House of Commons - Treasury

Select Committee on Treasury Second Report

IV ALCOHOL AND TOBACCO SMUGGLING

Alcohol and Tobacco Duty Rates

74. There were numerous calls from witnesses for the rates of excise duty on alcohol and tobacco to be reduced in order to discourage smuggling. Several witnesses argued that reducing duty rates was the only effective means of combatting smuggling.[249] A common observation was that smuggling had resulted from the combination of the UK's high duty rates and the opening up of the single European market.[250] The Imported Tobacco Products Advisory Council, for instance, asserted that "the problem of smuggling could be resolved at a stroke by reducing excise levels on tobacco products to about halfway towards the levels in Europe".[251] The Gin and Vodka Association of Great Britain said that "the root cause of the problems of fraud, diversion and smuggling is the current high levels of UK taxation compared with our near neighbours in the EU".[252] The Tobacco Alliance stated that "80% of retailers believe that the Government must act to reduce tobacco tax".[253] The Campaign for Real Ale recommended a 20% cut in alcohol duty rates over three years.[254]

75. International comparisons of excise duty rates were much employed to demonstrate that the UK's rates were significantly higher than those of European neighbours.[255] It was suggested by some witnesses that more urgent progress towards a harmonisation of EU duty rates, which it was assumed would involve UK rates being reduced, was required.[256] Customs and Excise explained that "the European Union's tax policy in the tobacco and alcohol area rests essentially on a regime of agreed minimum rates for tobacco and alcohol which, by the standards not only of the United Kingdom but of most of the northern members of the European Union, are pretty low. It is left to Member States to make their own judgement on these matters and that is what Ministers do once a year in the context of the annual budget".[257] In order for EU duty rates to be harmonised, therefore, the agreed minimum rates would need to be increased — significantly, if the UK was not to need to reduce its rates at the same time. This course of action is not likely to be an easy one for the UK to negotiate. The Financial Secretary to the Treasury recently stated that there had been no recent discussions between the Chancellor of the Exchequer and Ministers in other EU states regarding the harmonisation of excise duty on beer.[258]

76. Examples were given of countries which had successfully dealt with smuggling by reducing their duty rates, including Canada, Sweden, Denmark and Switzerland.[259] We investigated the Canadian experience during our visit there in October 1999 and found that tobacco smuggling had declined after tobacco duty rates were reduced, although there had been some switching to alcohol smuggling. Issues associated with the long land border between the US and Canada make comparisons between policies to combat smuggling in Canada and the UK difficult, however,[260] and we note the comments of Professor Joy Townsend, that the reduction in tobacco duty rates in Canada also had the effect of reducing Government revenue.[261] With regard to the Swedish example, Customs and Excise said "the high rates of duty there operated only for a fairly short time and they were brought down again fairly smartly".[262]

77. When we suggested to Customs and Excise that a reduction in duty rates would put an end to alcohol and tobacco smuggling, the department argued vigorously that this was an over-simplification of the true picture. Mr Byrne admitted that the "white van trade" would "automatically disappear" if UK duty rates were harmonised with those elsewhere in the EU, but said that this "would not for one moment mean that the tobacco problem would change".[263] Customs and Excise argued that "the bulk of the problem is in duty free from outside of the Community", the only solution to which would be "to remove excise duty virtually altogether". As evidence of this they cited the smuggling problems in Spain and Italy, countries with lower excise duty rates than the UK.[264] The department also suggested that, if duty rates were reduced, the "white van trade" would simply move into other forms of smuggling.[265] Consequently, "the equalisation of rates might do something in a very small area but it will not change the effect of the basic problem".[266]

EFFECT ON GOVERNMENT REVENUE

78. Some witnesses argued that a reduction in duty rates would have the effect of increasing Government revenue, as well as reducing smuggling.[267] They argued that, if duty rates were cut, consumers would switch from buying alcohol and tobacco from abroad to domestically retailed goods to such an extent that the reduction in excise revenue caused by the cut in rates would be more than offset by the increased domestic demand. It was also argued that, by reducing duty rates to reduce smuggling, firms which are currently facing difficulties because of smuggling would benefit from increased trade, thereby affecting taxation revenue and public expenditure in other positive ways.[268] The Brewers and Licensed Retailers Association has been particularly prominent in calling for a modest reduction in alcohol duties, which, it claimed, would have a significant effect on the alcohol industries and Government revenue.[269]

79. Economists from the Institute for Fiscal Studies (IFS) have used econometric analysis to test the relationship between alcohol duty rates and Government revenue. They have argued that reductions in beer and wine duty rates would cause Government revenue to be reduced, because the resulting increase in domestic demand would be too small to offset the rate cuts. With regard to spirits, they concluded that rates were currently set at a level which maximised Government revenue.[270] The results of this study have been hotly contested by the All-Party Parliamentary Beer Group, to which the IFS team responded, and the Brewers and Licensed Retailers Association.[271]

80. The IFS researchers agreed to our request to extend their analysis to tobacco products. Mr Mason, of the Tobacco Alliance, hoped that the IFS model would show that the responsiveness of UK domestic demand to changes in tobacco duty rates would demonstrate the need for rates to be reduced.[272] In fact, using the model developed for alcohol, the IFS model showed that the Government could earn more revenue by further increasing tobacco duty rates.[273] This finding is supported by the work of other researchers.[274]

81. The Minister rejected claims that reductions in duty rates would increase Government revenue, citing both the IFS research and the Treasury's own models.[275] The Chancellor has not been entirely dismissive of the arguments of the alcohol and tobacco industries, however. There was no change to the duty on spirits or hand rolling tobacco in the 1998 and 1999 budgets and duty on almost all alcoholic drinks was left unchanged in 1999. As we have seen, in the 1999 Pre-Budget Report, the Chancellor announced that the automatic annual 5% real terms increase in tobacco duty rates would be discontinued, and that the revenue from further real rate increases would be set aside for the National Health Service.[276]

HEALTH POLICY

82. We have not sought to examine in detail the Government's policy on the tobacco industry and the health risks of smoking, which are the subject of an inquiry by the Health Committee.[277] We received evidence from Professor Joy Townsend of the University of Hertfordshire, Action on Smoking and Health and the Health Education Authority, however, arguing that further increases in tobacco duty rates were required to help achieve various Government health objectives.[278] ASH was particularly critical of the Chancellor's decision to abolish the tobacco duty escalator in the Pre-Budget Report.[279] The Paymaster General assured us that there were no "grounds for fearing that the Government's resolve in tackling the issue of smoking is not as dedicated as it ever was."[280]

CONCLUSION

83. Although it is not disputed that reducing excise duty rates would stop the notorious "white van trade" in smuggled alcohol and tobacco, it is less clear that this course would affect large scale smuggling, which appears to be the major problem. Also, although debate on this matter continues, academic evidence does not lend weight to the argument that reducing duty rates would discourage cross-Channel trade, legitimate or otherwise, to such an extent that government revenue would increase. We have also taken as given that the Government's health policy objectives require high rates of duty on tobacco. The Government has a right to set its excise duty rates at the levels it sees fit, within the framework agreed with international partners, and to defend those levels when undermined by criminality. It must take a wide range of factors into account, including health policy objectives and the need to raise revenue, as well as the impact of duty rates on smuggling. Considering all these factors, and accepting that cutting duty rates, especially on tobacco, might help reduce smuggling, we recognise that the Government's policies on the level of duty rates will rightly be guided by far wider considerations than those concerned exclusively with alcohol and tobacco smuggling.

Other Measures

84. Witnesses made a number of suggestions about other measures which could be taken to combat smuggling, many of which involved tightening existing penalties for smuggling and using publicity to highlight its adverse consequences.[281] The Scottish Grocers' Federation called for the single European market to be "re-assessed" but this approach was dismissed by the ATFR report.[282] The Campaign for Real Ale argued that the system of Minimum Indicative Limits (MILs) employed within the EU should be tightened up.[283] These limits are "used to try to distinguish between legitimate personal importations and smuggled...or commercial importations. The presumption is that up to and including the indicative levels these are legitimate unless the Customs officer can show otherwise. Above those levels, the burden of proof changes and, if challenged, the importer must demonstrate how and why these [goods] are being imported for personal consumption as opposed to commercial or other purposes".[284] The MILs are much higher than the travellers' allowances in place before the launch of the single EU market but Customs and Excise argued that they were "the best result that could be secured" given that some EU members argued against having them altogether.[285] Mr Cotton, of the Wine and Beer Company, argued that the MILs were "rubbish" and "completely contrary to the whole spirit of the EU".[286]

Impact of Merger

85. Witnesses from the alcohol and tobacco industries were not convinced that the merger of the revenue departments, or the Closer Working programme, would be of benefit in the fight against smuggling. The Scotch Whisky Association, for instance, expressed concern that merger would lead to resources being at least temporarily diverted away from the front-line to handling reorganisation.[287] We have already argued, however, that merger could generate cost savings, for instance due to the amalgamation of support services, which could be ploughed back into anti-smuggling work. Synergistic benefits resulting from merger could also assist in combatting alcohol and tobacco smuggling, as better use was made of information and expertise across the whole of the merged department. We believe that the merger of the revenue departments could make more effective the Government's response to smuggling.

Conclusion

86. The Government has not found a policy response to alcohol and tobacco smuggling of appropriate size to deal with the scale of the problem. Tobacco smuggling, in particular, is seriously undermining Government revenue and having a deleterious effect on legitimate retailers. The measures recommended by the Alcohol and Tobacco Fraud Review and announced in the Pre-Budget Report are all worthy but, even collectively, they are not likely to be enough to bring an early end to smuggling or to give the impression that the Government is serious about tackling this problem. The Government needs to make a more significant commitment to reducing smuggling in order to stop the problem getting further out of hand.

87. One such commitment would be to reduce excise duty rates, perhaps dramatically. We have already questioned whether this should be the Government's primary response to smuggling. Consequently, we believe that more should be done to keep smuggled goods out of the UK. This will require significantly more resources for Customs and Excise, both for front-line staff at ports, particularly the major container ports, and for inland and investigative staff. We recommend that these are provided. The gradual erosion of staffing levels in Customs and Excise in recent years has, in our opinion, contributed to the rise of smuggling and must be reversed; we have already expressed our dissatisfaction at the need for Customs and Excise to divert resources from other important areas of its work to focus on tobacco smuggling.[288] An investment in extra Customs and Excise officers well in excess of the £35 million committed as a result of the ATFR is likely to be cost-effective. We also look to the department to ensure that improved links between different branches of Customs and Excise, and between Customs and Excise and Inland Revenue staff, are developed to ensure that the fight against smuggling is as effective as possible.

249 For instance, Ev, p89, paragraph 10.6, p104, paragraph 1.2, pp105, 107, p114, paragraphs 2.4 and 2.8, p260, paragraph 12, p267, paragraph 1.2, pp311-3 Back

250 Qq168, 202; Ev, p83, paragraph 4.10, p88, paragraph 9.2, p264, paragraph 3.5 Back

251 Ev, p264, paragraph 2 Back

252 Ev, p277 Back

253 Ev, p112, paragraph 5.6 Back

254 Ev, p105, section 2 Back

255 For instance Ev, p273, chart A, p274, chart C, p287, annex; for a detailed, recent comparison see The IFS Green Budget: January 2000, Institute of Fiscal Studies, p111, table 7.2 Back