Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 280-287)



  280. Thank you very much. I asked you before about this cost benefit analysis of the tax. I do not think I put my question very well so can I try again. The total tax that should be paid on tobacco is £13 billion, you are currently losing £3.5 billion of this, so your tax take is only £9.5 billion. There is obviously a balance between high tax and high smuggling and lower tax and lower smuggling. Could you secure more revenue than £9.5 billion by lowering tax rates? Have you done any cost benefit analysis of this?
  (Mr Broadbent) It is a convention obviously that our advice to ministers is confidential but when we advise ministers on duty rates we give them advice on elasticities, on both real and nominal prices and the average price of tobacco, because clearly you cannot have a fiscal policy which does not take account of these factors. I do not want to go into the advice we give. It is important to remember that tobacco duty has a health policy objective as well as a revenue objective and there is a lot of evidence which suggests that reducing the average price of cigarettes, which undoubtedly would be one of the impacts of reducing the tax, would lead to an increase in smoking, so it is perhaps more complicated than just would you get more revenue.

  281. This question of Imperial, as the meeting has gone on you have become more and more outspoken on the issue, which we welcome, and you have been an excellent witness, if I may say so, but is there anything more that you can say in private session that you have not told us in public?
  (Mr Broadbent) No, I think that we have had an open discussion about Imperial. My reticence, just to be clear, is that it is important to me and to our organisation that we can have a constructive relationship with all manufacturers, including Imperial. At the end of the day we are not going to win by having a fight but equally you come to a point where you have to be clear we are not making sufficient progress, and we have recently made that clear to Imperial and I have explained to the Committee we have made that clear to Imperial.

  282. Can you tell us anything more about the non-cooperation you are experiencing from manufacturers?
  (Mr Broadbent) If I give you some examples. For example, we know that Imperial account for 50% of the smuggled market. I talked before about our need when we seize smuggled goods to go to the manufacturer to track and trace the mechanisms so we can trace the route very quickly. Imperial by some measure are the slowest of the manufacturers in responding to our requests. I think Imperial are the only company to whom we have issued red and yellow cards who in one or two cases are still continuing to trade with those customers. I think that there have been occasions when Imperial have said to us that we should not speak to certain members of their staff who might be involved in sales, which means we cannot always have the discussions we want to have. These are the sorts of examples that I would give.

  283. I think we have had some discussion but it would be useful to get more information on estimates you have of what market share British companies secure and specify in what countries so that you can point to the excessive exports. I think we want to try and get fully to grips with this.
  (Mr Broadbent) I am happy to provide a general note. The issue is that the destination of exports is very rarely the final destination. We can try and provide what information we have. As I said, the cigarette trade is within that activity and it often goes through ports quite legally.

  Chairman: Thank you very much. Mr Barry Gardiner wants to come in on this.

  Mr Gardiner: Chair, I want to point out to the Committee that we do have the power to call Imperial to the Committee. I think we should consider whether we do that because it may be extremely helpful to our investigation.


  284. We might deal with that in a moment. There is a further question that Mr Rendel wanted me to ask. He points out that 10% of the licit market is 5.6 billion and 50% of the illicit market is 8.5 billion. Could we ask you finally whether it would be helpful to publicise that if you smoke Regals or Superkings the odds are that you are smoking a smuggled cigarette?
  (Mr Broadbent) We have published the brand breakdown in the PBR last November. My anxiety is that those who smoke Regals and Superkings may know already. We do publicise the brand breakdowns in the PBR.

Mr Williams

  285. One quick guide figure. Is the expenditure on advertising for the brands that make up half the smuggled cigarettes in relation to the domestic market higher than than you would expect their market share to justify? In other words, is it intended to create a demand for their smuggled goods?
  (Mr Broadbent) That is a good question. I am afraid I do not know the answer. I can have a look. I suspect we do not know what the actual spend is for those particular products but I will look into that and see.

  286. Would that not be an obvious guide figure for you if it occurred to me off the top of my head that if they are spending twice as much as they should on advertising it might be an indication that they are not advertising for domestic sales?
  (Mr Broadbent) It is a quesiton of getting at the data, and the data will be held commercially, but I will take it away.

Mr Bacon

  287. Since we are continuing to do this in open session, I was looking at this web site which was also published in a British newspaper at the beginning of January 2000, and at the eight million pages of BAT documents that were lodged in Guildford Surrey as part of the settlement of the 1998 US court case. It is very clear from an analysis of 11,000 pages of documents that has been done that company officials of BAT take into account what they call the DNP or GT, the "duty not paid" or "general trade" market, which are apparently according to Les Thompson, a former RJR senior sales manager who pleaded guilty in 1999 to money-laundering charges stemming from a US-Canadian smuggling operation and now spending 70 months in prison, a general euphemism used by senior folks when talking around the topic of smuggling. It is very clear that BAT systematically takes into account the GT or the DNP market in its marketing operations. There is an example here of a fierce trademark dispute with Philip Morris over which of those two companies had the right to use the Belmont brand name in Columbia. A 22 February 1994 memo outlined contingency options should BAT lose that case. One of those was to "launch new brands in duty paid and maintain Belmont in the general trade channel." That is according to Mr Thompson, the smuggling chap. However, a noted drawback of keeping Belmont in the GT channel was that the company "cannot support Belmont in the GT via advertising . . ." It goes on to another example, this was a Mr Dunt, a BAT official, and mentions a memo of 23-24 February 1994 summarising a visit of that date to Columbia which indicated that BAT wanted to control the timing and products it entered into the duty not paid market. Regarding the BAT Kent Super Lights brand the memo noted that "the duty not paid product should be launched two weeks after the duty paid product has been launched."

  Chairman: I think we got the point. Any comment?

  Mr Bacon: In other words, they are systematically taking into account both these streams. Presumably that is wrong, is it not?
  (Mr Broadbent) There is quite a large inquiry going on in relation to BAT in Latin America to which those documents relate to a period in the past. We are not engaged in that inquiry because that is on a different continent. We can only focus our attention on what we perceive BAT to be doing in the UK and whilst I think probably Gallaher's are outstanding in terms of the co-operation they give, BAT have not proved to be problematic and I certainly would not want to sit here and suggest we have a problem with BAT today. I am not trying to say that everything in the garden is perfect but I am not trying to suggest we have anything on the scale you are discussing here.

  Chairman: Thank you very much, this has been a very interesting session. It is indeed true that we have the right, should we so wish to, to summon Imperial or anybody else. I would ask colleagues to remain behind after the public session to discuss amongst ourselves whether that would be useful. May I say, Mr Broadbent, that whilst you have been accused by some colleagues of being complacent, this is a very difficult issue and I have to say you have been a quite excellent witness and you have sought to be very communicative with us to explain the difficult situation that your staff encounter and for that we are grateful. Thank you.

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