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Clause 10
Mr. Heathcoat-Amory: I beg to move amendment No. 13, in page 5, leave out lines 24 to 30 and insert--
| '1. Cigarettes | An amount equal to 22 per cent. of the retail price plus £75.46 per thousand cigarettes. |
| 2. Cigars | £112.62 per kilogram |
| 3. Hand Rolling tobacco | £87.74 per kilogram |
| 4. Other tobacco products | pound;49.52 per kilogram.'. |
Tobacco is subject to wholly unnecessary extra taxation in this massive tax-raising Finance Bill. Many of the arguments that I might deploy are similar to those that we used in the earlier debate on beer duty, so I shall not go into them in detail, but I shall allude to them.
The same phenomenon of cross-border shopping, combined with escalating illegality, occurs in the smuggling of both alcohol and tobacco. Again, there is evidence of increasing illegality, which is of great concern to the trade in general and smaller tobacconists in particular. All hon. Members who are in touch with trading interests in their constituencies will have been approached in recent weeks by representatives of the legitimate trade. Traders feel threatened and their businesses are undermined by an escalating tide of illegally supplied tobacco goods.
Estimates are inevitably somewhat speculative. The trade quotes a Customs and Excise figure of £690 million having been lost last year to tobacco smugglers. That figure comes from a written reply in Hansard on 17 February 1998 at column 528, so it has certainly been quoted by Ministers. The trade points out that the true figure could be a great deal higher, but, by definition, what is illegal is difficult to measure.
Evidence comes not only from cigarette sales, but from the prevalence on our streets of brands of hand-rolling tobacco that are not legally on sale in this country. There is a brand called Drum, as I recollect from my time in the Treasury, which, as far as I know, is not retailed under that name in this country. Of course, it is possible that smokers legally and legitimately buy it overseas and bring it back, but I am afraid that the bulk of it comes in illegally, as it is easy to compress, hide and smuggle, and it is then resold as contraband.
Another feature of the tobacco tax is that it is not just a matter of known smuggling at ports and airports. There is also a worrying persistence of large-scale duty frauds. That does not involve people stuffing a few packets of cigarettes or hand-rolling tobacco pouches down their trousers and walking through customs; it involves sophisticated gangs who are manipulating a product, the cost of which, when it is legitimately sold, is more than three quarters duty. When the majority of the retail price is made up of duty, that is an invitation to people to take advantage of the situation fraudulently.
That can take the form of cigarettes or tobacco designated for export, on which duty is therefore not paid, finding their way back on to the home market. Recently The Times reported a haul of 18 million cigarettes, which was intercepted by Customs and Excise investigators at Heathrow. According to the report:
Mr. Heathcoat-Amory:
My hon. Friend is right. He may have seen the report in the Financial Times on 15 April that Sweden has cut its excise duty on tobacco products by 27 per cent., precisely because it is threatened by cheap imports from its neighbours. We cannot realistically expect other European countries to increase their tobacco duties and close the gap between their rates and ours, as they are threatened by even cheaper supplies, typically from eastern Europe or the Mediterranean countries.
British Ministers sometimes ask countries with lower tobacco duties, such as Germany, to raise them for health reasons and as a useful source of revenue if, for instance, they are trying to comply with the requirements of the Maastricht treaty on the single European currency. They get the response, "We would like to, but we can't, as it would create in our country exactly the same problems that you face from smuggling and cross-border shopping."
There are severe constraints on member states and other countries caused by cross-border shopping and the prevalence of smuggling across what are increasingly open borders. Those who understand market economics realise--and even welcome--the discipline imposed by those constraints. The penalty that is borne by high-tax countries is much more effective than enforced
harmonisation by the European Commission or anyone else. If we step out of line, we pay a penalty through loss of revenue caused by cross-border shopping and increased illegality through smuggling. That is what is happening in Britain. The Government are making a bad situation worse by ratcheting up the duties in pursuit of revenue, despite the evidence of the damage that is being caused.
Before the Government took office, they were apparently aware of that. In an earlier debate, I referred to the Prime Minister's pledge, as Leader of the Opposition, to conduct an urgent, independent and comprehensive study of the issue. However, the Government have not honoured that pledge. Customs and Excise has conducted a review, which the Government are keeping secret, on tobacco and alcohol smuggling, but it has not been published; so it is not the urgent, independent and comprehensive study that was promised; it is a serious broken promise by the Prime Minister.
Will the Financial Secretary make available the report by Customs and Excise? If she is unwilling to do so, will she say why, as it flies in the face of all the assurances from the Government on taking office that they wished to be open and give the public a right to know, that they had nothing to hide and wished to generate a well informed public debate? If they are sincere about that, the very least that they can do if they are not prepared to keep their pre-election promise of an independent review is to publish the one that has already been conducted by part of the Minister's Department.
Who will pay for the extra taxation on tobacco? An interesting study has been carried out by London Economics, a group of economists who have taken evidence, assembled information and published a review on the incidence of tobacco duty. It reveals a marked regressivity about the tax.
The report comments on the fact that increasing tax has a deterrent effect on smokers. I always knew that, but I had not realised the extent of it. That is intuitively rather obvious. It points out:
Presumably that worried the Financial Secretary in opposition when she said on 23 January 1995:
"The cigarettes were originally bought for export without duty being paid. Instead the smugglers planned to use the European Union's liberal freight transit controls and a paperwork fraud to divert them on to the domestic market. . . The result would have been a loss of more than £2.5 million in taxes. . .
Sir Michael Spicer (West Worcestershire):
Before my right hon. Friend leaves the subject of smuggling, is he aware of what is happening in other countries? In Sweden, smuggling has become so bad that, having tried massive indirect taxation on tobacco, the Government have now reduced taxation by 27 per cent. as a direct response to smuggling. I understand that Denmark is thinking of following suit. I hope that my hon. Friend will ask why the Government are not contemplating that, instead of the minor action that they are taking to stop smuggling.
Customs intelligence officers say that gangs have abandoned smuggling drugs such as cannabis and started cigarette operations, because the penalties if they are caught are far lower and the profits are still good."
The trade is therefore characterised by two features: smuggling by individuals and small gangs in vans, and large-scale fraudulent operations by sophisticated gangs. Together, they cost the Revenue large sums and undermine the legitimate trade. The position is getting worse. Not only are the Government putting up duty, but, as noted in our previous debates today, the strong pound has made it that much cheaper to buy abroad.
The trade not only affects the legitimate business, particularly small, high street traders, but has a damaging effect on children. When the cigarettes and tobacco are sold in an uncontrolled market, there is, by definition, no control over who buys them.
8 pm
"It is mainly the better off (the top thirty per cent of householders by income) who have given up tobacco"--
presumably for other social reasons and pressures. The less well-off have not done so. The report comments that the tax is "extremely regressive" and
"becomes more so with each increase in duty."
The report includes research based on the family expenditure surveys for 1995-96 and 1996-97, and reveals that, in the latter of those two financial years,
"the poorest ten per cent of United Kingdom households spent almost 14 per cent. of their income on tobacco taxes whilst the richest 10 per cent. spent less than half per cent."
The survey includes non-smokers. If one concentrates entirely on those who smoke, the figures are rather startling. The data suggest that
"the poorest ten per cent of smoking households spend as much as a quarter of their income on tobacco compared to a little more than one per cent for the richest."
28 Apr 1998 : Column 209
The report estimates that
"savings to consumers from the one-off reduction in VAT on fuel, from eight per cent to five per cent"--
we hear about that constantly from Labour Members--
"may have been cancelled out by the first of the planned five per cent real annual increases in tobacco duty."
Not only are the Government taking back what they have given, but they will do so every year, while the reduction in VAT on fuel was a one-off measure. Perversely, they are encouraging smuggling in a way that does the most damage to the poorest people we represent.
"We have made clear our views on the health aspects on curtailing smoking and encouraging people not to smoke, but taxation is not the way to do that."--[Official Report, 23 January 1995; Vol. 253, c. 106.]
At that time, she did not feel that ratcheting up taxation on tobacco was a good way of achieving a health objective.
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