Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 300-319)



  300. Two do not, one does. My other question relates to loss of revenue which is the equivalent to 2 pence on the standard rate of tax all of us have to pay because of the extent of tobacco smuggling. We have heard from the Chairman the unease in which Excise hold you in the way you have participated with them in trying to counter smuggling. There are charges around, as you must know, that some of the companies have an interest in the promotion of smuggling to extend their sales. How would you react if the Chancellor said to you that in the next Budget he wanted to cut income tax by one pence in the pound and that your share of the smuggled market was the equivalent of that lost revenue and he was going to charge you that as an excess levy, and then it would not matter the sources from which smuggling came, the revenue would be paid and you would have much more interest, would you not, in controlling those outside sources from which smuggling comes?
  (Mr Davis) I have to reiterate the point, I think that belies the fact that we have ceased trading with a vast number of customers so in no way would I want that to be minimised because it is a very serious and responsible step to have taken. In respect of the hypothetical situation you put to me, I think it would be quite unfair and quite unacceptable in the sense that we as a tobacco company are not smuggling. We supply to bona fide distributors who are respected throughout the world. They handle other major consumer products in their particular markets. Somewhere down the chain of distribution, because of the huge tax-induced differentials we have in this country it is profitable for smugglers to hoover up stock and smuggle it into this country. We cannot police that, we are not policeman.

  301. You have no incentive to police it because the cigarettes are sold and you get your revenue.
  (Mr Davis) There is an incentive to us because we sell less in this country.

  302. But if the price is lower you sell more, do you not?
  (Mr Davis) It depends on the particular market but certainly in most countries of the world the retail prices are cheaper than in Britain because we have far and away the highest taxes in the world.

  303. Can I put that question in a different way to you. From what you said to the Chairman in your opening statement the extent of the smuggling of your product costs every taxpayer in this country one pence on the standard rate of tax. Do you think that is a burden they should bear?
  (Mr Davis) I do not think that is a burden they should bear. It is in all our interests in terms of ourselves, in terms of Customs to co-operate as fully as possible to stamp out the scourge of smuggling. It is a scourge.

  304. Would you think it unfair if the Chancellor levied an excess levy on those tobacco companies who Excise said were not fully co-operating in trying to counter smuggling?
  (Mr Davis) One has to test out the assumptions or statements that we are not co-operating with the Excise authorities. I think we would have to challenge that very seriously. I hope to have the chance to be able to do that today because, as I say, I think our track record of co-operating bears the closest of scrutiny. Coming back to your hypothetical point, no, I think it would be grossly unfair for the Chancellor to do that. I suspect, for instance, that the alcohol industry would think it equally grossly unfair if he were to levy money on them for beer and alcohol smuggling that comes into the UK. It is the same situation. We are not smuggling.

  305. Could I ask Mr Wells whether the company we are discussing today is as co-operative as other tobacco companies are in trying to counter tobacco smuggling.
  (Mr Wells) I think, as my Chairman said at the previous hearing, we have not suggested we receive no co-operation from Imperial Tobacco. It is rather that we receive less than full co-operation or that is as we perceive it at the present time. Certainly we have not considered the co-operation we have received to be as great as we have received from some other companies, which is why we have signed a memorandum of understanding with one other manufacturer but not to date with Imperial. I think it is also fair to say that we have said to Imperial we wish to review the co-operation we receive from them and if the improvements that we would like to see could be made we would certainly be willing to look again at a Memorandum with them.

  306. So, Mr Davis, the threat of a £1.5 or £1.6 billion levy on you might encourage co-operation with Excise, might it not, and save the rest of us one pence on the standard rate of tax?
  (Mr Davis) I have to come back to you and say that is not our perception of the co-operation. I can only ask one simple question—I know I am here to answer questions but if you will permit me to ask one—all I want to know from Customs is what are other tobacco companies doing that we are not? Tell us and we will do it.

  Mr Field: We might ask Customs that and the other companies that but thank you very much.

  Chairman: Thank you very much. Mr David Rendel?

Mr Rendel

  307. Do you believe you have a duty to try to reduce tobacco smuggling?
  (Mr Davis) Yes, I think we do because our prime duty is to our shareholders and to our employees and, quite frankly, smuggling, looking at it in its pure economic perspective as it affects us as a company, as I said earlier on, is certainly a double whammy. It is arguably a triple whammy because it means we sell less in the UK, which is a profitable market for us. If there is substitution of a smuggled product for a bona fide product we lose money on that and that is not good for our shareholders. The fact that we are trying to create international markets and exporting our products to bona fide distributors, investing in advertising and promotion in those countries where we are able to, investing in sales infrastructure in those countries, it is a totally wasted investment for us, which is bad for our shareholders and employees. When we have seen, as we have of late, a lack of product available to be smuggled into this country then we start to see counterfeit product coming in. It is a triple whammy for us. It does us no good whatsoever, it does us tremendous damage. We do have a duty to our shareholders and our employees to try and stamp out smuggling.

  308. I am interested in your answer from two points of view. Firstly, you seem to think that part of your duty is to make sure that smuggling is reduced otherwise we may get more counterfeit product, which does not seem a particularly moral reason for trying to reduce it. The other is that all of your answer was in terms of economics. You do not seem to have any feel that your company has any duty to try to make sure that the law of this country is properly obeyed. It does surprise me that you do not feel as a company that you have some sort of ethical duty to try to make sure tobacco smuggling is reduced as well as a purely financial one.
  (Mr Davis) I perhaps concentrated on the economic answers obviously in terms of duty to our shareholders and our employees but, yes, there are other aspects to it as well. You would misrepresent me if I were to let that statement stay on record that we do not care about the other aspects. We genuinely do. Smuggling undermines the legitimate UK market which was a very orderly market. I am very pleased to see that smuggling is coming down at a fast accelerating rate at the moment. It undermines—

  309. You have made the point now that you do think you have a moral or an ethical duty to cut smuggling.
  (Mr Davis) I was in mid-answer—

  310. I have heard what you are trying to say. You were asked for brief answers. May I go on and ask what you have done to try to reduce smuggling as a company?
  (Mr Davis) I have covered a number of issues already. We have worked, we believe, very co-operatively with Customs. From our point of view as a company, as I say, we have ceased trading with 30 distributors since December 1999. These were in countries that were sensitive or targeted by smugglers.

  311. How many of those distributors were brought to your attention by Customs and Excise?
  (Mr Davis) I think I am right in saying it was 13 red carded and four yellow carded so 17 of the 30 distributors but some of them had already been dealt with by the time the red card was issued.

  312. What was your reason for deciding to cease to distribute to the rest?
  (Mr Davis) There were a number of reasons but primarily the reason was we had a flow-back of stock (obviously not from that initial distributor but lower down the distribution chain in those countries and the smugglers were hoovering it up) and we could not get guarantees it would stop coming back. It was not sticking in the market so we ceased supply. Basically the measures we have when we get stock coming back are we either suspend supply, we cease supply or we review the brands we supply and take out sensitive UK brands. In terms of the dominant action it is to cease supply.

  313. You have said on more than one occasion already in answer to other questions that we have by far the highest rate of tax in this country than any other country in the world and that is one of the main reasons for smuggling.
  (Mr Davis) It is part of the economic incentive to smuggle.

  314. What is the overall percentage tax take on the price of a pack of cigarettes in the UK?
  (Mr Davis) On a pack of premium cigarettes, it is just under 80% and for lower priced cigarettes it is about 90%.

  315. Do you know what it is in the Republic of Ireland?
  (Mr Davis) Around about 70%.

  316. My understanding is that it is 78%, in France it is 76%, in Belgium it is 73%. It is not that different to the tax take in this country.
  (Mr Dibble) May I respond as Economic Affairs Manager. The percentages for tax comparisons can be quite misleading because 100% of a very low figure is a very low amount, therefore you have to look at the price differentials. That is why smugglers smuggle. So a packet of Regal sells at £4.40 in the United Kingdom but the same pack sells at £1.54 in Spain, for example, where it is much lower taxed. Clearly the percentage tax burden in Spain could be very similar but the absolute tax burden is much lower.

  317. Why are you selling to your distributors, presumably at a much lower basic price in Spain than you are in the United Kingdom? That is the real problem. What you seem to be saying now is that the real reason for smuggling into the UK is that the base price is higher. Surely that is something you can control?
  (Mr Dibble) I am not saying that at all. What I am saying is that we do make more profit in the United Kingdom. We cannot make quite so much profit in Spain because there is more competition and there are historic reasons of a monopoly situation where the industry did not make a profit, but the figure to concentrate on is that over 80% of the price differential between the United Kingdom and Spain is tax. Tax is the big absolute differential.

  318. It is only accounted for tax because the base price is so much higher in the UK than it is in Spain. The percentage increase is roughly the same, they are both over 70%.
  (Mr Dibble) UK tax is levied predominantly as a specific amount not a percentage of the price and therefore the absolute amount is the absolute amount.
  (Mr Davis) Perhaps if I can clarify, if you look at the period between the November Chancellor's Budget in 1996 and the March 2000 Chancellor's Budget, the excise tax on cigarettes was increased by approximately 84 pence per 20, which is the equivalent of about 64 euros per thousand. That is an increase over a three and a half year period. That equates to the total tax target of all the countries in the EU by the year 2008, and by 2010 for the accession countries. UK tax is hugely above anywhere else in the rest of Europe.

  319. The absolute level of the tax, I certainly accept that, but the figure that we have been given—and I would be interested if you wish to deny them—is that the retail price in the United Kingdom is £4.40
  (Mr Davis) There is an Appendix in our submission.[1]

1   Ref Figure 3, page 10 of the Report. Back

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