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To ask Mr Chancellor of the Exchequer, pursuant to the Answer of 6 February 2017 to Question 62819, what estimate his Department has made of the effect of each increase of one per cent in excise duty charged on tobacco products on the (a) size and (b) value of the illicit tobacco market; and what the fiscal effect of changes in that market are.
HM Revenue and Customs (HMRC) has made no assessment of the market or revenue effects of an increase of one per cent in excise duty charged on tobacco products that is restricted only to the illicit market. Consumers are expected to respond to price increases by reducing their consumption of duty-paid tobacco. They may also switch to lower priced products. Reducing consumption of duty-paid tobacco will include reducing consumption of tobacco as well as switching to the illicit market.
This behavioural response to a rise in prices is captured by the price elasticity of demand. More information on HMRC’s long-run estimate of the price elasticity of demand for cigarettes can be found here: https://www.gov.uk/government/publications/econometric-analysis-of-cigarette-consumption-in-the-uk.
Information on the size of the illicit market for cigarettes and hand rolling tobacco is available in HM Revenue and Custom’s ‘Tobacco tax gap estimates 2015-16’ publication, which is available to view at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/561322/HMRC-tobacco-tax-gap-estimates-2016.pdf.