Clause 16

Finance (No. 3) Bill – in a Public Bill Committee at 11:00 am on 17th May 2011.

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

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

The clause increases tobacco duties by 2% above inflation and rebalances cigarette duty. Obviously, tobacco duty is an important source of revenue for the Exchequer. In 2009-10, it raised some £9 billion in taxation—2% of all taxation—which was similar to that raised by alcohol duties. The Government have rebalanced cigarette duty towards the specific duty and away from the proportional or ad valorem duty, as permitted by last year’s European directive on tobacco duty. The cigarette industry estimates that the specific duty now accounts for 63% of the weighted average price of a packet of cigarettes. That means that the increase in duty on a packet of 20 economy cigarettes is around 50p, while the increase on a packet of premium cigarettes is around 33p.

In the tax information and impact note for this change, the Government state that their objectives are

“to maintain high tobacco duty rates to support health objectives…and to ensure that tobacco duties continue to contribute to fiscal consolidation.”

In some ways, this echoes the debate that we have already had on alcohol duties. Taxes on alcohol and tobacco are partly to do with changing behaviour and partly to do with revenue-raising. The aim is probably clearer-cut in this particular instance. With alcohol, there are plenty of people who drink responsibly and enjoy a drink. It is a niche market, which is important and which we should be encouraging. Most people would accept that the equivalent is not true of the tobacco industry and smoking. We want to discourage smoking across the board and we do not accept the concept of responsible smoking.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

Let me add to the hon. Lady’s point. Both tobacco and alcohol are exceptionally addictive drugs, especially in the long run. There is, however, a difference between the two. Smoking does not affect a person’s everyday life and their ability to drive a car or operate heavy machinery. As someone who has given up smoking and who finds every day a struggle, I can say that it is an exceptionally addictive drug. However, it never stopped me from carrying out my day-to-day activities. If I was drinking 10 pints a day, it would.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

The hon. Gentleman makes a valid point. However, I know some people who smoke only socially; it is something that they do when they go to the pub. However, they may do that less now because they have to go outside to have a cigarette. None the less, smoking is linked to certain habits, so they may crave a cigarette far more when they have a pint in their hand than when they are working during the day. For others, smoking is something they do habitually throughout the day. Even when people smoke only a few a day or when they go out, it is still harmful and may have a longer-term impact on their health. The same may not be true if someone has a few pints once a week. However, the stories vary. If we read the Daily Mail, one day we will be told that red wine every now and then is really good for our health, but another day it will say that red wine causes cancer and that we should stay away from it. If we followed all of its advice we would be very muddled indeed.

Photo of Bill Esterson Bill Esterson Labour, Sefton Central

My hon. Friend makes an important point about the difference between smoking and drinking alcohol. However, there are issues  around drinking alcohol for some groups. I refer in particular to pregnant women. I am interested to hear whether she agrees with me on that point and whether we should address that point in our debate now.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I do not want to test Mr Hood’s patience by straying back to the alcohol debate. Certainly, both smoking and drinking are health risks for pregnant women and should be discouraged.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

Every time there is a large football match and Wembley stadium is full of 80,000 or 90,000 people, I think of how that is roughly the number of people who die prematurely every year from the effects of smoking. I may be a bit of a prude about smoking, but I believe it cannot be taxed enough. At the same time, we must do more to tackle the issue of contraband and illegally imported or manufactured cigarettes. That is an important issue in communities such as my constituency of Gateshead.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I thank my hon. Friend for that intervention. I was coming to the tobacco industry and the issue of revenue-raising, rather than the public health debate. The Government are protecting revenue from tobacco duty, which continues in the direction of travel taken by the previous Government. The tobacco industry believes that raising the price of cheaper cigarettes, rather than more expensive ones, will encourage fewer smokers to cross into the non-UK duty-paid sector.

Of the £9 billion raised in tobacco duty, over £8 billion comes from cigarettes, so it is an important revenue source. Last year, however, about 16% of cigarettes consumed in the UK came from the so-called non-UK duty-paid sector, comprising 11% from illegally imported or manufactured cigarettes, and 5% from legal cross-border shopping. Given that, why have the Government chosen this specific level for the rebalancing of cigarette duty? The previous Government intended to make the specific duty the primary means of taxing cigarettes. With this change, the specific duty will account for 63% of the tax burden of the average cigarette packet. The Government could have gone further, as the latest EU directive would allow that tax to reach 76.5%, but they appear to have taken a more cautious approach. Do the Government intend to go further and work towards achieving the 76.5% allowed by the EU directive, or do they intend to stick with the 63% introduced by the legislation? It is not clear in the Budget whether there will be a gradual rebalancing in the future. Could that be on the cards?

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I want to draw on the comments made by the hon. Member for Gateshead. Raising tobacco duty has obvious health benefits but could lead to a further increase in smuggling and contraband tobacco. We must find a balance between raising duty and creating a black market.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

That is a valid point. Most people accept that smoking should be discouraged, but simply saying that we should not use taxation on cigarettes to deter people from smoking because they will go to the black market is the wrong path to take. Measures to increase duty on tobacco should go hand in hand with those that crack down on the illegal market, which may require investment in staff to be properly enforced.

The Government have

“committed to providing clarity and certainty on the future direction of tax policy”.

That is supposed to underpin their approach to tax policy, but the issue of rebalancing in future Budgets is not clear. Will the Minister clarify why the clause on tobacco duty was not included in the draft Finance Bill earlier this year? Do the Government have a set of principles that guides when they publish clauses in draft form and when they choose not to? The Exchequer Secretary to the Treasury said in the Government’s consultation response last year that he wanted consultation and scrutiny of draft legislation to be the “cornerstones” of the Government’s approach to tax policy.

Building on the point made by the hon. Member for Elmet and Rothwell, what assessment has been made of any increase in consumption of non-UK duty-paid tobacco as a result of the rises? The measure affects some other tobacco products more than cigarettes. For example, Her Majesty’s Revenue and Customs estimates that between 55% and 61% of hand-rolling tobacco consumption in the UK is non-UK duty-paid. Cigarette smuggling costs the Exchequer £1.4 billion a year; hand-rolling tobacco smuggling is not too far behind, costing £0.8 billion a year.

I recall debating a statutory instrument recently with the Minister. We were discussing the grading of the size of hand-rolling tobacco and whether it fell into a particular taxation category. It is a complicated area. We debated people avoiding taxation by creating extra long cigarettes and then chopping them up. I appreciate that the Government are trying to tackle a difficult issue.

Data from HMRC have shown that as cigarette duty has risen over the years and consumption has fallen, since around 1999, many smokers have shifted from cigarettes to hand-rolling tobacco. That might mean that many smokers are avoiding or evading tax and it may account for the significant cost to the Exchequer of hand-rolling tobacco smuggling. Last month, the Government produced a strategy for combating tobacco tax smuggling, which used some of the £917 million allocated to HMRC over the spending review period to tackle tax evasion and fraud. Over the same period, however, there will be cuts of around £2 billion to HMRC’s budget. HMRC staff unions have estimated that the reduction in resources might mean a loss of some 10,000 staff over the spending review period.

Photo of Alison McGovern Alison McGovern Labour, Wirral South 11:15 am, 17th May 2011

It is a pleasure to serve under your chairmanship, Mr Hood. I thank my hon. Friend for giving way. Currently, we are losing staff from the civil service, especially in HMRC. Does she agree that the manner of that and speed with which it is happening is disturbing, and that by using voluntary redundancy we risk losing some of our most experienced and knowledgeable staff?

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I agree. The matter comes down to one issue, which is perhaps slightly out of the scope of our current discussion. The short-sighted view is that the Government can cut costs by laying off HMRC staff. However, compelling representations have been made to me by people who work at HMRC. They argue  that they bring revenue into the Treasury—that they are money makers, because they tackle tax avoidance. If staff are not there to crack down on tax avoidance, we may save on the short-term costs of employing tax inspectors and staff who chase people who are trying to avoid duties, but there will be a medium to long-term cost to the Exchequer of doing that.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

We have carried out some interesting work in my area on tackling contraband and smuggled tobacco. There have been raids on what are known locally and colloquially as tab houses, where sometimes stolen, sometimes smuggled, sometimes contraband tobacco is sold out of people’s houses. Much of that work had to be co-ordinated by HMRC, without which it would not have been as successful as it has been in our locality. It is vital that such work continues to tackle that real scourge of local communities in places such as Gateshead.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

My hon. Friend the Member for Gateshead is right. Occasionally, high profile cases are reported of HMRC’s success in cracking down on tab houses. I must admit I have not heard that phrase before—it must be a northern thing, or a north-eastern thing in particular. I am not sure what the equivalent colloquial term is in Bristol, if such a term exists.

The problem is similar in some ways to the battle against illegal drugs. Every now and then police have a successful raid on, say, a cannabis farm or a crack den, but to some extent that is the tip of the iceberg and the police do not have the resources to combat the huge underlying problem. It is similar to the evasion of duties. The Chartered Institute of Taxation, in evidence to the Treasury Committee, recently said,

“taxpayers have a growing perception that HMRC do not have adequate resources to tackle evasion”.

Has there been any assessment of HMRC’s overall ability to tackle tax evasion and fraud, including on cigarettes and tobacco products, given that it faces a net reduction in resources over the spending review period?

Photo of Bill Esterson Bill Esterson Labour, Sefton Central

HMRC in Sefton employs a large number of my constituents, some of whom work on this issue. My hon. Friend made the point about the reduction in resources and HMRC’s ability to carry out its duties and pursue evasion, but it is important that we also recognise the wider impact on the local community and the loss of revenue from the inability to support the local economy. They are related points.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

Whenever the Government cut public sector jobs, the impact is obviously much wider than just the people who lose their jobs; it also impacts on jobs in the supply chain and on the wider economy in terms of money spent in shops. Although I have great sympathy for people in my hon. Friend’s constituency who feel that their jobs are under threat, my main issues with the clause are, does it affect the Government’s ability to enforce tobacco duties and is it short-termist in its effect on future revenue streams?

One concern is about discouraging illegal behaviour by ensuring that those who indulge in such behaviour have a genuine fear of being caught, because if people  think they can do something with impunity, they are very likely to carry on doing it. In addition, there is a correlation between the number of staff employed to look at tax evasion and crack down on those flouting the duties and the Government’s revenue stream. I am interested to hear what projections the Minister has done on protecting the revenue that will come from these duties.

Finally, the strategy published last month also announces that this autumn the Government will reduce the indicative levels for personal imports of tobacco products to 800 cigarettes and 1 kg of hand-rolling tobacco, which were the limits before October 2002. The current indicative limits are 3,200 cigarettes and 3 kg of hand-rolling tobacco. What measures are in place to enforce the new limits? The Minister will recall that the policy was previously deemed unworkable, which was largely due to opposition from smokers in the UK who wanted to shop for cigarettes cross-border, as is their right under European law. I recently dealt with a couple of cases in my constituency of people who were upset and offended that customs apprehended them under suspicion of buying cigarettes to sell on the black market when they had taken advantage of an annual or bi-annual trip across the channel to stock up on such products.

Photo of Bridget Phillipson Bridget Phillipson Labour, Houghton and Sunderland South

That point brings us back to enforcement, which we discussed in terms of HMRC. Given the budget losses and cuts to front-line staff faced by the UK Border Agency and others who patrol airports, I am unsure how enforceable some of the proposals will be.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

That is a valid point, in that if the law is to be tightened up by reducing the levels of personal imports, how will it be enforced? Will there be enforcement issues at the border?

The reason why the indicative levels for personal imports were increased was not just due to opposition from smokers in the UK, but to a High Court ruling on seizures by HM Customs and Excise. The then Economic Secretary to the Treasury, my right hon. Friend the Member for Wentworth and Dearne (John Healey), raised the indicative limit to 3,200 cigarettes and 3 kg of hand-rolling tobacco in October 2002. The European Commissioner responsible at that time also reminded the UK that cross-border shopping is a fundamental right under EU law and should not be regarded as a form of tax evasion, even if it gives rise to revenue losses for the UK Exchequer.

The Minister is now re-attempting the policy, this time in the context of the above-inflation rises in tobacco duty set out in the clause. While we on the Opposition Benches do not oppose those rises, will the Minister explain what new measures she is taking to enforce the new limits? What opposition does she expect from smokers who wish to continue to exercise their right under European law to buy tobacco for personal use? What steps has she taken to ensure that the new policy of reducing the limit for personal imports will not result in legal action at UK or European level?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I will do my best to cover the issues raised by the Committee today. Clause 16 makes changes to ensure that tobacco duty contributes to wider efforts to tackle the deficit and support the Government’s  health objectives. It reduces the affordability of smoking by targeting the duty increase on cheaper tobacco products, as we have heard. It also helps to tackle down-trading from more expensive to cheaper tobacco products.

As we have heard other hon. Members point out, smoking kills half of all long-term users, and is the single biggest cause of inequalities in death rates between the rich and poor in the UK. It is a dramatic driver of health inequalities. Treating smoking-related illnesses has been estimated to cost the NHS £2.7 billion a year. Action on Smoking and Health has said that it recognises that the duty changes that we are introducing this year

“should help more smokers to quit”.

Maintaining high levels of tobacco duty, alongside continuing action to clamp down on tobacco smuggling—I will come on to that in more detail—is a key part of the Government’s strategy to reduce smoking prevalence.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

As the chair of the all-party group on smoking and health—which works across the House; the hon. Member for Gateshead is an active member of the group—I welcome what the Government are doing. It is important that taxation measures are seen in the context of an overall Government strategy. We have just seen the publication of the Government’s tobacco control strategy, which confirms the prohibition of display of cigarettes in shops from next year for large shops and 2015 for smaller shops, and consultation on plain packaging too. There are many things that we can do, in the taxation of cigarettes, to drive down consumption, but they have to be seen as a joined-up strategy for controlling tobacco use.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

My hon. Friend is absolutely right. We have tried to work across Government to have a more joined-up strategy. As we have heard—for example, in the point made by the hon. Member for Gateshead—taxation has an important role to play. The clause increases the duty paid on all tobacco products by 2% above the RPI, as pre-announced in the March Budget of 2010. It also restructures the duty on cigarettes. Ad valorem duty on cigarettes decreases to 16.5%, and specific duty increases by 25% above inflation. Targeting the duty increase on cheaper cigarettes, the clause adds 50p to a packet of 20 economy cigarettes and 33p to a packet of 20 premium cigarettes. As a result, the duty differential between premium and economy cigarettes is decreased by 14p, which should help combat down-trading.

Finally, the clause also increases the duty on hand-rolling tobacco by an initial 10% beyond the pre-announced increase. That increases the price of a 25 gram packet of hand-rolling tobacco by 67p, and reduces the duty differential between hand-rolling tobacco and economy cigarettes from 50% to 47% per gram of tobacco. The clause will raise an additional £355 million in the next five years, contributing to fiscal consolidation.

Research has consistently shown that the price of tobacco products affects demand. By increasing the duty on tobacco, particularly on cheaper tobacco products, the affordability of smoking is reduced. The proposed duty increases can therefore be expected to decrease smoking prevalence, with positive health impacts. As I said, that will see a further reduction in health inequalities.

As we have heard, the changes being made by the clause have also been made possible by a revision of EU directive 95/59/EC, which came into force on 1 January  2011. The directive now allows for the specific duty element to make up to 76.5% of the total taxation on cigarettes, revised up from 55%. The clause will raise the UK-specific component from approximately 50% to 60% of total taxation.

The shadow Minister asked why the Government had not gone for the absolute top rate. In consultation with the industry and other stakeholders, and in looking to combat illicit trading, we felt that this was broadly the right balance to be struck.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 11:30 am, 17th May 2011

I thank the Minister for her response. She mentioned consultation with the industry. The issues at stake here are quite different from those connected with the alcohol industry. That takes us back to the concept of people enjoying drinking but doing so responsibly, and everyone wanting to protect our pubs, breweries and industries such as the Scotch whisky industry. With smoking, however, it is not so much a question of wanting to protect the profits of tobacco manufacturers. Do discussions with the tobacco companies hinge on the balance between legal and illegal tobacco sales, or has the Minister been involved in discussions with the industry that are more about protecting jobs and livelihoods?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

There are a couple of points to make in answer to that intervention. First, we should remember that tobacco and cigarette production takes place in the UK, including in Northern Ireland; that, of course, provides employment.

The other aspect that has become more important in recent years is the change in the illicit market. I shall say what we are doing about that in a moment. Rather than there being a dominance of bootlegging, the market has shifted in recent years with an increase in counterfeit and so-called cheap whites—cheap non-duty paid cigarettes manufactured in far-away countries such as China. That is big business. The tobacco companies are as keen as we are to ensure that we strike the right balance. They do not want to see duty rates rise, but they obviously want it done in a way that gives us a good chance of tackling the illicit market.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I am listening intently to the Minister, as I am interested in the subject. Is there not evidence that tobacco and cigarettes manufactured here are being exported to other European countries and deliberately re-imported in order to escape duty? We are having discussions with the Tobacco Manufacturers’ Association and representative companies who are engaged in this illegal trade.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

Those concerns have been put to us by health groups concerned about tackling smoking. We want to tackle illicit trading of all kinds in this arena, and we obviously work with the industry on that.

I direct the Committee’s attention to the recent publication by HMRC and the UK Border Agency called “Tackling tobacco smuggling—building on our success.” I recommend it; it is an unusually good read for a Government document. Having worked on its development, I know that it is about the right length and that it contains an awful lot of useful information on what we are doing but does not waffle too much.

Photo of Neil Parish Neil Parish Conservative, Tiverton and Honiton

It is not necessarily illegal for tobacco companies to sell tobacco abroad. One problem is low taxation on tobacco in many member states. The companies sell it legally to those member states, and people buy it abroad and bring it back here. We need to get Europe to up its tobacco taxes, so that we do not have so much smuggling.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

My hon. Friend makes an interesting point. The changes in the directive that we have seen have already led to some countries making changes to their structure of tobacco taxation that are similar to those we are making in the Committee today. We recognise that we face a constant challenge in tackling illicit trading and that is precisely why we have just published a renewed strategy, to build on the successes that have already been achieved in tackling tobacco fraud. I hope that I can reassure the Committee that we are putting more money into this sector. There will be more fiscal crime liaison officers and there will be 100 extra enforcement posts from April to enable HMRC, in conjunction with the UK Border Agency, to apply a harder-hitting range of sanctions.

I want to go into a little detail about some of the steps that we are taking, because they are important. It is also important for this Committee to send out a very clear message that at both Government level and local level we will not tolerate illicit tobacco smuggling. The hon. Member for Sefton Central talked about his local community and he is absolutely right that the overwhelming majority of law-abiding shopkeepers are on the receiving end of tobacco smuggling and are losing out as a result of illicit trading. That is one of the reasons why it is so important for local economies that we take steps to tackle tobacco smuggling.

Broadly, our strategy is to expand HMRC’s reach overseas through its fiscal crime liaison network. As I have said, increasingly we face the challenge of these cheap white goods that are mass-manufactured in countries far away from the UK. We are increasing the number of officers that we have overseas working with other tax authorities to develop our national intelligence, so that we can stop smuggling at source more effectively. As the members of the Committee can imagine, it is far more effective for us to intercept an entire shipment before it leaves a country than to try and track the increasingly smaller components of that shipment as it gets broken up and is gradually fed into our illicit smuggling market. That is a key part of our strategy.

We are increasing capability, as I have said, and we are increasing capability and capacity within the intelligence and criminal investigation functions. That work will go alongside a much harder-hitting set of enforcement actions and sanctions against offenders. Those measures will include: seizure of goods; seizure of vehicles, vessels and possible non-restoration; criminal prosecution, with a custodial sentence of up to seven years; confiscation of assets as part of the proceeds of crime work; assessment for the loss of duty that must be paid and, on top of that, financial wrongdoing penalties of up to 100% of the duty that is due; civil action, including winding-up orders and bankruptcy fines of up to £5,000 for selling illicit tobacco that does not bear the “UK Duty Paid” fiscal markings; and for those people selling the illicit tobacco there will of course be prohibition on the sale of tobacco products for up to six months, with travel  restrictions imposed on repeat tobacco smugglers. So we are absolutely focused on ensuring that we tackle illicit trading.

The final question was about minimum indicative limits. The use of those limits is one of the changes that we have made and it is an important change. Just to provide some reassurance for the Committee, the MILs that we have introduced now align with effectively every other European country. It was the previous limits that were completely out of whack and it seemed sensible to bring our limits into line with those of other European countries. That change will help border officials to identify cases where there is a risk of smuggling and therefore to reduce the revenue loss, particularly at this time of reduced finances. People using tobacco products for their own personal use will be unaffected. So this change will hopefully enable us to identify more effectively cases where there is a risk of smuggling while allowing people to continue bringing back tobacco products for their own personal consumption, as the hon. Member for Bristol East pointed out.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

The Minister has said that people importing tobacco products for their own personal use will be unaffected. However, obviously, if they have up to now been importing them up to the current levels, they will be affected because the limits are being reduced. The amount that can be brought into the country will therefore have an impact on those people. Although I do not necessarily oppose the reduction, what steps are being taken to publicise the measure, because we are talking about a regular event in some people’s lives? Such people will make the trip abroad once or twice a year specifically with the aim of saving themselves money by stocking up on goods in the hypermarkets in Calais or wherever. What steps are being taken to tell them that they will have to alter their behaviour and bring in lower levels?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

I think the hon. Lady will find that one of the challenges in terms of tackling the prevalence of smoking is that many of the duty-free shops will make it very clear to customers just how much they are able to bring back without there being a risk that they will be accused of bringing back something that is not for personal use. The rules are not changing. People can bring back the amount that they want if it is for personal use. However, one of the dangers of having the minimum indicative limits at the previous level was that there was always a massive risk that they would be abused and that people would bring back huge amounts regularly and say it was for personal use. It was much harder for UK Border Agency officials to manage those risks. We are now striking a much better balance. People will continue to be able to bring tobacco products back for their personal use. We will be aligned with other European countries and I hope that strikes a sensible balance.

In conclusion, the clause will raise an additional £355 million over five years and will contribute to fiscal consolidation. It will further support the Government’s health objectives by reducing the affordability of smoking and helping to tackle down-trading to cheaper tobacco products.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.