House of Commons - Treasury

Select Committee on Treasury Second Report

IV ALCOHOL AND TOBACCO SMUGGLING

46. Alcohol and tobacco smuggling has emerged as one of the most significant challenges to be faced by Customs and Excise in recent years.[152] There are a number of types of alcohol and tobacco smuggling, including:[153]

_the smuggling of duty paid goods (the _white van trade_), where goods bought ostensibly for personal use are sold on in the UK without payment of UK duty and VAT_
_diversion fraud, where goods destined for export are in fact diverted to the UK home market without payment of VAT or UK duty_
large-scale smuggling of alcohol and, particularly, tobacco from countries outside the EU by concealment or misdescription in order to evade duty and VAT.

Scale

47. Establishing how much revenue is lost to the Exchequer each year as a result of alcohol and tobacco smuggling is not a simple matter, not least because of problems with the presentation of the estimates made by Customs and Excise.[154] Table 5 sets out the revenue lost (VAT and duty) from only one form of smuggling — cross-Channel smuggling.

Table 5: Estimated revenue lost (VAT and duty) through Cross-Channel smuggling 1996-99[155]

£ million	1996	1997	1998	1999
Total Alcohol	200	180	220	215
Total Tobacco	680	790	1,000	1,055
Total	875	970	1,220	1,270

Table 6 sets out Government revenue from alcohol and tobacco excise duties.

Table 6: Government Revenue from Excise Duties, 1995-96—2000-01[156]

£ million	1995-96	1996-97	1997-98	1998-99	1999-2000 (forecast)	2000-01 (forecast)
Total Alcohol	5617.2	5631.2	5741.6	5765.6	6300.0	6500.0
Total Tobacco	7290.6	8038.8	8356.1	8207.1	5700.0	7100.0

It can be seen that the proportion of VAT and excise duty revenue lost as a result of cross-Channel smuggling amounted in 1998-99 to:

in the case of alcohol smuggling, less than 4% of total revenue from alcohol excise duties
in the case of tobacco, over 12% of total revenue from tobacco excise duties.

As for the loss of revenue from all forms of smuggling, Customs and Excise has estimated that £1.7 billion was lost from all forms of tobacco smuggling, including large-scale freight smuggling, in 1998, and that £2.5 billion was lost in 1999.[157] The proportion of VAT and excise duty lost as a result of all forms of tobacco smuggling, therefore, in 1999 was estimated at over 30% of total revenue from tobacco duty. The department has not been able to estimate the total revenue loss resulting from all forms of alcohol smuggling, however.[158] Customs and Excise's estimates of the scale of alcohol and tobacco smuggling show that tobacco smuggling is a more serious problem than alcohol smuggling and one that appears to be rapidly worsening.

48. Another significant feature of table 6 is that it shows that the Government is predicting revenue from tobacco duty to fall by over 30% in 1999-2000, although a partial recovery is expected thereafter. The Minister explained that this forecast took account of the growing effects of "forestalling", whereby "tobacco manufacturers produce and clear large amounts of goods at pre-Budget rates of duty in advance of the Budget, and then clear only very small amounts in the months subsequent to that".[159] She admitted, however, that the figures took account of "reducing release for sales from the warehouses of tobacco products" although specific forecasts of revenue loss from smuggling are not published.[160] The revenue collected by the Government from tobacco duty is being significantly undermined by smuggling.

49. Alcohol and tobacco smuggling should not be confused with legitimate cross-Channel shopping. Since the creation of the Single Market in 1993, consumers have been able to bring unlimited quantities of alcohol, tobacco and other goods into the UK from EU countries for personal consumption without being liable for duty.[161] Table 7 shows recent trends in revenue lost as a result of legitimate cross-Channel shopping.

Table 7: Estimated revenue (VAT and excise duty) lost as a result of legitimate cross-Channel shopping 1996-98[162]

£ million	1996	1997	1998
Total Alcohol	190	240	285
Total Tobacco	50	60	85

50. The department_s estimates of the scale of alcohol and tobacco smuggling have been criticised by a number of trade associations as inadequate. The Campaign for Real Ale suggested to us that the total revenue loss from beer smuggling exceeded _700 million in 1998-99.[163] The Tobacco Manufacturers_ Association argued that the revenue loss resulting from tobacco smuggling totalled _3 billion in 1999.[164] The Scotch Whisky Association was critical of Customs and Excise_s inability to estimate revenue lost from alcohol diversion fraud and told us that the revenue lost from spirits diversion fraud was _possibly several times more_ than the _30 million estimated to be lost as a result of crossChannel smuggling of spirits.[165] The Association called for _a much fuller, more accurate and open Government assessment of the scale and costs of the problems of smuggling and fraud_.[166] The Public and Commercial Services Union, which represents many of the Customs and Excise staff employed to tackle smuggling, described the department_s estimate of revenue lost as a result of tobacco smuggling as _extremely conservative_.[167]

51. Customs and Excise defended the robustness of its estimates of alcohol and tobacco smuggling in oral evidence. Mr Howard told us that _we have had extensive discussions, both with the tobacco manufacturers and various producers and distributors in the alcohol industries, to discuss the methodologies we use_ and that differences of views on how to assess the scale of smuggling had _narrowed...very considerably_.[168] Nevertheless, we were surprised to find that Customs and Excise has not estimated the total revenue loss resulting from all forms of alcohol smuggling, including diversion fraud and illegal importation of containers. The Scotch Whisky Association was able to tell us about latest trends in diversion fraud, based on sales data from cash and carry warehouses.[169] We recommend that Customs and Excise, working with the relevant industries, formulates estimates of the revenue lost as a result of all forms of alcohol smuggling.

Who are the smugglers?

52. Several witnesses cited the "white van trade" as the main component of alcohol and tobacco smuggling.[170] Customs and Excise told us that the "white van trade" accounted for "probably less than a quarter" of the smuggling problem. Most alcohol and tobacco smuggling involved the freight trade and "is mainly in the hands of people who are reasonably well organised". Customs and Excise warned us that "there is a significantly increasing amount of serious criminality that is getting involved in the major container routes".[171]

Impact

53. As tables 5 and 6 showed, alcohol and tobacco smuggling can result in revenue being lost to the Exchequer from evasion of duty and VAT. We received evidence of other, wider effects of smuggling on society, including:

loss of trade for legitimate alcohol and tobacco retailers such as newsagents, public houses and off licences, sometimes resulting in closure, unemployment and consequential public expenditure implications.[172] The Association of Convenience Stores told us that, on average, independent retailers had lost over 16% of their trade in tobacco and alcohol in the last year due to smuggling.[173] We also received details of lost trade in strong lagers from A. G. Parfett and Sons Ltd,[174] hand rolling tobacco from Palmer, Harvey and McLane Ltd,[175] and beer sold in Shepherd Neame public houses from the Independent Family Brewers of Britain,[176] which were attributed to smuggling
crime, sometimes violent and organised, linked to smuggling, particularly in the vicinity of the Channel ports[177]
encouragement of non-compliance with tax obligations more generally[178]
encouragement of tobacco and alcohol consumption, due to lower prices for smuggled goods and the easier availability of such products to children.[179]

A number of witnesses commented that these adverse impacts were likely to be most keenly felt in areas close to where alcohol and tobacco tends to enter the country illegally, particularly Kent, although we received evidence from retailers throughout the country about the impact of smuggling on their businesses.[180] We recommend that the Government examines the social and economic impacts of alcohol and tobacco smuggling.

Government Response

54. In its latest annual report, Customs and Excise states that it "continued to report record levels of success in tackling fraudulent imports and sales of alcohol and tobacco, as tougher policies and better targeting began to bite".[181] Numerous statistics are published by the department to measure the extent to which it is successfully tackling smuggling, some of which are tabulated below.[182]

Table 8: Value of Revenue Evasion Detected

£ million	Target	Outturn
1995-96	6.5	14
1996-97	14	29.4
1997-98	37	76
1998-99	184	388.4

Table 9: Value of Criminal Evasion Prevented

£ million	Target	Outturn
1995-96	n/a[183]	150
1996-97	200	572
1997-98	241	1719
1998-99	750	986

Table 10: Excise Duties and Single Market Proceedings

	1994-95	1995-96	1996-97	1997-98	1998-99
Number of People Sentenced	20	49	89	131	175
Total Sentences Passed (in months)	n/a	n/a	n/a	1,741	2,194
Court fines and costs	£401,200	£304,100	£207,700	£102,405	£41,592
Compound settlements[184]	£47,300	£246,000	£496,800	£478,126	£1,674,698

55. The figures presented in the tables above show that Customs and Excise has been detecting increasing amounts of excise revenue lost from smuggling, preventing an increasing amount of revenue being lost as a result of smuggling, and securing an increasing number of convictions for offences related to alcohol and tobacco smuggling. Customs and Excise told us in oral evidence that "the first seven months of this year, where we have been trying all sorts of new methods, are a dramatic improvement on the same period last year".[185] We congratulate all those staff whose dedicated and determined efforts are resulting in such significant detections and recoveries. We appreciate the difficulties and indeed the dangers that they often overcome — we saw some evidence of these for ourselves on our visit to Dover — in order to produce such results. This does not necessarily show that Customs and Excise has been more successful in its fight against smuggling, however. The increasing detection of smuggling may simply reflect the increasing incidence of smuggling, as shown in table 5, and the value of revenue evasion detected remains a small proportion of the estimated total revenue being lost from smuggling. In our view, Customs and Excise can report with confidence "record levels of success in tackling fraudulent imports and sales of alcohol and tobacco" only when their estimates of the revenue being lost from smuggling begin to decline, the opposite of the current trend in relation to tobacco.

56. Tables 8 and 9 relate to the two main variables which Customs and Excise targets in order to measure its effectiveness in tackling alcohol and tobacco smuggling. There is a danger that the distinction between the "value of revenue evasion detected" and the "value of criminal evasion prevented" might not be entirely clear to the lay observer. Nor is it clear why the value of revenue evasion detected in 1998-99 differs from the "revenue value of alcohol and tobacco detections made nationally by Customs EVO and anti-smuggling staff" which was cited in Customs and Excise's written evidence to us.[186] Furthermore, the department has, at different times, targeted a number of other variables in recent years. In 1995-96 Customs and Excise said that it had exceeded its target for securing 900 vehicles used to carry smuggled goods.[187] In 1997-98 the number of detections made of smuggled goods yielding excise revenue over £10,000 was reported.[188] In 1998-99 the department said that it had easily exceeded its target for the number of major excise smuggling organisations dismantled or significantly disrupted.[189] It is difficult to put these targets, and outcomes, into context without being able to make comparisons over a number of years. Targets published for one year only are of extremely limited value in terms of assessing the effectiveness of Government policies. We also discovered an error in the figures reported to Parliament of the number of vehicles seized annually by Customs and Excise.[190] We recommend that Customs and Excise reviews its objectives and targets in relation to alcohol and tobacco smuggling with a view to clarifying them and making it easier to assess the department's performance over time.

CRIMINAL AND CIVIL PENALTIES

57. Mr Byrne, of Customs and Excise, told us that, in recent years, the number of custodial sentences and confiscation orders related to alcohol and tobacco smuggling had increased.[191] He argued against the notion that heavier penalties would necessarily help the fight against alcohol and tobacco smuggling, however. Smugglers have received custodial sentences of up to eight years, but "the difficulty we have to face in that area is it is quite resource intensive to push people through the courts [and] even those who we have successfully prosecuted — and they have been imprisoned — have demonstrated that it does not necessarily deter them from continuing to organise smuggling runs".[192] Confiscation orders have mostly been used against drug smugglers because, with excise fraud, "rather than confiscate the asset we can pursue people for the back taxes".[193] A new initiative being considered throughout Government is the possibility of civil confiscation of assets, in order to "make it easier...to get some recompense from criminals who are pretty fleet-footed at salting away assets in a way which it is very difficult to get at if you have to prove a specific criminal case to the standards of criminal prosecution and a link between the conviction and the assets every time".[194]

CLOSER WORKING WITHIN CUSTOMS AND EXCISE

58. Customs and Excise told us that it was increasingly seeking to look at firms' VAT, excise and customs obligations as a whole, rather than have different parts of the department look at each set of obligations separately for each firm.[195] In terms of combatting tobacco smuggling, Dame Valerie Strachan told us that the department's approach often involved "our anti-smugglers and our customs people and our excise people and indeed our VAT people because we are using our VAT cash teams to check on what is happening at the retail end".[196] Mr Troup told us that, in his experience, there was still "insufficient coordination" between different parts of Customs and Excise.[197] The Confederation of British Industry made a similar point in relation to the advice sought by taxpayers on tax and duty matters from Customs and Excise.[198] In oral evidence, the department said that the links between its shadow economy teams and excise verification officers were "good but improving" and Dame Valerie Strachan explained that the Operational Policy directorate was taking a "holistic" approach to improving linkages between the different components of Customs and Excise.[199] We approve of this drive towards a more joined up departmental approach. We are not convinced, however, that the different parts of Customs and Excise are working together as efficiently and effectively as they could be to deal with problems such as tobacco smuggling. We look to the department to improve its internal linkages and working arrangements as a matter of priority from now on.

59. In recent months, the number of Customs and Excise staff engaged in work to counter tobacco smuggling has increased by around one third.[200] The extra staff have been switched from other areas of Customs and Excise, including aspects of VAT work, as part of the department's "disruption initiative".[201] Dame Valerie Strachan admitted that the initiative did entail "some costs to other areas but we try to do it in a way which minimises the effect on others".[202] Development of the disruption initiative demonstrates that Customs and Excise staff can work flexibly across boundaries within their department and it might also help Customs and Excise take advantage of internal synergies in future. While we commend the willingness of Customs and Excise to develop a flexible response to tobacco smuggling, we are profoundly dissatisfied that resources should need to be diverted from other important areas of the department's work in order to deal with the present crisis. In our opinion, the need to transfer staff from other work demonstrates that Customs and Excise lacks the resources it requires to function effectively, an issue to which we return in paragraph 87.

ALCOHOL AND TOBACCO FRAUD REVIEW

60. Customs and Excise published a review of alcohol and tobacco smuggling (ATFR) in January 1998 which included a number of recommendations intended to tackle the problem. The principal recommendation was that additional staff be made available to tackle smuggling, of which 145 are now in place, most of which are frontline staff.[203] The department told us that "other measures include new computer systems to counter paperbased (diversion) frauds; a tougher vehicle restoration policy; greater liaison with trade bodies (through the Excise Alliance); and greater cooperation with other agencies, such as joint operations with the Police, the Benefits Agency and Trading Standards".[204] Customs and Excise was allocated £35 million over three years as part of the Comprehensive Spending Review to implement the ATFR recommendations, £9 million being made available in 1998-99.[205] We commissioned and have published information on the implementation of these recommendations.[206] Customs and Excise told us that the "record of the ATFR in proposing measures which will deal effectively with diversion fraud has been pretty good".[207]

61. Several witnesses were critical of Customs and Excise's response to alcohol and tobacco smuggling. The Tobacco Manufacturers' Association described the ATFR as a "very modest and wholly inadequate" response to tobacco smuggling.[208] The Gin and Vodka Association of Great Britain said that "the ATFR as a whole lacks structure and contains a scattergun of proposals", criticisms echoed by the Brewers and Licensed Retailers Association.[209] The Public and Commercial Services Union told us that there had been "little or no progress in implementing some of the report's recommendations".[210] A wide range of alcohol and tobacco trade associations alleged that some of the ATFR recommendations, particularly those intended to tackle diversion fraud, imposed unfair burdens on compliant firms without effectively dealing with smugglers.[211] Customs and Excise said that it was consulting extensively to avoid "simply heaping...burdens on retailers".[212] Finally, the Scotch Whisky Association complained that the ATFR "ignored the principal driver of fraud, namely high duty rates".[213]

HOLDING AND MOVEMENT OF EXCISE GOODS

62. Much of the criticism from the alcohol and tobacco industries of the ATFR has centred on the changes it proposed to the systems for the holding and movement of excise goods. These systems are EU-wide and almost entirely paper based. Customs and Excise's ATFR report concluded that "even at basic levels, the existing rules [for the commercial movement of duty paid goods in the EU] were not being complied with" and that the system for the movement of goods which have not paid VAT or duty across the EU "has been subject to widespread abuse".[214] The Scotch Whisky Association described the database of authorised tax warehouses and warehousekeepers as "unclear, incomplete, out of date and inaccurate".[215] These weaknesses have provided ample opportunities for abuse, leading to diversion fraud and freight trade smuggling.[216] There were several ATFR recommendations to tighten up these systems and to computerise them.[217]

63. Agreement is required within the EU to improve and modernise the systems concerned with the holding and movement of excise goods. Many ATFR recommendations were aimed at influencing the conclusions of the EU's High-Level Fraud Review, on which we received a note from Customs and Excise.[218] The Scotch Whisky Association complained of "insufficient resources devoted to excise issues within the European Commission in order to progress issues which are in urgent need of attention", a concern we expressed to Customs and Excise.[219] Dame Valerie Strachan said that "everybody is very keen to help each other on this" issue and also explained that, in advance of the computerisation of the excise control systems, it was intended that the UK would set up an "early warning system" of excise good movements by April 2000.[220] The Scotch Whisky Association was concerned at the practicalities of this system and also provided us with detailed points about other aspects of the ATFR's recommendations in this area.[221] It is important that Customs and Excise addresses the detailed points made by witnesses about the proposed changes to excise control systems, particularly given criticisms that burdens on compliant firms might be increased. We were concerned to find that the systems remain paper-based and that opportunities for abuse seem unacceptably rife. We recommend that the systems for the holding and movement of excise goods are brought into the 21st century, by computerisation, as quickly as possible.

TAYLOR REVIEW

64. In the March 1999 Budget, the Chancellor of the Exchequer announced that there would be an "independent evaluation of the strategy and measures deployed to tackle excise duty and fraud and evasion, in particular the growing threat of tobacco smuggling" which Mr Martin Taylor, formerly Chief Executive of Barclays Bank, was asked to undertake.[222] The results of Mr Taylor_s evaluation influenced the measures relating to tobacco smuggling announced in the PreBudget Report of November 1999.[223] We requested sight of Mr Taylor_s report to the Chancellor so that we could assess whether the measures announced by the Chancellor to deal with tobacco smuggling fully met the evaluation_s recommendations. We were also concerned to investigate how Mr Taylor had undertaken his review, given that witnesses from several key alcohol and tobacco trade and retail associations told us that they had not been consulted by him.[224] We were told that the advice tendered by Mr Taylor was _personal and confidential_ to the Chancellor and could not be made available to Parliament as a result.[225] We consider it unacceptable that the Treasury should commission a review of an important area of Government policy, and announce policy measures apparently based on the outcome of that review, without allowing Parliament access to the review_s conclusions. We recommend that the Chancellor make available for Parliamentary scrutiny the results of Mr Martin Taylor_s recent evaluation of Government policy to tackle tobacco smuggling.

PRE-BUDGET REPORT

65. The 1999 Pre-Budget Report included a number of measures to combat tobacco smuggling, including:[226]

a new national network of x-ray scanning equipment
pack marks for tobacco products to indicate that UK duty has been paid, and new offences relating to the trade in smuggled tobacco
a proposal that the licences for pubs and related premises include provision for punishing the retail of smuggled goods
more vigorous use by Customs and Excise of powers to confiscate assets used in smuggling
more publicity for the rules regarding the importation of alcohol and tobacco from other EU countries.

The Chancellor also announced that tobacco duty rates would no longer be automatically increased each year by 5% in real terms.[227]

66. Many of the measures included in the Pre-Budget Report were recommendations of the Alcohol and Tobacco Fraud Review. X-ray scanners, tobacco pack marks and associated offences, and increased publicity relating to smuggling, including a leaflet explaining the law on the importation of alcohol and tobacco from the EU, were all recommended by the ATFR in 1998 and have been the subject of work within Government since then.[228] The suggestion that the measures included in the Pre-Budget Report followed from Martin Taylor's advice to the Chancellor would appear only to apply to those measures not recommended by the ATFR — the need for Customs and Excise to exercise existing powers more vigorously and the changes to the licensing framework for pubs and related premises, on which detailed proposals are awaited. It is unclear why, fifteen months after the report of Customs and Excise's Alcohol and Tobacco Fraud Review was published, the Chancellor should seek another evaluation of the Government's strategy for dealing with tobacco smuggling, particularly when some of the most significant recommendations of the original review are only now being implemented and given that it is difficult to identify whether or not the Government has acted upon any fresh recommendations by Martin Taylor.

XRay Scanners

67. One recommendation of the ATFR, accepted by the Chancellor in the 1999 Pre-Budget Report, was that the potential for the use of largescale xray equipment to detect smuggled goods in container traffic should be explored.[229] Some witnesses offered support for this initiative.[230] Mr Mason of Tobacco Alliance told us that his organisation had long supported the introduction of xray scanners and that _if you can xray containers quickly and economically they can stop large consignments coming in_.[231] We received information about the Dutch experience of the use of x-ray scanners to combat large-scale smuggling, something on which the Paymaster General commented favourably.[232] We questioned Customs and Excise officials and the Minister closely about the time it would take for this network to be set up. Customs and Excise currently envisages purchasing thirteen scanners, of which three would be fixed, four mobile and six relocatable, and anticipates that the first scanners would be operative by 31 March 2001. It is hoped that the full network will be established by the end of 2002.[233] The Minister told us that she was keen for the network to be put in place as quickly as possible, but that concerns about the availability and reliability of the equipment would necessarily cause delay.[234] We received assurances that full account would be taken of the health and safety implications of employing x-ray scanners, particularly from the point of view of the operators.[235] We urge the Minister to be vigilant against any delay to the establishment of the proposed national network of x-ray scanners to combat large-scale smuggling, and recommend that the relevant health and safety authorities are fully consulted about the deployment of the scanners.

Tobacco Pack Marks

68. In his 1999 Pre-Budget Report, the Chancellor of the Exchequer announced that "from early 2001 cigarette packs and hand rolling tobacco pouches sold in the UK will be required to carry a mark to show that UK duty has been paid on them" as well as a date after which the tobacco will not be allowed to be sold. It was also announced that "following the introduction of pack marks, new offences will be brought in to ensure that those who deal in smuggled goods can be prosecuted more quickly and effectively".[236] Customs and Excise published a draft regulatory impact assessment of the proposed pack marks for consultation on 9 November 1999.[237] It is intended that the proposals be included in the Finance Bill 2000.[238]

69. The purpose of the duty paid pack mark is so that "anyone buying or selling tobacco will know immediately whether they are dealing with legitimate goods" and to "make it easier for the police and trading standards officers to help HM Customs and Excise in their enforcement role".[239] Customs and Excise said that the measure would be "very helpful" and estimated that the pack marks alone could have a deterrent effect worth 5-10% of the overall revenue lost from tobacco smuggling.[240] Respondents to the draft regulatory impact assessment were generally supportive of the Government's wish to make smuggled tobacco products easier to identify and intercept, but questioned whether the duty paid mark would prove useful. In oral evidence to us, for instance, Mr Mason, of the Tobacco Alliance, suggested that the duty paid mark would be easy for smugglers to counterfeit.[241] Respondents questioned whether the duty paid mark would have any impact on tobacco diversion fraud and suggested that the health warning on tobacco products already showed whether or not they originated in the UK. A number of respondents commended the use of tax stamps, rather than a duty paid mark, which are bought by manufacturers and placed on tobacco products before distribution from bonded warehouses and which it was suggested were a better indication of UK duty having been paid. Opponents of the duty paid mark suggested that the proposal contravened EU internal market legislation.

70. Action on Smoking and Health (ASH) argued that the Government's proposals for marking packs of tobacco products were "too weak to constitute an adequate or proportional response to the enormous problem of tobacco smuggling". It argued for the introduction of time-limited tax stamps rather than the duty paid mark, particularly in order to combat diversion fraud as well as forestalling. ASH also proposed much tighter state controls on the distribution of tobacco products, akin to those on the distribution of high value pharmaceuticals and the movement of hazardous waste. The organisation concluded by stating that the Government's proposals "appear to have been excessively influenced by the tobacco industry".[242]

71. The Minister assured us that the details of the Government's pack mark proposals were "not cut and dried yet", and that issues such as the ease with which the pack marks could be counterfeited were receiving attention.[243] Although the proposed duty paid mark should make it easier for tobacco products smuggled from abroad to be identified, we are concerned that opportunities for diversion fraud, in particular, might remain unaffected by the proposal and might expand further. Customs and Excise has rejected tax stamps on grounds of "costs for Customs and the trade" but ASH told us that "no cost benefit analysis was presented to justify this argument".[244] We recommend that further consideration be given to the introduction of tax stamps on tobacco products, including the publication of a full analysis of the costs and benefits of such a course.

72. In arguing against the proposed duty paid mark ASH commented that "there appears to be nothing to stop tobacco products bearing these marks being legally exported from the UK without duty being paid. Consignments could then be illegally reimported, perhaps described as a completely different product. This is not unlike the practice of some manufacturers of exporting UK manufactured tobacco products with UK health warnings — an approach that facilitates illegal re-import and subsequent resale".[245] In answer to a recent parliamentary question, the Economic Secretary to the Treasury stated that "Customs does not routinely require tobacco manufacturers or other exporters to provide data on cigarettes exported with UK health warnings and markings. Customs is considering whether there is a case for doing so in future".[246] We are concerned at the possibility that tobacco smuggling might be facilitated by the export of tobacco products bearing UK health warnings and, in future, duty markings, and we recommend that Customs and Excise urgently reviews the extent to which this occurs, and the impact of this practice on smuggling.

73. The proposal that tobacco products should be marked with a date, after which they cannot be sold, is intended to deal with the problem of forestalling, rather than smuggling.[247] It has attracted considerable criticism from tobacco manufacturers, distributors, wholesalers, pack manufacturers and retailers, particularly on grounds of cost. The Tobacco Alliance told us it was likely that the date mark proposal would inconvenience small retailers who might not be able to clear stock within the time period indicated by the date mark.[248] Respondents to the Customs and Excise consultation exercise suggested that, if implemented, the proposal would simply create a black market in tobacco products which had passed their "sell by" date, but which were otherwise fit for consumption. We see no reason why the tobacco trade should be able to benefit financially every year from a one-way bet on tobacco duty rates being increased, by facilitating the sale after the Budget of tobacco products on which the pre-Budget rates of duty have been charged, and, consequently, we support action to put an end to forestalling.

152 We have used the term "smuggling" throughout this Report, including to encompass cases where excise duty is avoided without goods being traded across borders. "Excise fraud" is possibly too broad a term for the problem we discuss and was not generally used by witnesses. "Bootlegging", a US term for illicit trade in alcohol which has been in more general use in the UK since the 1920s, was used interchangeably with "smuggling" by several witnesses Back

153 For further details see Report of the Alcohol and Tobacco Fraud Review, Customs and Excise, Jan 98, (hereafter ATFR), section 4; and Ev, p15, paragraph 9.2 Back

154 Qq552-7, 562-5 Back

155 Ev, p154 Back

156 Annual Report, table A1, p72; Pre-Budget Report, HM Treasury, Nov 99, Cm4479, (hereafter Pre-Budget Report), table B9, p154 Back

157 Ev, p154, paragraph 1 Back

158 Q30 Back

159 Q525; and Q34 for the explanation of forestalling; and paragraph 73 Back

160 Qq38-41, 525 Back

161 Ev, p14, paragraph 9.1; and see paragraph 84 Back

162 HC Deb, 26 Nov 99, c255w Back

163 Ev, p104, paragraph 1.1; also Qq222-3 Back