Clause 23

Finance (No. 2) Bill – in a Public Bill Committee at 7:00 pm on 26 October 2010.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The clause changes section 4 of the Tobacco Products Duty Act 1979 and is designed to change the process for calculating duty on long cigarettes. The changes come into force at on 1 January 2011. Again, I welcome the measure, which was previously introduced by the Labour Government as a technical change to tackle tax avoidance. I have no problems with the clause. I just want to test the Minister on a number of issues.

First, the proposal sets the taxation changes for substitution, to ensure that long cigarettes are 8 cm long, rather than 9 cm, as in the 1979 Act. Further changes set out in paragraph (1)(b) deal with each 3 cm portion of the remainder of a cigarette being taxed at a different rate. Would the Minister give us some idea why he chose those figures? The average length of a cigarette, excluding the filter, is about 6 cm, so why was 8 cm chosen, rather than, say, 7 cm? I accept that there would be a rise in taxation, but why did he choose 8 cm per cigarette? Why have 3 cm on top of the 8 cm, which effectively equates to another cigarette? What criteria did the Treasury use? Why not 2 cm, or 4 cm? Those figures represent material changes and differences on  the tax that could be raised from those who would try to use the length of a cigarette to ensure that they can avoid taxation.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I am listening to the right hon. Gentleman’s argument with interest. Is he saying that cigarettes are notably overtaxed? [ Interruption. ] I declare an interest.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I would be interested to hear what the hon. Gentleman’s interest is. If he is a smoker, the bottom line is that he should give up—[ Interruption. ] Indeed, he should follow the Deputy Prime Minister’s example and try to give up.

The point is that the measure was introduced by the previous Labour Government, and I am pleased that the Minister has taken it up, because we were concerned that people could effectively pay less tax on cigarettes. Once the larger cigarettes are in the country, they could be removed to form other cigarettes, which could then be sold on without tax having been paid. The average length of a cigarette, excluding the filter, is currently around 6 cm. The figure that was used previously was 9 cm, and the Minister has chosen 8 cm. He could have chosen 7 cm, so why did he choose 8 cm? A larger cigarette is in fact larger than the average length of 6 cm, at 7 cm. What was the rationale behind that decision?

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I am slightly confused about what you are trying to drive at here. Are you talking about the taxation for Joe Public going to the shop, or about taxation for wholesalers moving cigarettes around? Your last comment confused me slightly, although that could be my ignorance.

Photo of Martin Caton Martin Caton Labour, Gower

Order. I am not saying anything. You are referring to the right hon. Gentleman who speaks for the Opposition.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I will try to help the hon. Gentleman, as I am sure will the Minister in due course. I am talking about a tax-avoidance measure. People were bringing into the country cigarettes that were longer than the average size of 6 cm. That is a way of avoiding tax, because they could bring in 12 cm cigarettes, cut them in half and effectively have two cigarettes for every one for which they had paid tax. The previous legislation, the Tobacco Products Duty Act 1979, gave the figure of 9 cm, which would equate to two cigarettes, so if someone came in with a cigarette that was 10 cm long, it would be taxed as two cigarettes, rather than one. The Bill will reduce the 9 cm figure to 8 cm. If we are trying to prevent people from bringing in more tobacco and claiming that it is one cigarette when in fact it can be chopped down to make two, what is the rationale for choosing 8 cm, rather than 7 cm, which is an alternative figure?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I put it to the right hon. Gentleman that one of the biggest problems with cigarettes is the tax differential. In the UK they are taxed very highly, but in many places on the continent they are taxed at a  much lower level. That is particularly taxing for my constituents, who man the border valiantly at Dover. Does he agree with me that the border guardians, employed by the UK Border Agency, who do such a great job in trying to stamp out smuggling, should be encouraged in their jobs and that perhaps there should be less of a tax differential, because it incentivises all the dreadful smuggling that goes on?

I have no objection to the tax-avoidance measure, but I would have tested the Minister. I tried to table an amendment, but it was ruled out of order because it raised the duty, quite rightly, by reducing the length to 7 cm. Perhaps the Minister will give me a justification for the figure of 8 cm, rather than 7 cm. Similarly, as I have mentioned, clause 23(1)(b) states that each 3 cm portion of the remainder of the cigarette shall be deemed an additional cigarette. Again, if we are trying to avoid taxation, there is an argument to look at reducing that figure further. The whole purpose is to ensure that people pay duty on their 1,000 cigarettes at the agreed rate of duty. If, for example, we reduced the 3 cm on top of the proposed 8 cm, to 2 cm, it would presumably have an impact. I am testing the Minister about the justification for the figure of 3 cm as opposed to 2 cm or 4 cm. It is important that the record shows the thinking behind that decision.

This may seem a trivial point, but it is not. We are talking about the length of cigarettes, but I would welcome a view about what happens to the width of cigarettes. It is possible for duty to be levied on a cigarette that is part of the 8 cm and 3 cm, and is within the 1,000 cigarettes that form part of the taxation cohort. It would be possible for somebody, should they so wish, to manufacture a cigarette that is twice as thick as a normal cigarette, to disembowel that tobacco and reconstitute it into 2,000 cigarettes from a 1,000 cohort brought into the country. If taxation avoidance is the shared motivation behind the clause, I would be interested to know what steps are being taken on the width of cigarettes. Has the Minister given any consideration to that, as well as to measures on the length of cigarettes?

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell 7:15, 26 October 2010

I am listening carefully to what is being said, but it seems that on the measure that you are trying to press to the Minister, a loophole could be found, whatever the response. You have moved from halving the length of a cigarette to doubling its width. If the demand is out there to do such things, surely whatever law is passed and whatever definition is used, the legislation  could be got around easily. I know you are saying that you are trying to test the argument, but I would have thought that any provision could be got around.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

That is an argument to do nothing and never to take any tax-avoidance measures at all. I am simply saying to the Minister that the legislation passed in 1979 sets out the length of a cigarette in relation to duty. A cigarette of more than 9 cm would qualify as two cigarettes for duty purposes. That is a way in which we can look at importation for those who wish to bring in a 10 cm or 11 cm cigarette, cut it in half and sell it as two cigarettes to people in the community, thereby avoiding duty. Whatever our political differences, we do not want to avoid taxation by back-door means. I simply say to the Minister that the length is being reduced from 9 cm to 8 cm and there could be an argument to tighten the measure further, from 9 cm to 7 cm for example. Why is it 8 cm?

I have already said this, but I shall say it again for the sake of further clarity and to ensure that we have a full debate on the matter. When we add each 3 cm portion of the remainder of the cigarette, it will be considered as a further cigarette. Why 3 cm and not 2 cm? If we are looking at tax avoidance, I would have thought that the tighter the regulation, the more opportunity there was to send a strong signal and ensure that the appropriate duty is paid. With those few comments, I am happy to hear what the Minister says.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I welcome the clause. It may dismay some of my coalition colleagues, but I do so in my role as Chairman of the all-party group on smoking and health. The measure deals with tax avoidance from a Revenue perspective, but it also achieves important public health outcomes. I can tell the right hon. Member for Delyn that whether cigarettes are measured by length, width, weight or nicotine content as a proportion of the substance that is wrapped in paper it is important to ensure that the duty is properly paid.

Contrary to what many people think, the real price of cigarettes in the 21st century is little different from what it was in the 1970s, because living standards have risen. It is true, as one of my colleagues said earlier, that taxation is relatively high here compared with taxation by some of our European neighbours, but the price that people pay for cigarettes in the UK relative to their disposable income is rather low compared with the figure 30 or 40 years ago.

My all-party group took evidence during the summer recess. While many of my colleagues were enjoying better climes, I was taking expert witness evidence in order to submit a report to the Government. The report was sent to Treasury Ministers, and I hope that officials have passed it to my colleague. It shows that price is still an important determinant in attacking a substance that is inherently addictive, and that people can be persuaded to change their behaviour as a result of the cost.

Although there are tax-avoidance reasons for introducing the clause, there are excellent public health reasons for tackling smuggling and the avoidance of duty. We can build on the important measures put in place with  cross-party support in the previous Parliament to ban smoking in all public places, and I hope that we will not have to wait too long for Government approval for the regulations that will ban vending machine sales and cigarette displays.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

May I apologise, Mr Caton, for getting my language wrong on my second intervention? I meant no offence.

I wish to add to what was said by my hon. Friend the Member for Dover. I believe that the focus of his comments was slightly wrong. I gave up smoking on 1 August, and I can tell the Committee that it is one of the hardest things that I have ever done. Although the price of cigarettes, and the level of tax, caused me to complain, it never stopped me buying them. We must therefore be careful when saying that raising taxation would help, because people make cutbacks elsewhere to feed their drug habit—and that is exactly what it is. I detect from what the right hon. Member for Delyn said that there is cross-party support for the measure, but I wonder whether our debate will achieve anything or whether it is just a testy argument.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, clause 23 is intended to prevent the avoidance of tobacco duty. I hope that it will be some comfort to my hon. Friend the Member for Bristol West to know that in last week’s spending review announcement additional sums were given to HMRC to allow it to take further action to reduce cigarette smuggling. It is something that the Government take seriously.

Those seeking to avoid the element of tobacco duty applied specifically to the number of cigarettes produce what are known as long cigarettes, which are designed to be broken or cut into shorter sections by the smoker. The final number of cigarettes is thus greater than the quantity used for duty calculation purposes. We are aware that some brands of long cigarettes are 8 cm or more in length. Under the new rules, they will be classed as being four or more cigarettes. We therefore hope that the legislation will be useful in that respect. Clause 23 will amend legislation so that for cigarettes longer than 8 cm, excluding the filter, each additional 3 cm will be treated as an additional cigarette for the purposes of specific duty calculations. For example, a cigarette of 12 cm would be treated as three cigarettes.

The right hon. Member for Delyn asked what the reason was for those particular measurements. We are amending legislation that dates back to 1979 to ensure that UK legislation remains aligned with EU directive 95/59, which itself has been amended and updated. This is an example of our complying with European measures, and it is clearly important to co-ordinate at a European level, for reasons that I do not need to go into. Tobacco duty is an important contributor to the public finances. It contributed approximately £9 billion in 2009-10, with cigarette duty alone contributing approximately £8 billion.

Our decision to include the measure in the Budget will help to protect tobacco duty revenues. Almost all UK brands are unaffected, although one or two businesses that manufacture or are niche importers of long cigarette brands might be somewhat upset. Smoking is the single biggest cause of preventable illness and early death in the UK, so tackling tax avoidance with the measure will  help to maintain the high price of cigarettes; I nevertheless note the comments made by my hon. Friend the Member for Bristol West. The measure will support the Government’s health objective of reducing smoking prevalence.

On the size parameters, the EU consulted relevant parties to decide the definitions. Width is not currently an avoidance issue, with companies making extra-wide cigarettes, because it is relatively easy to break up long cigarettes, but not wide ones. I am sure that if we start to see wide cigarettes being produced, we might return to the issue in future Finance Bills.

The clause will come into force on 1 January 2011. It supports the Government’s policy of tackling tobacco tax avoidance, while helping to maintain the high price of cigarettes. It will help to reduce smoking and lower the financial, social and personal costs associated with smoking.

Question put and agreed to.

Clause 23 accordingly ordered to stand part of the Bill.