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Session 1999-2000
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee H

Thursday 11 May 2000


[Mr. Frank Cook in the Chair]

Finance Bill

(Except clauses 1, 12, 30, 31, 59, 102 and 113)

9 am

The Chairman: For the convenience of the Committee, I should explain that it is normal for the dress code to be observed at the beginning of a sitting. It is my fervent hope that we can conduct our affairs in a tolerant and tolerable frame of mind. To improve our powers of concentration on the line-by-line scrutiny to which we must apply ourselves, I am happy for hon. Gentlemen to divest themselves of their outer garment upperwise at every sitting. I will not need to repeat that. For sittings chaired by my co-Chairman, Dr. Clark, it will be necessary to obtain his permission.

Mr. Graham Allen (Nottingham, North): I beg to move,

    That the Committee, at its rising on Tuesday 16th May, do adjourn till Thursday 18th May at One o'clock.

By way of explanation, next Thursday there will be Treasury questions on the Floor of the House. I think that all hon. Members have a great interest in Treasury questions. We propose that, with agreement through the usual channels, the Committee sits next Thursday, exceptionally, at

1 pm.

We intend the sitting to continue until 3.30. With the approval of the Chair, we might have a short break between 3.30 and 4.30. That will allow members of the Committee to participate fully in parliamentary questions next Thursday morning.

Question put and agreed to.

Clause 13

Basis of calculation of ad valorem element of duty on cigarettes

Question proposed, That the clause stand part of the Bill.

Mr. David Heathcoat-Amory (Wells): I do not want a long debate on this clause. I hope that the main debate on tobacco and smuggling will take place under clause 14, so I have only one question. Clause 13 appears sensible. As I understand it, the excise duty is calculated by reference partly to the number of cigarettes and partly to the price, and a percentage is charged. Reading the notes on clauses, I understand that there is an avoidance problem, in that manufacturers can have a recommended price, but in fact charge more than that by putting a higher price on the packs. Therefore, the duty should be calculated on the higher price. If I have understood that correctly, I shall not quarrel with that.

However, I am slightly intrigued to know what happens when there is neither a recommended price nor a marked price. Let us suppose that a trader imports a consignment of cigarettes from a new source. How much tax is payable? Let us suppose that an individual at the frontier brings in a huge number of cigarettes, on which duty has already been paid, but at a lower rate in another country, perhaps outside the European Union. That person wants to pay duty on the cigarettes, because he does not want to be accused of doing anything illegal. He does not intend to smoke them all himself, but wishes to sell them on to workmates or friends and, therefore, wants to pay the full duty. Presumably, he has no recommended retail price for those cigarettes and nothing, certainly not in English currency, is stamped on the pack. How does the system work in such eventualities?

The Financial Secretary to the Treasury (Mr. Stephen Timms): Mr. Cook, I welcome you back to the Chair. As the right hon. Gentleman said, the clause changes the basis for calculating the ad valorem or price-related element of the duty on cigarettes. It will prevent tax avoidance by cigarette manufacturers and importers by ensuring that the duty charged is based on the highest retail price at the time duty is payable. The excise duty on cigarettes has two parts-a specific duty calculated by the number of cigarettes and an ad valorem duty calculated as a percentage of the retail price.

Of late, there has been some evidence that, in a small number of cases, some advantage has been taken of the current law, which requires the calculation and payment of the ad valorem component based on published recommended retail prices, even though individual packs are marked for sale at a higher price. That system has the potential to become more widespread. It has been used to avoid paying the higher ad valorem duty due following a price increase. The measure provides that the basis for the calculation of ad valorem duty is the higher of either the price marked on the cigarette pack when duty is due or the published recommended retail selling price. That complements our action to curb trade forestalling of duty increases, which will be considered in the longer debate that the right hon. Gentleman and I expect will take place on clause 14.

In an example of the kind about which the right hon. Gentleman asked, the requirement is technically to charge duty on the highest price at which cigarettes are sold in the United Kingdom. If there is any doubt, it is for Customs and Excise officials to use their best judgment about the correct price to use. In practice, Customs and Excise tends to consult its records and use the most popular price category.

Mr. Heathcoat-Amory: I am grateful to the Financial Secretary, but I am none the wiser. I gave an example of a new importation of which there would not be a record of any sort. By definition, there would therefore be no established retail price. My second example related to an individual attempting to pay duty at the frontier. Clearly, Customs and Excise would have nothing to go on, as everything would lie in the future. The person might modestly mark up his purchase of cigarettes from a country such as Turkey or another further afield in order to resell them. There would be no published tariff and nothing on which Customs and Excise could work.

It is all very well to say that Customs and Excise could make a judgment, but I would like to know on what it would be based. Tax cannot be levied purely at its discretion if that tax is based on a figure that is simply plucked out of the air. Will the Financial Secretary give a fuller explanation now, or let me have one in due course?

Mr. Timms: I have made the point that the strict interpretation of what is required is for duty to be charged at the highest price for which cigarettes are on sale in the UK. In the example that the right hon. Gentleman gave, I imagine that the person importing the cigarettes would be required to state the price at which it is intended that they be sold in the UK. Duty will then be payable on that price, so the question is about the highest price at which cigarettes will be sold and on which duty is payable.

Mr. Heathcoat-Amory: I still find the situation in which someone does not know at what price he eventually wishes to sell the cigarettes unsatisfactory. If it were a new consignment, possibly of a new brand of cigarettes, from a country that had not previously exported to the United Kingdom, we could be in entirely novel territory. I am surprised that there is no definitive answer on the revenue payable. If the individual brought in a large consignment, the sums involved could be considerable. So it is unsatisfactory for someone to turn up at the border, say that he will resell the cigarettes, hand over a cheque and walk away free. That is a very confused and confusing way of levying an important duty on an importer.

I am hardly the wiser after the Financial Secretary's reply. I understand it in terms of an established system of importation of a known brand from a previous supplier through a route that is known to customs, but I am talking about a new situation or about someone who has in his possession many cigarettes that he has bought very cheaply, which he does not intend to smoke himself, who has a crisis of conscience at the border and wishes to pay the duty. Will he simply be asked the price at which he intends to resell them and be asked to pay the duty? If so, I find that unsatisfactory and subjective.

Mr. Timms: The answer depends on the circumstances. He described the case of someone who decided, mid-journey, that he wanted to sell the cigarettes that he was importing, but the normal situation would be a commercial one and commercial records will be available for that. Such packs will need UK health warnings to be sold legally in the UK so one could not decide to sell such cigarettes on the spur of the moment. In the off-the-cuff situation to which the right hon. Gentleman referred, officials will be able to refer to the price established for that category of cigarette-king-size for example-in the UK. Commercial documentation will normally be available, a commercial arrangement will have been entered into and UK health warnings will be printed on the pack. On that basis, those cigarettes can legally be sold in the UK and information will be available for the application of the correct rate of duty.

Question put and agreed to.

Clause 13 ordered to stand part of the Bill.

Mr. Stephen Dorrell (Charnwood): On a point of order, Mr. Cook. The Committee will recall that we discussed on Tuesday the rate of duty for hydrocarbon oils and alcoholic liquor. During those debates, the Financial Secretary was straightforward in his account of how the Government's figure of 3.41 per cent. was fixed and stated clearly that that figure included the Government's Budget estimate of the amount by which interest rates would increase during the summer. In response to pressure, the Financial Secretary undertook to write to every member of the Committee to provide that figure, which the Government had included in their estimates. I mean no criticism-yet-of the Financial Secretary, but I have not received such a letter. I do not know whether other members of the Committee have. I hope, Mr. Cook, that you will encourage the Financial Secretary to fulfill his pledge to the Committee before we leave the issue of setting duty rates. On Tuesday, the Committee agreed to 3.41 per cent. because the Government said that they would provide that information to the Committee. They have not yet done so.

9.15 am


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