe asked how we came to that judgment and this agreement. We consulted very widely, including with ASH, the tobacco manufacturers, other countries and potential suppliers of the sort of technology that we were interested in using.

In summary, this is a duty increase that continues our policy of maintaining a high price for cigarettes without hampering our efforts to tackle smuggling. It will help to reduce smoking. It will help to lower the costs associated with smoking. I am glad of the indication from both the Liberals and the Tories that they will not seek to oppose this clause.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.