Examination of witnesses (Questions 1440
- 1459)
WEDNESDAY 16 FEBRUARY 2000
MR M BROUGHTON,
MR K CLARKE,
MR C BATES
and MR D CAMPBELL
1440. That is very important. So you are now
saying that.
(Mr Clarke) If you keep banging the tax up as Mr Bates
says, you are merely increasing the profits for those who are
feeding an ever larger share.
1441. You are now saying then that the tax policy
in increasing taxation is actually wrong. That is what you are
saying.
(Mr Clarke) I am not saying it is wrong, I am saying
it is not delivering the objective of the policy.
1442. Despite the fact that cigarette smoking
is in fact declining in this country.
(Mr Clarke) It is stable.
(Mr Broughton) I think you will find legitimate cigarette
smoking is definitely decreasing.
1443. We could argue about that, but you are
saying that the tax policy is wrong—
(Mr Clarke) I think awareness of the health hazards
is almost universal throughout the world now. I think people make
their own judgements and there was a sharp decline in consumption
in this country obviously following the first awareness of the
health hazards and the increasing of the price. What has happened
is that the decline in smoking in this country is not particularly
marked at the moment, it is not dropping as it used to. More importantly,
the policy of putting up the price by tax, is being frustrated
by the fact that criminals are now largely importing 25 per cent
of the market and selling it more cheaply, undercutting us, undercutting
our competitors because they are selling it here at a lower rate
of tax. Nothing is going to stop it if the supply of cheap tobacco
is going to carry on increasing in this country. You cannot stop
them if you put so much profit in the trade.
1444. That is perfectly clear. Mr Broughton,
you have already said to us this afternoon that you do believe
smuggling is not in the interests of BAT.
(Mr Broughton) Yes.
1445. You are clear on that point.
(Mr Broughton) Overall, bottom line, it is against
our interests.
1446. So you do not want to do it. Mr Bates,
would you agree that smuggling is not in the interests of tobacco
companies or if you do not agree with that could you tell me how
the tobacco companies might in fact benefit from the smuggling
or condoning or actively helping smuggling?
(Mr Bates) It is in their interests in some circumstances
and not in others. It is in their interests in all circumstances
because they still earn the revenue from products which are ultimately
smuggled because they are sold to the wholesalers. It does keep
a flow of cheap cigarettes on the market and therefore blunts
any possible price effect from taxation. Most importantly to the
British manufacturers and all the manufacturers round the world,
it is used as an argument against the sound economic and health
policy of raising tobacco taxes, an approach recently endorsed
by the World Bank. Where they may not like it, is the fact that
in competitive markets, as all these markets are, it does drive
a race to the bottom in ethical behaviour which is what we observe
in these documents as BAT and Philip Morris fight it out for market
share in the illegal markets. Where they do not like it—and
I sympathise with them—is when the smugglers finally realise
that there is no point in buying smuggled cigarettes from BAT,
they might as well buy the cigarettes they are going to supply
from counterfeiters. In that case all the indicators go in the
other direction and the most pressing necessity is to close down
those smuggling routes. There are documents which we have precised
rather than supplied in full which indicate they have the ability
to close down smuggling routes if it is not in their interests;
if for instance counterfeiting is coming in or they are "cannibalising"
their own legal sales in a well established and mature market.
Generally, there are so many advantages to it, in particular working
against the policy of increasing taxes. When they say they are
against smuggling, what that really is code for is that they are
against tobacco taxation. If only the tobacco taxation would go
away there would be no smuggling and there would be no price disincentive
to smoke and consumption would increase commensurately.
Mr Gunnell
1447. Mr Clarke has repeated to us that the
high taxation causes smuggling and one of the things you stated
to us is that where taxation and trade restrictions encourage
smuggling, then BAT acts on the basis that its brands will be
available in the smuggled market as well as the legitimate market.
What does that actually mean in practice?
(Mr Clarke) Mr Bates's argument founders on the British
example. It is a strange part of this allegation to go the byways
of the wholesale trade, legitimate and illegitimate in Colombia
or in Myanmar or in China before they clamp down and so on. Let
us take an example which is really quite the most important to
us and nearest to hand which is the British market. We sell to
legitimate distributors on the continent, Carrefour. We know and
this Committee knows some of that will find its way smuggled into
this country but you will not find any whisky distiller or any
other manufacturer who will withdraw sales to the major distributors
in France because some of it is going to be smuggled; that is
what it means. A most extraordinary interpretation was put upon
that sentence by The Guardian. Our two antagonists here, immediately
leapt on the sentence saying I was admitting we were organising
smuggling. It is nonsense. I did not hear Mr Bates answer my British
point.
(Mr Bates) Which was?
(Mr Clarke) The fact is that these two cannot in eight
million documents find anything to suggest that we have played
any part in smuggling cigarettes into the United Kingdom. Nobody
challenges the figure that 25 per cent is smuggled. The cause
is the tax policy advocated by Mr Bates.
(Mr Bates) We know and he ought to know that BAT is
not a big player in the UK market because of historical agreements
about who supplies the British market with the key brands. Gallaher
supplies Benson & Hedges—
(Mr Clarke) We are all in duty free.
(Mr Bates) You are all in duty free but it is a non
sequitur and an irrelevance and we have not been looking to
pin the UK smuggling problem on BAT at all; none of us has. There
is no evidence and that is why it is a diversionary and pointless
argument. What we are highlighting is that there is a number of
similarities between the Andorra operation, which is not the kind
of popular view of smuggling. The popular view of smuggling is
plucky chaps going over the Channel in a white van. In fact most
of the cigarette smuggling, at least two thirds, is happening
in very large consignments through duty-not-paid type routes rather
than driven by cross-border tax differential and bootlegging.
It is that similarity which we are drawing here. When Gallaher
and Imperial started to supply millions and millions and millions
of cigarettes to wholesalers in Andorra, knowing that they would
be smuggled back into the UK, they were up to exactly the same
racket that BAT was up to in Singapore and Aruba: supplying a
wholesaler who they knew would undertake smuggling back into their
key markets and therefore controlling and feeding the illegal
distribution channels.
Chairman
1448. Diversionary and pointless, Mr Clarke?
(Mr Clarke) First one correction and Mr Broughton
as my executive colleague will correct me if I am in error but
I think British American Tobacco were always in the duty free
trade in the United Kingdom.
(Mr Broughton) Correct.
(Mr Clarke) It is not true that we were not in the
United Kingdom market.
(Mr Bates) As I said, irrelevant.
(Mr Clarke) It is not irrelevant. One thing we are
agreed upon is that there is no evidence that even by interpretation
BAT has had any improper conduct in the British market. The fact
is, going back to Mr Gunnell's question, smuggling in the British
market is soaring. If this Committee is concerned about smuggling,
Britain is a burgeoning smuggled market. It is a big criminal
racket. Why? Because the tax differential is too high, the tax
differential is so wide that its organised criminality is growing
very rapidly. Mr Bates has not answered my point. What is his
reaction to that? He says put the tax up higher, which is good
news for smugglers but it is not good news for anybody else.
Audrey Wise
1449. I am all in favour of the inquiries and
questions and answers being pursued with vigour but there have
been suggestions that this inquiry is somehow being taken over
or led by the witnesses on my left there. I have to say that I
wanted this session—with due apologies to Mr Campbell—not
because of Mr Campbell's work or Mr Bates's work. I regarded the
sensational article in The Guardian as being Mr Clarke's article.
It was my suggestion that we invite you, Mr Clarke, to come here.
(Mr Clarke) I am very grateful.
1450. Other colleagues suggested the other witnesses.
So there is no question at all that somehow we are being led by
Mr Campbell and Mr Bates in this. I regarded your article as very
sensational and I was very interested in the statement of the
causes of smuggling which you pin largely on high tax levels,
which you repeated this afternoon. I notice that in the report
of the Treasury Select Committee which was published on 8 February
on HM Customs & Excise, which looks into smuggling issues,
that select committee says that there were numerous calls from
witnesses for the rate of excise duty on alcohol and tobacco to
be reduced in order to discourage smuggling. So you are not alone
in your views. The Treasury Select Committee did not in the end
accept those suggestions but I am curious as to when you formed
your views as to the role of high taxation in smuggling?
(Mr Clarke) About 1994. I have been trying to look
up my own references to this point. I have been trying to find
Hansard and other references to my views. When I was Secretary
of State for Health I quite openly advocated the then policy of
the Government because I was a member but I agreed with it, that
the best remedy was to raise the price by taxation. I have always
been an opponent of banning advertising and all that kind of thing,
but that is not the subject under discussion. I said the best
method was to raise taxation. I became Chancellor in 1993, inheriting
the commitment to raise the taxation of cigarettes over and above
inflation which I followed in 1993 and alcohol as well. From then
on I began to be increasingly wary about this because of the criminality
it was encouraging and the problems being caused. In my later
budgets—I am afraid I still have not sorted out exactly
which ones—I steadily froze the beer duty increasingly in
budgets, I was the first Chancellor for 100 years to reduce the
tax on spirits and I stopped raising the tax on handrolled tobacco
in line with the escalator because I think we all believe that
handrolled tobacco is particularly dominated by smuggling and
at that stage a large part of the market was smuggled. I actually
gave as my reasons for backing off the policy my concern about
smuggling. I found a strange transcript from an interview I gave
on Channel Four News on 8 December 1992; strange because it is
as partial as some of the selections we have here. It does have
me saying that I did not like having to put tobacco tax up so
far ... not because of the health consequences, which are fine,
but because newsagents and others found it encouraged smuggling
if we overdid it. I kept coming back to that theme and I got increasingly
worried about the criminality. I lost confidence in the policy.
If I may say so, the reason why I decided it was easier to have
a go at beer and spirits and freeze those and was more cautious
on tobacco was because of my fear of ASH. We had a tiny majority
and I found it easier to tell the House of Commons that the time
had come to stop all this with beer and spirits than I did with
tobacco. All Chancellors find that thanks to the support of ASH
it is the only popular tax we have, at least with the politically
correct section of the chattering classes. So I was more cautious.
Every time I had a budget we had long discussions about the criminality
and what we were going to do. The Customs & Excise remedy
is that you need to employ more excise men; that is their remedy.
Carry on banging up the tax, we will raise you the revenue, just
employ more of us and we will stop it. I am afraid it is becoming
increasingly clear that much as I admire the efforts of Customs
& Excise on smuggling, drugs, tobacco, everything else, the
fact is that with the lack of border controls we now have, this
is not going to work. The more you make it more profitable, the
more you have the shooting incidents in Dover and all the other
sorts of things which now go on when people move into the racket
of cigarette smuggling.
1451. You became Chancellor in May 1993, as
you indicated.
(Mr Clarke) Yes; you have probably researched me better
than I have succeeded in doing.
1452. When did you cease to be Chancellor?
(Mr Clarke) When the public made a peculiar decision
in 1997.
1453. In April 1993, just prior to your becoming
Chancellor, the total tax on 20 cigarettes amounted to 180.2p.
I can tell the Committee how that is made up if they want me to.
I obtained the figures from the House of Commons Library. That
was 76 per cent of the then price of 20 cigarettes. In January
1997 when you were still Chancellor, the total tax had been increased
to 242.5p, that was 78.7 per cent of the price of 20 cigarettes.
So it seems as though your reign as Chancellor—and you have
explained your hesitations and fears, which I find very interesting
and I am sure so will Mr Bates—you did not even manage to
keep the percentage similar. The percentage of the price of 20
cigarettes was greater as tax take when you finished than when
you started.
(Mr Clarke) That was the policy and had been the policy
for some time and we carried on with it and it was true with alcohol
as well but not for health reasons particularly. I said and I
found examples that I began to lose confidence and we became increasingly
worried by the smuggling. What has happened is that the policy
has just carried on remorselessly. My successor has had more than
one budget in a year and in both of them he raised tobacco taxation
by a larger percentage than I was increasing it before. What has
happened is that the tax has continued to climb into the stratosphere
and every year makes it worse. As the profits get bigger and also
as the criminals begin to develop their routes and their techniques
for getting into this trade, the situation is deteriorating. I
quite agree, I do not deny, that I raised tobacco taxation and
I was quite a keen advocate of the policy if you go back to when
I was Secretary of State for Health. The question now is a question
to which I perhaps did not respond adequately at the time: what
is our answer to this point? The main beneficiaries of this are
smugglers; not the nation's young but the smugglers.
1454. It is a worrying analysis of criminality
and the answers to criminality. I could see, for example, that
you could abolish tax evasion if you abolished taxes: the higher
the taxes are undoubtedly on your argument, the more there will
be tax evasion. I am talking about evasion not avoidance. You
could argue, in fact perhaps I shall start arguing, that one of
the reasons for increasing the national minimum wage rather more
handsomely than may happen is that it would remove some of the
temptation from a low-paid worker to pay too much attention to
the till. You could discourage the crime of people abstracting
money from their work places in order to add to their incomes
if you increased the salaries. You could extend this from crime
to crime. It is very interesting but I have not noticed that anybody
does that. It just seems to be an argument used in relation to
this kind of smuggling.
(Mr Clarke) No, it is not, it is indirect taxation
as well. I am a defender, was a defender as Chancellor and still
am a defender, of the European Union rules on value added tax.
They give a bracket in which one can operate. It is not just to
prevent smuggling because you still have differential VAT but
it does restrict the range of differential tax across borders.
It also stops governments suddenly going to zero rates on products
where they want people to drive over the border to buy in their
shops as opposed to in their neighbours' and you have frightful
rows between Belgium and Holland on cut flowers and things. That
is a diversion. The indirect taxation, particularly now we have
a single market and now we have removed the border controls of
the transit of goods is a problem. With VAT we have these limits.
The best solution with excise is in theory that you should move
towards the approximation of duty across the Union; that is what
I argued for as Chancellor. I suspect every Chancellor argued
that.
(Mr Broughton) It is also what we would argue for
as a tobacco company.
(Mr Clarke) I suspect my successor goes to ECOFIN
and every now and again, if it comes up, raises the question of
approximating the excise on alcohol as well as tobacco. That is
the real answer to the smugglers. Unfortunately, as Commissioner
Monti I am sure would confirm, this is one of these hopeless subjects
which comes up and up and up and goes round and round in circles.
It is a classic situation where all 15 Member States think it
is a great idea so long as everybody else moves to their level
of taxation. To move towards any approximation is very difficult.
We are now regarded, with the Irish, as completely out on our
own, going off into the stratosphere in tobacco and alcohol taxation
with nobody else prepared to join us. The Danes used to have the
other stratospheric taxes and they have dropped their taxes on
alcohol because they found one third of all the alcohol being
sold in Denmark was coming over the border bought elsewhere. Until
someone can crack this question of getting the European governments
as a whole to agree to approximate the tax we are in difficulty.
It may be unfortunate but the British Government is almost obliged,
it seems to me, to turn its attention to the fact that it is now
getting hopelessly out of line with what is going on over the
Channel.
1455. I think you said that you started to get
doubts about the efficacy of this policy in 1992 which was even
before you became Chancellor.
(Mr Clarke) I think it was 1994; in 1993 I seem to
have been quite enthusiastic about it in my first budget.
1456. Then you developed these anxieties.
(Mr Clarke) And expressed them.
1457. Expressed them to your fellow Cabinet
Ministers or ...?
(Mr Clarke) It is in my budget speech in November
1996. Budget speeches tend to be terse item by item but on 26
November 1996 I limited the rate of increase of duty on handrolling
tobacco to the rate of inflation which was less than the rest.
Handrolling tobacco has been by far the easiest tobacco product
to smuggle although it represents a very small part of the tobacco
market. I found an interview in December 1994 on Channel Four
News where I was pointing out that I did not like doing this any
more because the problem of smuggling was getting so great in
the case of tobacco.
1458. Obviously if you put these things in your
budget speech you shared these views with your fellow Cabinet
members.
(Mr Clarke) The great advantage the Chancellor has
in the budget is that you do not have to share too much with your
Cabinet colleagues.
1459. I appreciate that.
(Mr Clarke) You tell them about it on the morning
of the budget. I am sure I did. I had discussed this problem with
Cabinet colleagues but not in a formal discussion because you
do not have Cabinet meetings which discuss the budget quite like
that.
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