Clause
6
Rates
of tobacco products
duty
Question
proposed, That the clause stand part of the
Bill.
Mr.
Newmark:
You took me by surprise, Mr.
Illsley.
The
Chairman:
In that case, I shall call the
Minister.
John
Healey:
I wish to move the clause
formally.
Mr.
Newmark:
As always, I turn to the explanatory notes when
considering clauses. Paragraphs 4 and 5, which are in the background
note section, are important because they show the thrust of the
Government’s objective, and I shall reflect on them later when
questioning the
Minister.
The
background note begins by
saying:
“Keeping
tobacco prices high is one of a number of measures set out in the
Government White Paper on tobacco, Smoking Kills, intended to
help existing smokers quit the
habit”.
The Government
are seeking, in part at least, to change behaviour. I appreciate that
there are other ways of trying to change behaviour, but clearly this is
a linchpin in changing behaviour. The background note
continues:
“Research
has consistently shown that the price of cigarettes affects demand.
Cigarette prices in the UK are now at historically high
levels.”
That goes back
to the Minister’s discussion with my hon. Friend the Member for
Windsor about price elasticity, what that does and how it impacts on
demand. In normal cases I would agree that a higher price has an impact
on demand. Unfortunately, it does not take into account—I shall
go into this later—the increase in the illicit trade of
cigarettes, particularly hand-rolled cigarettes. I want to probe a
little further the assumptions about changing behaviour, price
elasticity and the impact on the increase in supply of illicit
tobacco.
I begin by
noting that despite consistent increases in tobacco duty, revenue has
been broadly flat for the past few years, given that the out-turn in
2002-03 was the same as the projection for 2007-08. Table C8
onpage 281 of the Red Book shows that tobacco duties were
£8 billion in 2005-06 and £8.1 billion in 2006-07, and
are projected to be £8.1 billion in 2007-08, so the increase has
been relatively
flat.
If duty rates
are indexed to maintain the real price of tobacco, does the Treasury
attribute the real-terms decline in receipts to there being fewer
smokers or more cunning smugglers? Is the purpose of tobacco duty to
raise revenue or to change behaviour, or a bit of
both?
There
are mixed messages here, as elsewhere. The Government say that smoking
kills half of all smokers. Organised criminal gangs who smuggle tobacco
provide a cheap and unregulated supply, which undermines the
Government’s policy of using tax to maintain the high price of
tobacco and to help to reduce smoking, especially among the young. That
implies that the illicit trade has a measurable impact on public
health. Is the Government’s anti-smuggling strategy focused on
improving public health or safeguarding revenue, and what is their
priority? Increasing tax has the potential to stimulate illicit trade
and to provide better access for youngsters to indulge in tobacco
products; hence the two objectives seem to be slightly
contradictory.
The
growth area in the illicit tobacco trade is in counterfeiting, which
has both revenue and public health consequences. Last year, HMRC and
the Treasury published findings that between 85 per cent. and 100 per
cent. of cheap cigarettes sold in London were counterfeit. What is the
latest estimate of the impact of counterfeiting on both public health
and revenue? I shall be interested to hear whether the Minister has
done some homework on that.
Last year, HMRC and the Treasury
published a document with the tongue-twisting title, “New
responses to new challenges—Reinforcing the Tackling Tobacco
Smuggling Strategy”. Given that the Government admit that
smugglers constantly change their strategy to avoid anti-avoidance
measures, can the Minister offer the Committee an update on
HMRC’s evolving strategy one year
on?
HMRC goes on to
argue that illicit market share is falling, although it admits to a
statistical uncertainty, and it has moved to a definition of the
illicit market based on a range between upper and lower estimates. That
range, I read, is between 10 per cent. and 19 per cent. for 2004-05. Is
the Treasury satisfied that data from consumer surveys and estimates
with a spread of 9 per cent. are adequate for revenue forecasting
purposes?
The
Comptroller and Auditor General has to audit the tobacco duty revenue
forecast based on data on the illicit market share dating from 2003-04
because of a lack of more recent firm data. I believe that that was
outlined in the Budget 2007. The revised National Audit Office audited
assumption assumes that the underlying duty paid on cigarettes will be
3 per cent. lower than the estimated out-turn for the current year.
Again, I want to ask the Minister whether the Treasury is confident
that no further downward revision of revenue forecast will be
necessary.
In March
2006, the HMRC-Treasury paper
admitted:
“Tobacco
smuggling costs £2.9bn per year in lost revenue—the
equivalent to 1p off the basic rate of income
tax”.
That
is equivalent to 35 per cent. of tobacco tax receipts; I get that
number mathematically by 2.9 billion divided over 8.1 billion. How does
that compare with HMRC’s estimate of the illicit market share as
being between 10 per cent. and 19 per cent.? Would the cost of
lost revenue as a percentage of total receipts not be a more useful way
of judging the scale of the
problem?
Is HMRC on
track to meet the target for reducing the illicit market share to 13
per cent. by 2007-08, as outlined by the Government? This year’s
Finance Bill contains plenty of anti-avoidance measures to protect
receipts in other areas. Did Treasury officials consider the case for
further legislation to tackle tobacco smuggling? Would tighter border
controls help to tackle tobacco tax evasion? Would the reclaimed
tobacco revenue not go some way towards paying for the new border
police force suggested by the Leader of the Opposition, among
others?
I read in
HMRC’s report of 2005-06 that one in four cigarettes smoked in
Britain is hand rolled, yet half of the hand-rolling tobacco used in
the UK is thought to be illicit, costing £880 million in lost
revenue in 2003-04. In fact, the major example of tax-motivated
behaviour change has been the doubling of the number of those using
hand-rolling tobacco since 1990. Given the continued growth in the
market for hand-rolling tobacco and the level of tax evasion associated
with it, is that the right kind of behaviour change for the Government
to encourage?
Imperial Tobacco has said that
its experience of a smoking ban in Scotland, introduced just a year
ago, and the experience in other markets, such as Ireland, confirms its
view that smokers will continue to smoke.
Any initial dip in consumption diminishes over time. Does the Treasury
concur with that assessment and how did it reach its revised forecast
that the ban would lead to a loss of revenue of just £100
million in 2007-08 and £500 million in 2008-09? Finally, is it
anticipated that further revisions to the projection will be
necessary?
The
Chairman:
For the avoidance of any further confusion,
Members will notice that a number of clauses have no amendments so far.
The question will be that the clause stand part of the Bill, which will
enable debate. No one is required to move the question, as it is put by
the Chairman, and any Member can speak to
it.
Mr.
Goodman:
Welcome to the Chair, Mr. Illsley. The
Financial Secretary began by speculating about what your presence meant
in terms of the goings on in the exalted world of the Speaker’s
Panel. I would not be so bold as to follow him in that, but I know that
you will enjoy every minute of these proceedings and I can see that you
already feel thoroughly at
home.
10.15
am
The
Chairman:
Order. For the benefit of the Committee, it is a
little disconcerting to look around the room and see that the hon.
Member for Coventry, South and I are the longest-serving Members here.
As a former Opposition Whip, I know a lot about Finance Bills. The
disappointment is that they have changed very little since
1988.
Mr.
Goodman:
My experience could not possibly compare to
yours, Mr. Illsley. Although you may not know the background
to this—I shall be very happy to tell you all about it
afterwards—you will at least be pleased to see that I have been
restored to my correct gender and political party in the
Committee’s
proceedings.
The
Economic Secretary to the Treasury (Ed Balls):
We
haven’t
noticed.
Mr.
Goodman:
For such an observant person as the
Economic Secretary, I can scarcely believe that to be
true.
Without any
further ado, let me move on to what is left in the clause that my hon.
Friend the Member for Braintree has not already covered in his masterly
exposition. Just as with the corresponding clause in last year’s
Bill, he has given the Committee a chance to explore the relationship
between the rate of duty, the amount of revenue for the Treasury, and
the effects as regards smuggling, counterfeit and lost revenue. There
is obviously a relationship between those factors. The case for large
increases in duties, which I think my hon. Friend the Member for Ludlow
hinted at last year, is that they will help to reduce smoking and, on
paper at least, bring in more revenue for public services. The case for
lower rates, freezes or even cuts, which was hinted at last year by my
hon. Friend the Member for Braintree—we were therefore able to
have an interesting discussion—is that the law of unintended
consequences applies. In other words, large increases
will stimulate the smuggling of tobacco and counterfeit products, and
thereby reduce revenue and fail to reduce smoking, as people switch
from legal to illegal
tobacco. In what was
his key quotation from last year—which will probably explain his
thinking this year, too—the Financial Secretary acknowledged
those competing pressures and trade-offs, when, with reference to a
Treasury study, he
said:
“The
model’s main findings show that, with tobacco, we are close to
the revenue maximisation point with cigarette duty. That means that any
large real increase in duty rates would increase smuggling and start to
reduce, not increase,
revenues.”
I assume that
that is the position this year, too. That analysis helps to explain why
the Government abandoned the tobacco duty escalator in 2001. It also
helps to make the case for this year’s inflationary rise, which
we do not intend to oppose.
It is perhaps significant that
the Tobacco Manufacturers Association’s response to this
year’s rise has been muted. It said that the
“announcement of an inflation-only
increase in tobacco duty is an indication that the Government
acknowledges that tobacco duty is the cause of the UK’s high
levels of smuggling and crossborder
shopping”.
While calling
for a “fundamental review” of policy, the association
also said:
“We
welcome this continued restraint but it is still an increase. It will
serve only to widen the price differentials between the UK and the rest
of the EU. It will further encourage smuggling and counterfeit activity
and enhance the economic incentive for smokers to shop abroad or
purchase tobacco products on the black
market.”
None the less,
the tobacco manufacturers seem on the whole to be reasonably
satisfied.
The same
cannot, apparently, be said for Action on Smoking and Health. As the
Financial Secretary knows, sadly, we cannot please all the people all
the time. ASH said that it
was
“disappointed that
the Chancellor missed a golden opportunity to raise the tax on tobacco
above the rate of
inflation”.
ASH had
called for a 19p increase on a packet of 20 cigarettes, which
is equivalent to a 3 per cent. increase above the inflation
rate.
As I have said,
we do not intend to oppose the rises. We suspect that the balance is
about right. However, I should like to ask some broader questions about
the Government’s anti-smuggling strategy, in which the rise
proposed in the clause presumably plays a part, following the same line
of inquiry as my hon. Friend the Member for
Braintree.
Last year,
against a background of increased freight movement and visits and a
rise in the consumption of hand-rolled products, the Committee had an
opportunity to hear estimates from HMRC of revenue loss from smuggling
and cross-border activity. My hon. Friend mentioned the counterfeiting
figures, and the estimates last year showed that after progress between
2001 and 2003, there had been a rise in the non-cross-border element in
2003-04, from £2.6 billion to £2.9 billion, and an
overall rise in revenue loss from £4 billion to £4.2
billion. What are the figures for 2004-05? Has the trend corrected
itself or has there been a similar decline? Has consumption fallen as
it has each year since 1999?
The Financial
Secretary reminded the Committee last year that the Government’s
anti-smuggling strategies are underpinned by memoranda of
understanding—memoranda, not memorandums, as the hon. Member for
Wolverhampton, South-West said last year; so, that is
satisfactory—signed with the majority of the tobacco industry.
The manufacturers clearly favour that approach, and they unsurprisingly
lobby energetically for freezes or reductions in duties. It is worth
noting that the Financial Secretary said last
year:
“Duty
cuts would not produce proportionate reductions in tobacco smuggling.
Only a large cut in duty would be likely to have any significant impact
on the behaviour of consumers and
suppliers.”—[Official Report, Standing Committee
A, 9 May 2006; c.
17.]
I assume that we
can rule out such a large cut, because of the effect that it would have
on revenue.
Although
the approach to countering smuggling via memoranda of understanding
satisfies the tobacco industry broadly, it does not meet with the
approval of ASH. It says that the Government should consult formally
with what it describes as “independent
stakeholders”—I presume that it considers itself to be
one of those independent stakeholders—and the tobacco industry
on smuggling and, in particular, the development of a system of covert
markings. I should like to know the Financial Secretary’s
response to that idea in due course.
The Financial Secretary will be
well aware that ASH also says that the Government should sign up to the
agreement between the European Commission and Philip Morris
International on tobacco smuggling. Under the agreement, which was
signed in 2004, the company announced that it will pay the European
Commission $1 billion in a landmark deal on tobacco smuggling. Under
the agreement, the company is heavily penalised if its products are
smuggled into EU countries. Originally, 10 member states signed up to
the agreement with the Commission, and the deal meant that court action
against PMI in the US was dropped.
The key elements of the
agreement are seizure payments, which penalise PMI if any of its
products are smuggled into the EU, and compliance protocols. The
agreement is reviewed annually. The Select Committee on the Treasury
said:
“We are
concerned to note...that Customs have not sought a similar
agreement with Philip Morris... Whether it would be better for the
UK to sign the EU agreement or to seek a separate memorandum of
understanding with Philip Morris depends upon the arrangements that can
be negotiated with the company. But doing nothing is
unacceptable.”
Again, I
should like to know the Financial Secretary’s response to that
point.
HMRC has
traditionally argued that there would be limited financial benefit to
signing such an agreement. ASH’s counter-argument is that there
may not have been a clear financial benefit to date, in 2004-05, but it
goes on to ask about the subsequent years looking to the
future.
I have two
final questions. First, do the Government fully support the development
of a legally enforceable and comprehensive illicit trade protocol under
the framework convention on tobacco control, the international health
treaty signed by 142 parties? Secondly, what progress has been made on
the development of track-and-trace technology, which allows authorities
to trace supply lines and product distribution? In particular, what
discussions have the Government held with other
Governments—
It
being twenty-five minutes past Ten o’clock,
The
Chairman
adjourned the Committee without Question put,
pursuant to the Standing Order.
Adjourned till this day at
One
o’clock.
Correction
Tuesday
8 May 2007
Col. 33, line
53, Delete Mr. Timms and insert
John
Healey.
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