Clause 185 - Rates of Tobacco Products Duty

Finance Bill – in a Public Bill Committee at 5:15 pm on 19th June 2012.

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

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 5:30 pm, 19th June 2012

We have moved on rapidly from discussing the oil industry to discussing tobacco products. The clause provides for changes to the level of excise duty on tobacco products, including cigarettes, cigars, hand-rolling tobacco, other smoking tobacco and chewing tobacco, to take effect from 21 March 2012. We all understand the concerns around smoking, the health implications and the consequences for some of the least well-off people in the various communities in the UK. Successive Governments have chosen to maintain high tobacco duty rates to support health objectives. They have also ensured that tobacco duties continue to contribute to Government revenues and fiscal consolidation. Over the years, a link has been made with the price of tobacco products, the level of demand and the issues around health.

Under the clause, excise duty on all tobacco products is increased by 5% in real terms, in addition to the retail price index and the pre-announced increases of 2% above inflation on all tobacco product duties that will be maintained in 2013 and 2014—the so-called escalator. That duty, together with the consequential VAT increase, will on average increase the price of a pack of 20 cigarettes by 37p, a pack of five small cigars by 12p, a pack of hand-rolling tobacco by 37p and a pack of pipe tobacco by 20p. The revenue yield from those changes is estimated at £70 million in 2012-13.

I should have perhaps said at the outset that I have never been a smoker. As someone who was actively involved in sport in my much younger days, I never felt the need to take up that particular hobby as I had to spend my time training. None the less, I do wish to comment on the questions that have been raised by some in the industry about the excise duty and VAT rises and also about the potential impact of higher tobacco prices on the sale of illegal and cheap imports coming into the country. Potentially, the non-UK duty-paid products will impact on the duty-paid products. The industry has done some work on this issue and preliminary results show an increase in the non-UK duty-paid products this year compared with the same period last year. There is a fear that there will be further large increases in the current year.

Will the Minister tell us how the Treasury views the future and whether it will consider the scale of future duty increases on tobacco products? Does it intend to continue with the increase in tobacco duties by 2% above inflation in each of the next two Budgets in the face of rising levels of non-UK duty-paid products or does it intend to balance out some of those issues? I ask that question because in the 2011 Budget, the changes that were announced by the Chancellor to reduce tax differentials were meant to address the exploitation of the tax structure by those producing cheaper cigarettes and the revenue loss caused by the downtrading from the more expensive brands to the cheaper cigarettes. Does the Minister believe that that has been successful? I understand that some data from Her Majesty’s Revenue  and Customs suggest that, far from the differential decreasing, the gap has actually widened, and that, potentially, downtrading has continued. It would be helpful if she could say something about that. If the information is not all there, can this issue be considered in more detail at this point in time? Will the Minister consider undertaking some work to try to understand the impact of the changes in structure, and to look ahead to the next Budget in terms of how best to ensure that the Government’s policy is successful?

Will the Minister refer to the suggestion—I understand that some in the industry would be supportive, though others would not—of a minimum excise tax? In other words, a point would be set below which manufacturers of cheaper products would be forced to make an additional excise payment or simply increase the prices to comply. I understand that a similar proposal is currently being introduced by the Irish Government in their Finance Bill. Some who are involved in considering health issues and who want to ensure that smoking is not made more attractive, particularly to younger people, have suggested that this is something that the Government should consider. Perhaps the Minister could give us an indication of whether she intends to introduce any further changes to the tax and duty system in relation to cigarettes and other tobacco products linked to health issues.

I hope the Minister will also be able to address the measures relating to enforcement and anti-avoidance. I attended a useful debate in Westminster Hall some time ago, as the Minister will no doubt recall. We were able, in a non-partisan and non-party political way, to discuss the serious issue of ensuring support for all health initiatives, while at the same time ensuring that those who were determined to undermine the taxation system and criminal law were brought to account and held to account.

With those few remarks, I ask the Minister to answer those questions. I may come back if I feel there are other points I wish to raise.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I shall not take too long, as I suspect that there is some consensus in the Committee on the health impacts of smoking and other aspects relating to tobacco products.

Clause 185 makes changes to ensure that tobacco products duty continues to contribute to wider efforts to reduce the deficit and support the Government’s health objectives. It reduces the affordability of smoking, which is acknowledged to be very effective in encouraging smokers to quit, and in discouraging young people from taking up smoking—points finely put across by the hon. Member for Kilmarnock and Loudoun. I will endeavour to answer her questions as I move through my comments.

It is clear to all of us that smoking kills. We have all been brought up with that message, depending on our ages and what advertising campaigns we grew up with. Smoking kills half of all long-term users and is the single biggest cause of inequalities in death rates between the richest and poorest in the UK. Smoking accounts for more than 100,000 deaths in the UK each year, and continues to be the single largest cause of preventable illness and premature death. Treating smoking-related  illnesses has been estimated to cost the NHS £2.7 billion a year. Maintaining high levels of tobacco products duty, alongside continuing action to clamp down on tobacco smuggling, which I will come on to in a moment, is a key part of the Government’s strategy to reduce the prevalence of smoking.

Clause 185 increased the duty paid on all tobacco products by 5% above RPI from 6 pm on 21 March 2012. The new rate therefore adds 37p to a packet of 20 cigarettes or a 25 g packet of hand-rolling tobacco. The clause will raise an additional £260 million over the next five years, which will make an extremely valuable contribution to Government revenues and to fiscal consolidation.

In one of her many questions, the hon. Member for Kilmarnock and Loudoun tempted me with talk about future tobacco rates. As I have made clear, because this type of rate becomes effective from a given time on Budget day, I am unlikely to be able to stand here, many months in advance, and give her the means, if she so wishes, to stockpile—I am sure that she would not wish to do such a thing.

The fact is that tobacco duty is the subject of some debate. During the year, I have discussed the issue with and received information from a range of industry stakeholders, including, crucially, those campaigning on the health side. That kind of engagement will certainly continue, including no doubt at the time of next year’s Budget.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I should declare an interest as a member of the all-party group on smoking and health, and I am still a member of the Gateshead Smokefree Alliance. I am very keen to see a reduction in the prevalence of smoking among the general population of my constituency and across the whole country. I know that, across Departments, the Government are considering a whole range of measures—including plain packaging and a reduction in the display of marketing—but it is clear that the tobacco industry needs new recruits. As the Minister pointed out, annually about 100,000 people die prematurely from the effects of smoking. To replace those who have died and, sadly, can no longer buy cigarettes, the tobacco industry needs new recruits, and it is determinedly marketing towards young people. Have Treasury Ministers thought about taxing products that are particularly aimed at young people?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I thank the hon. Gentleman, and everyone in the House and in the all-party group who do sterling work on this topic. I know that several colleagues and other hon. Members do such work.

The hon. Gentleman makes an interesting point. Not having been a smoker either, I did some preparatory research by looking at various tobacco packages in order to understand the range available. I was shocked by those that are being redesigned to appeal, frankly, to younger or to female smokers. There are different ways of designing packages, as the advertising industry has done since time immemorial, to appeal to a given audience. We should continue to make a cultural point about what it is acceptable to encourage our young people to do and not to do. That topic could be approached in several different ways, and in due course I would be delighted to hear more from the hon. Gentleman.

Stephen Williams rose—

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

And, indeed, from my hon. Friend, who also does great work on this matter.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West 5:45 pm, 19th June 2012

I am the chairman of the all-party group on smoking and health, which has members from all parties across both Houses, and the hon. Member for Gateshead is a particularly enthusiastic member. I am pleased that the Minister has mentioned the different packaging designs—in the shape of lipstick tubes, camera phones, iPods—that are now being used by the tobacco industry to recruit a new generation of smokers. No longer are cigarettes marketed purely in the traditional rectangular boxes, with which some of us might be familiar. Does she agree that the best way forward is therefore to move to standardised and plain packs? I do not know whether anyone is involved in this, but will she deplore the recent edition of The House magazine, which we have all been sent? It is packaged and has as its cover an advertorial on behalf of the tobacco industry, but it does not disclose that that has been paid for by the industry.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

Order. I really do not want to get into a debate about smoking, and I really do not think that packaging has much to do with the duty, so perhaps the Minister could continue.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

Thank you, Mr Bone. I have not yet found my copy of The House magazine, but I clearly need to.

The point that unifies the sensible concerns raised by hon. Members today with the clause is the need for evidence and to continue to understand the industry. As my hon. Friend the Member for Bristol West knows, the Government are consulting on tobacco packaging, and, as I was saying to the hon. Member for Gateshead, there is much to listen to and learn from in the groups that he works with, and I am happy to receive work from them.

I want to touch on a point made by the hon. Member for Kilmarnock and Loudoun, which relates to the concept of downtrading. It is true—I have already put it on the record—that the rate adds 37p to a pack of 20 cigarettes. For those non-smokers who may not know, there are different bandings of cigarettes, but it adds that kind of money to a smoke, and some people will choose to seek out a cheaper product in the market. There is a bottom to that market and that leads on to the illicit trade, which is an important topic that the hon. Lady also raised.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I do not want to follow the route of my hon. Friend the Member for Bristol West in making a massive attack on the freedom of speech and the press in this country, but I want to note—this is in order—a key point. The level of taxation on cigarettes is particularly difficult for the least well-off. I must declare an interest as a former smoker who has recently given up. Being a Member of Parliament nowadays means that I can no longer afford to smoke, but it is much harder for those who are particularly hard-pressed and do not earn much money. Would it not be better to have greater education rather than taxation? I also note  that the illicit supply of smuggled cigarettes seems to be on the rise, which is a concern and a potentially serious health hazard.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

There is a grain of truth here, which is that research has consistently shown that the price of tobacco products does affect demand. It is my aim to reduce smoking through increasing duty on tobacco products, and I say that plainly. I would like to see people choose not to afford to smoke, and I would like to see young people choose not to take it up in the first place. I would like to see all the effects of reducing smoking prevalence.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Some people will refuse to give up smoking, and some of those people will be extremely poor and on very limited means. They will find that an increasing part of their budget is going on taxation. The measure is regressive and hits some of the poorest people in the country, so should the Government not be concerned?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

My hon. Friend raises a point. People up and down the income distribution and with different profiles choose to smoke. I make no bones about that and I am not embarrassed to have to say that. This measure adds money to the price of cigarettes, and I think that that is a good thing. I would like to see less smoking.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Unfortunately, tobacco is addictive, and therefore some of these people who are addicted find that they have almost no choice but to smoke. Unless there are alternatives to help them quite strongly to give up, we are taxing the poorest people in society.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

Perhaps I ought to pray in aid my hon. Friend the Member for Dover. I do not know whether my hon. Friend the Member for North East Somerset has taken part recently in some of the excellent NHS campaigns, but they are providing exactly what he seeks: help, through the state, for people to give up and kick their addiction. He is right that the problem of addiction underpins this debate. I do not have all the answers—I have only the tax rate—but it is clear that a broader job needs to be done across the education, business and health sectors.

Photo of Grahame Morris Grahame Morris Labour, Easington

What would the cost to the Treasury be if everyone gave up their addiction to cigarettes and stopped buying them via legal means? Would it be in the order of £12 billion?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I suspect that even HMRC modelling and the most wishful of thinking would not allow that scenario to arise. As I have said, the clause will raise an additional £260 million. I am sure that the figure sought by the hon. Gentleman can be supplied to him at another time.

I want to address the issue of illicit trade, which is also relevant to the hon. Gentleman’s intervention. Whatever the product, someone will try to sell it for gain, which is as true of the market under discussion as it is of any other market. The Government are committed to tackling tobacco smuggling, which is only one element of illicit trade, but a major one at that. Tobacco fraud costs taxpayers more than £2 billion a year, depriving  the general public of revenue to fund vital public services that support us all, including those to whom my hon. Friend the Member for North East Somerset has referred. Illicit tobacco undermines public health objectives and affects the health both of individuals who smoke and of wider communities.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

I am yet another in the queue of many people who have given up smoking. On trying to affect behavioural change, in 2003 it was estimated that about £10 billion a year was lost to the Revenue through tax avoidance as a result of smuggling and so on. That has now come down, as the Economic Secretary has said, to about £2 billion. However, as taxes go up, people are pushed towards behavioural change and buy illicit tobacco from car boot sales, for example, which they would not otherwise have done. What efforts is HMRC making to tackle the illicit trade in cheap whites and so on, in order to try to recover money on behalf of taxpayers?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I certainly can provide that update—my hon. Friend may even be able to look over my shoulder and see the figures on the page in front of me. The key point is that HMRC and the UK Border Agency launched a renewed smuggling strategy in April 2011. Since the precursor to that strategy was introduced in 2000—this covers a period of 11 years—the size of the illicit cigarette market has been cut by almost half, which I am sure hon. Members will agree is a sizeable achievement. The renewed strategy has to build on that success.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I have had some experience of the illicit smuggling market in my own constituency of Gateshead. There has been a significant variation in the exchange rate between the pound and the euro since 2003. Back in 2003, busloads of people used to leave the north-east to go to places such as Luxembourg, buy cigarettes—the personal allowance was 3,000 cigarettes per person—bring them back into the country and then smoke 150 packets before going on their next trip a fortnight later. The difference in the exchange rate was widely abused. The fact that European countries, by and large, increased their tobacco duties has cut down on much of that trade.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

The hon. Gentleman makes a valuable point, and he highlights how HMRC must keep on its toes to stay abreast of all the latest developments in technology and products, and of what is happening in the markets in which Britain operates.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I want to touch on smuggling again. As the Minister knows, I represent Dover. Does she agree that the border officers do a fine job of stopping smuggling at our border? Does she agree that some of the £260 million that the measure raises might be invested in strengthening our border still further, so that we can clamp down even harder on smuggling and protect Exchequer revenues?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I am delighted to join my hon. Friend in praising the work of border staff. I have already noted that their work has resulted in the halving of the illicit  cigarette market—a task that was set them—which is laudable. I hear his suggestion about how we should use that £260 million, and I will consider it along with other points made in the debate.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset

Following on from the point made by the hon. Member for Gateshead, will the Minister tell us whether there are any emergency plans in place in the event of a collapse of the euro? In that event, tobacco from Greece, Spain, Italy and any other countries that had left the euro would be a good deal cheaper. What might the Treasury do about that to protect its revenues?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

All hon. Members—particularly my hon. Friend—well know, from having asked similar questions, that contingency plans are in place in case that should occur.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Before the Minister finishes, I would like to return to clause 185. During the Finance Bill Committee in May 2011 the then Economic Secretary justified the change that was being made by saying that she wished to target duty increases on cheaper tobacco products, because that would help to tackle down-trading from more expensive to cheaper tobacco products. Will the Minister reinforce that commitment? Will the Government look at the matter in the year ahead and perhaps introduce further changes in 2013?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I am glad that the hon. Lady has noted that point. I wanted to finish by answering one of her earlier questions about changes to structure. Hon. Members may know that tobacco taxes have two component parts. My predecessor made the changes that the hon. Lady has mentioned at Budget 2011. When the Budget 2012 decisions were taken, 12 months’ data were not yet available to me. I would like to be able to assess the impact of the Budget 2011 measures prudently before committing to further changes in the structure of cigarette duty.

The hon. Lady asked about a potential gap in HMRC data, and I can confirm that our latest data on the tobacco tax gap have not shown an increase in illicit trade. Those data are updated annually and official figures will be available in September. Some industry data show an increase, and hon. Members may draw their own conclusions about that. As I say, we will have to wait for official data to be released, because information is vital in this area.

I have said that the clause will raise an additional £260 million over five years, which will help us to reduce the deficit and to fund the vital public services that relate to the health aspects of the measure. The taxation change supports the Government’s health objectives by helping to reduce smoking. I am confident of the performance of HMRC and Border Force officials in tackling the illicit market. I end with a quote from the Action on Smoking and Health group from February of this year, the views of which were endorsed by 91 health and welfare organisations:

“Reducing affordability through increasing taxation is acknowledged to be very effective in encouraging smokers to quit and in discouraging young people, who are particularly price sensitive, from taking up smoking.”

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I was about to sit down, but of course I will give way.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

My hon. Friend will know that there is a rise in the new electronic cigarettes, of which I am a beneficiary. I have noticed that many Members from both sides of the House increasingly use them. Currently, they are untaxed. Does she envisage that they will remain so for the rest of this Parliament?

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

My hon. Friend goes a step too far—I announce for the record that he is about to show one of said products to the Committee. I shall leave my comments there.

Question put and agreed to.

Clause 185 accordingly ordered to stand part of the Bill.