Clause 71 - Rates of tobacco products duty

Finance Bill – in a Public Bill Committee at 9:45 am on 10 June 2014.

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Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 9:45, 10 June 2014

I beg to move amendment 24, in clause 71, page 61, line 2, at end insert—

‘(3) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish a report on levels of revenue from the rates set out in this section.

(4) The report referred to in subsection (3) above must in particular examine—

(a) changes in revenue due to illicit market share,

(b) action to mitigate any such changes in revenue.

(5) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”

Photo of Martin Caton Martin Caton Labour, Gower

With this it will be convenient to discuss clause stand part.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The clause deals with rates of tobacco duty. In Labour’s final Budget, the then Chancellor announced that tobacco duty would rise by 1% above inflation in that year, 2010, and by 2% above inflation thereafter for the following four years. That policy has been maintained by this Government, including in the clause: indeed, in this year’s Budget, the Chancellor announced that tobacco duty rates will continue to rise by 2% above inflation each year between 2015-16 and 2019-20, although such provisions will continue to be made in each and every Finance Bill.

I am interested to see whether the hon. Member for Bedford in particular will support the Opposition amendment, which asks the Chancellor of the Exchequer to undertake a review of the levels of revenue set out. Our focus is on illicit market share, but the hon. Gentleman could use this opportunity to raise the inquiry into the duty escalator that he seeks from the Government.

Research has consistently shown a link between the price of tobacco products, levels of demand and public health issues, with successive Governments therefore maintaining high tobacco duty rates to discourage the take-up of such habits, particularly by children. It is right, of course, that the Government maintain this policy, but aside from the changes to tobacco duty that I have just set out, the Chancellor’s Budget report also announced the Government’s intention to consult on other measures related to tobacco duties, both of which are to commence this summer. First, the Government intend to consult on a minimum excise tax. Secondly, they intend to consult on

“a range of measures to strengthen its response to tobacco smuggling and improve anti-forestalling controls”,

with a view to legislating in next year’s Finance Bill. Perhaps that is a tacit concession that the Government’s actions to date have done little to tackle this extremely important problem and have perhaps fallen short of initial hopes.

It is worth noting that both of those issues were raised by my hon. Friend the Member for Nottingham East during last year’s Finance Bill Committee: specifically, duty stamps to tackle fraud and a minimum excise tax. Both received particularly vague responses from the then Economic Secretary; none the less, we now find the Government turning their attention once again to tobacco duty fraud, which is also the subject of our amendment 24.

The amendment calls on the Government to take account of changes in revenue due to increasing levels of illicit tobacco trading, as well as, of course, exploring what more the Government can do to mitigate revenue losses, particularly in the light of the Government’s disappointing results to date. HMRC estimates that revenue losses from tobacco smuggling and other sub-economy activities in 2011-12 totalled £1.3 billion. As with HMRC’s alcohol tax gap estimates, that is HMRC’s mid-point estimate. If we take its upper estimate, revenue losses from both cigarettes and hand-rolled tobacco, inclusive of associated VAT losses, could be as high as £2.4 billion. Although that is marginally down on the previous year, it still represents more than £1 billion in lost tax revenues, which is clearly a critical amount in these austere times.

Although HMRC estimates the illicit market share for cigarettes as 7% in 2011-12, the estimated illicit market share for hand-rolling tobacco in the same year was a staggering 35%. Indeed, it is also worth pointing out that tobacco duty receipts have recently been coming in lower than the OBR’s—and presumably the Treasury’s—forecasts. The OBR revised down its forecasts for tobacco duty receipts in its December 2013 report by between £100 and £300 million per year over the next few years, but it has since transpired that those forecasts, reiterated by the OBR in the Budget in March this year, also overestimated tobacco duty revenue.

HMRC’s statistics, published for the most recent year, show that tobacco duty receipts totalled £9.5 billion, yet at the Budget the OBR still expected £9.7 billion in receipts. In fact, HMRC’s latest statistics show that revenue from tobacco duties has actually fallen by more than £100 million compared with the previous year for the first time since 2005. What does the Minister make of these changing trends and the fact that the OBR’s and the Treasury’s forecasts have overestimated tobacco duty revenue? Does she believe they are a result of increases in illicit tobacco products on the market, or are there other reasons such as an increasing take-up of e-cigarettes, or is there a wider—and welcome—trend of people giving up smoking, and fewer people starting to smoke?

Of course, the issue of the illicit tobacco trade does not have consequences only in terms of revenue losses. We also know that illicit cigarettes carry serious public health risks, as well as putting the livelihoods of reputable retailers at risk through being undermined. A recent report in one of my local newspapers reported that illicit tobacco traders often target children, therefore circumventing both excise duty and age of sale legislation. The Chronicle, my local paper, reported that the North East Trading Standards tobacco control project manager, Richard Ferry, pointed out that pubs, shops and private  homes have been used as “tab houses” to sell cigarettes for as little as 25p, which should obviously be of concern to any Government.

By way of background, the Government launched the “Tackling Tobacco Smuggling” strategy in April 2011. According to the Public Accounts Committee’s report on HMRC’s progress to date in tackling tobacco fraud, published last October, HMRC planned to use the additional investment that the Government announced in the 2010 spending review to deliver five projects with a total expected benefit of £1.4 billion by March 2015, but the Committee concluded that three of the five initiatives “yielded nothing” by March 2013. In one example it highlighted, officers were working overseas, but HMRC realised that such powers could not be exercised abroad, so revenue yield from the project was reduced from £465 million to £100 million. The PAC concluded that most of the extra £25 million that the Government committed to reinvest in 2010 was spent on business-as-usual tasks, rather than new initiatives.

The National Audit Office was equally damning. It concluded that HMRC is “unlikely” to achieve its target of £1.4 billion in revenue protection, citing the fact that progress by the end of 2012-13 was two thirds of the expected yield. The fact that HMRC is one of the only tax agencies in the world to publish tax gap estimates is to be applauded, but the PAC and NAO are concerned that there remain “significant inaccuracies” in its estimates of the impact of its work. Does HMRC agree with the NAO's and the PAC’s assessments that the Government’s strategy to date has fallen short of the mark in tackling tobacco fraud and is therefore unlikely to recover more than a fraction of the anticipated £1 billion or so in duty revenue?

No doubt Ministers intend to publish their views on new measures in the forthcoming consultation, but I would be grateful if the Minister set out the Government’s views on some of the measures that we discussed previously in relation to alcohol, such as fiscal marks and track and trace technologies. Do the Government intend to consult on fiscal stamps as a measure to tackle this type of fraud? In last year’s Finance Bill Committee, the then Economic Secretary suggested that the Government were in talks with the EU Commission about track and trace technology and how it might work in practice. It would be helpful if the Minister could update the Committee about those discussions.

I would like to pick up on one aspect of the anti-tobacco fraud strategy. Close working with local authorities and trading standards to tackle fraud is part of the Government’s “Closer Working Protocol”, whose stated aims are to

“implement effective examples of joint-working” and improve relationships to ensure better enforcement. In May 2013, my local council, Newcastle city council, led the way by creating a declaration committing it to take comprehensive action to address the harm from smoking. Although it covers a range of issues regarding smoking and public health, it acknowledges the role of illicit tobacco in funding criminal activities and giving children access to cheap tobacco.

The declaration is a hugely positive step forward in the fight against illicit tobacco and was subsequently endorsed by various Government agencies, including the Department for Health, as the then public health  Minister made clear in a public letter last June. It has now been accepted by 50 local authorities across England, according to the Smokefree Action website. The declaration seeks to

“Protect…tobacco control work from the commercial and vested interests of the tobacco industry by not accepting any partnerships, payments, gifts and services, monetary or in kind or research funding offered by the tobacco industry to officials or employees”.

That is in line with the UK’s obligations under article 5.3 of the World Health Organisation’s framework convention on tobacco control. The Trading Standards Institute clarified that position by making clear that although it is fully committed to meeting that obligation,

“some limited and transparent engagement with the tobacco industry” is necessary to effectively tackle the illicit tobacco trade. Indeed, Newcastle trading standards has worked with tobacco manufacturers in test purchasing operations to root out what are termed “illicit whites”—cigarettes manufactured purely for the sub-economy market, as my local paper reported.

Considering that the Department of Health has fully endorsed that local strategy, I would be interested to hear from the Minister whether HMRC has had any input into that and whether it considers that joint working with tobacco companies is necessary to combat the illicit trade. Equally, I would be interested to hear what work HMRC is doing with the Department of Health, perhaps alongside Trading Standards, on the impact of the declaration and the wider local government strategy on the level of counter-fraud activity.

Photo of Ian Mearns Ian Mearns Labour, Gateshead 10:00, 10 June 2014

In our neck of the woods, there is a concern that tobacco that has been exported from this country and then re-imported is getting on to the streets, but without the duty being paid to Revenue and Customs. There is a deep suspicion in many people’s minds—particularly trading standards officers I have spoken to—that the tobacco industry itself is behind that. There is a suspicion, but it is very difficult to prove.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I have heard those views expressed. There is a difficult balance to strike, in that working with the tobacco industry can help with intelligence-sharing and tackling illicit, anti-trade activity, but that might not stack up with the health imperative to live up to the declaration I outlined earlier, which many local authorities have now signed up to. I would be interested to hear what HMRC and the Government’s approach is, and whether collaborative work is being done with the Department of Health, so that it can become a national way forward, rather than simply being taken up on a local basis.

To conclude, the Opposition’s amendment 24 calls on the Government to place a renewed focus on the impact of tobacco duty rates on the illicit trade and associated Exchequer revenue losses. Estimated losses from the illicit tobacco trade could be as high as £2.4 billion, according to HMRC’s upper estimates, so it is critical that these matters are kept under constant review, particularly as the Government’s efforts since 2010 appear to have fallen short of the mark. For that reason, I urge hon. Members to back the Opposition’s amendment to place a renewed focus on tobacco fraud and tackling this important issue on the Government’s agenda.

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

Clause 71 makes changes to ensure that the tobacco duty regime continues to work as part of the Government’s wider health agenda to reduce smoking prevalence—something we can all agree on, on both sides of the House. The clause implements tobacco duty increases of 2% above RPI inflation.

The Government are committed to reducing smoking rates, especially among young people. Smoking is the largest cause of preventable illness and premature death in the UK, killing half of all long-term users. There is no such thing as safe smoking. Treating smoking-related illnesses is also a drain on our public health services, costing the NHS approximately £2.7 billion in 2006-07. Reducing the affordability of tobacco products through taxation is acknowledged to be very effective in reducing smoking prevalence.

Clause 71 increases the duty rate on all tobacco products by 2% above inflation. The change came into effect at 6 pm on 19 March, adding 24p to a packet of 20 cigarettes and 23p to a 25-gram packet of hand-rolling tobacco. Research has consistently shown that the price of tobacco products affects demand. By increasing prices through taxation, we hope to strengthen the Government’s wider health agenda to reduce smoking prevalence, which, as I said, will reduce health inequalities and reduce the cost to the NHS of treating smoking-related illnesses. Research also shows that, in addition to establishing high tobacco duty rates, maintaining high rates is also important in reducing smoking prevalence. That is why annual duty increases of 2% above inflation will continue until the end of the next Parliament.

Let me turn to the Opposition’s amendment 24, which would require the Government to publish a report on the levels of revenue from the duty rates set out in the clause, the changes to revenue due to illicit market share and any relevant actions to mitigate that. As we have heard, it is another Opposition-sponsored review. The Government do not want just to keep having reviews, but actually to make some changes that will have an effect. We want action. I wonder whether all these reviews will be chaired by redundant Labour MPs after the next election. [Interruption.] I just wanted to wake the Committee up. The Government already publish the information, so the amendment is superfluous.

The forecasted revenue impacts of the tobacco duty announcements made in the Budget were published in the Budget document. In addition, HMRC’s annual report, published each July, sets out the tobacco products duty revenue raised in the previous year. Illicit market share is documented in HMRC’s annual tobacco tax gap estimates. The 2013-14 estimates are due to be published in autumn 2014. HMRC and Border Force’s work to combat the illicit trade is set out in the “Tackling tobacco smuggling” strategy, which was first published in 2000 and updated in 2006, 2008 and 2011. The Government are undertaking a joint review of the strategy, which we aim to publish later this year.

It is clear that the information requested by the amendment is already provided by the Government. I understand, however, the shared desire of the Committee to tackle the illicit tobacco trade and ensure that smuggling does not undermine the health and revenue benefits of duty increases. HMRC and Border Force have an effective strategy in place to tackle illicit activity and, as documented in the reports I have just referenced, we have seen a long-term decline in the illegal trade. The illicit market  has reduced from 22% to 9% for cigarettes and from 61% to 36% for hand-rolling tobacco since the launch of the first anti-fraud strategy. To further build on that success, the Government will consult on a package of measures to strengthen the response to tobacco smuggling, which will ensure that HMRC and Border Force continue to combat tobacco smuggling effectively.

The hon. Member for Newcastle upon Tyne North mentioned the minimum excise tax. The Government have committed to consult on whether a minimum excise tax for tobacco—which would set a minimum duty rate for a packet of cigarettes—could help to improve public health. This could also be a useful tool to limit the availability of cheap tobacco, further helping to reduce the affordability of smoking.

Let me turn to some of the hon. Lady’s questions. On receipts and HMRC progress, receipts have been on a broadly upward trend in recent years. Receipts are forecast to increase every year up to and including 2018-19. Since the launch of the first anti-fraud strategy in 2000, the illicit market for cigarettes has been reduced from 22% to 9%. The Government continue to monitor tobacco receipts and developments in the tobacco market.

On the National Audit Office and Public Accounts Committee reports, HMRC has already implemented four of the five NAO recommendations and five of the PAC recommendations. We thank them for their work. On working with other agencies, HMRC works with a variety of agencies, including trading standards, to combat illicit trade. Where appropriate, HMRC works with the tobacco industry. HMRC also works collaboratively with public health groups, such as the north of England project, which was acknowledged in the NAO report. Such joint working is clearly important.

On anti-fraud and revenue protection, the Government announced in the Budget that we would consult on three tobacco anti-fraud and revenue protection areas. One relates to anti-forestalling restrictions and the framework convention on tobacco control protocol, which is a World Health Organisation agreement to tackle the illicit tobacco trade. It contains details of a track-and-trace system, but the tobacco products directive proposals go beyond what is required under the trade protocol. We need to see where the directive finally gets to.

I think I have answered the hon. Lady’s questions. The clause implements the tobacco duty rate increases of 2% above inflation and fits into the Government’s wider health agenda of reducing smoking prevalence. I therefore ask her to withdraw her amendment.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the Minister for her response to my queries. We tabled the amendment to send a strong signal that we want to see the issue rising up the Government’s agenda, and we are reassured that she has work ongoing in this area. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 71 ordered to stand part of the Bill.

Photo of Martin Caton Martin Caton Labour, Gower

Clauses 72 to 74 have been considered by the Committee of the whole House.