Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 380-399)



  380. Most of it is being sent back, is it not?
  (Mr Davidson) That is not the intention of our policy.

  381. Mr Davis, you know it is happening, do you not? If you know it is happening and you are doing something that is fuelling illegal activity, do you not, as Mr Field suggested, think that there should be some sort of windfall tax on the profit made on excess production that you knew from the statistics was coming back smuggled?
  (Mr Davidson) We now know that has happened in some cases but that was not the intention of doing it.

  382. How long have you known that?
  (Mr Davidson) As long as we have been sharing data with Customs and we have seen the seizures list.
  (Mr Dibble) We started sharing seizure information with Customs in May 2000. By the end of calender year 2000 on one customer which Customs yellow carded we had had two seizures from that customer.
  (Mr Davis) It was really a 2001 type issue.

  383. So you did not know anything about this until 2001?
  (Mr Davis) No. What Mr Dibble said was we started getting seizure data from Customs in the later part of 2000.

  384. But how long have you known that very large proportions of your production have been sold to markets and then just shipped back as smuggled product? 10 years?
  (Mr Davis) No, I do not think that is fair to say, because smuggling of cigarettes into the UK did not really start until 1997. Really up until about 1999 most of that was coming from EU countries. It was late in the 1990s when we started to see containers being intercepted and multi-brands and different aged stock and what have you. I would have to argue that I think the reaction, and whilst Customs may say with hindsight we could always have acted a bit quicker, it is fair to say, in terms of the reality and complexities of the situation, an orderly withdrawal from markets, a cessation of trade with bona fide distributors, on the timescale involved we have not done too badly. It is not there any more.

  385. The third and final triple-whammy was to say if there is a lack of product available to be smuggled that would give rise to counterfeit cigarettes. You seem to be saying that it is better to supply your legitimate brands even if they are smuggled than if counterfeit and therefore that seemed to be a reason why you were continuing to fuel smuggling.
  (Mr Davis) No. I think that is a gross misrepresentation of what I said.

  386. What is the third point of your triple-whammy?
  (Mr Davis) The point I make is that smuggling is happening. Smugglers are putting products into this country.

  387. It is a bit like arms sales, if somebody shoots we might as well provide them, there is a market there?
  (Mr Davis) No. As I say, smugglers are smuggling products into this country and increasingly we are also finding counterfeit product coming in and that is because they cannot get hold of legitimate—

  388. If you cannot beat them, join them.
  (Mr Davis) I do not see the point you are trying to make there.

  389. Your third point in your triple-whammy was simply that if you did not provide smuggled products they would be counterfeit and that would be worse.
  (Mr Davis) No. I am saying that as Customs and ourselves with our supply policy cut down the opportunity, by the seizures and by the lack of supply then one of the other corollaries of that is we are seeing an increased amount of counterfeit goods coming into the country. It is a simple point I am making. That also damages us. That was what I meant by the triple-whammy.

  390. Do you expect to be taken to court as in the Canadian cases we have seen? Do you envisage that will happen or do you think the British Government may try to charge some windfall tax against lost revenue where you have knowingly supplied product that has given rise to massive losses and therefore a marginal increase of one pence in income tax?
  (Mr Davis) I do not expect either, sir, because I do not think either would be justified.

  Geraint Davies: Thank you.

  Chairman: Thank you, Mr Davies. Mr Nigel Jones.

Mr Jones

  391. You have said two or three times that smuggling started in 1997. Why was that? Was it the new Labour Government?
  (Mr Davis) I was not trying to make a party political point. I think the point was in 1997 there was a clip point where the tax induced price differential reached a minimum of a pound compared with any other market in Europe and with some it was two pounds or more than two pounds. That sort of magic pound figure seemed to kick it into life. As I say, in the early couple of years, as far as our observations are concerned, most of it was coming back from other EU duty paid countries. It was in the late 1990s, and I would hope colleagues in Customs would corroborate this, it was in 1999 that we started to see the large scale container type diversion taking place. I think it is fair to say that the cause throughout the 1990s in this country, or most of the 1990s, is that we had tax increases which were 3% above inflation and from 1997 they were actually 5% above inflation, so we had a very rapid escalation and, as I said, that 84 pence over a three and a half year period was actually more than the total target tax for many EU countries and accession countries today.

  392. So your answer in brief is that it was the price of the product in the UK shops which caused smuggling to start?
  (Mr Davis) I think that is undoubtedly the cause.

  393. And the punitive taxation that you say is on cigarettes in the UK. Yet you have also said that now numbers of smuggled cigarettes are coming down very significantly. Is that because of action taken by Customs and Excise or is it because of action that you have been taking as well?
  (Mr Davis) I think it is both. I think Customs have been demonstrably more successful with more resources. There have been more seizures, more action at the ports, etc. On the manufacturer's part, from our point of view anyway, we have discontinued supply to those sensitive markets where container diversion has been taking place.

  394. Do you think it is possible to eradicate smuggling and, if so, what will it take to achieve that?
  (Mr Davis) I think it is very difficult to eradicate smuggling with the tax differentials that we have at this point in time. Something that John has discussed in Government policy making bodies before is what we would call the Island Premium.
  (Mr Dibble) Yes, we discussed this theory with Martin Taylor in September 1999 and last discussed it with Mr Boateng earlier this year prior to the Budget. The theory is that the UK does not have to approximate tax with the rest of Europe because of its island situation, it can afford to charge more taxation, but the extent to which it can charge more is limited. It is clearly not to the extent it charges now. We believe it is something like an Island Premium and that equates broadly to the Irish tax level which would mean a reduction in UK taxes of about £1.50. That model we shared with the Government. I would say clearly, having said that, that it is going to be a lot harder for the Government to put the genie back in the bottle now it has been let out than it was to let it out. We are facing a monster.
  (Mr Davis) We are certainly not holding our breath that they are going to reduce it by £1.50.

  395. I have been through this argument before because, as the Chairman will know, I am Chairman of the All-Party Parliamentary Beer Group and we have had these discussions with the Treasury as well. There is a difference between beer and duty levels and cigarettes. If you want to bring lots of beer across it is extremely heavy and if you bring it across in a van you are likely to break the suspension, whereas cigarettes are much lighter. The Island Premium, would you like to estimate what we would need to reduce it? You are saying a £1.50 reduction in duty.
  (Mr Dibble) In duty.

  396. According to this the Republic of Ireland duty is £1.02. This is your Appendix II.
  (Mr Dibble) No, sorry, that is the difference.

  397. Total taxation £2.49 in the Republic and £3.51 in the UK.
  (Mr Dibble) So there is a pound difference in tax between us and Ireland. Ireland also has some smuggling so we would argue they are slightly above what is sustainable within a single market.

  398. If the Government were to contemplate, after negotiation with you, approximating our duty levels with those of Ireland, and I am not promising here, what about the price that you charge? Why do you charge so much? Is it because the market will stand it?
  (Mr Dibble) There are a number of things built into our prices in the UK. One is our advertising costs but they will not be there much longer, so that is one saving we can make. The other is within the 89 pence there is the retailer's margin, which is far higher in the UK than throughout the rest of Europe. That is because rent and rates for retail properties and insurance even for the high priced product are quite significant in the UK. There are a lot of factors built into the difference. There are also considerations in other markets, what is the price of products, particularly in ex-monopoly markets, and the ability to compete determines the price we judge.
  (Mr Davis) You could not enter the market and go 20% above currently the most expensive brand in the country.

  399. There are swings and roundabouts in this argument about duty. If you get the Government to cut their duty then there will be a hit on revenues to the Treasury immediately but if you can eradicate smuggling then they will get more money and, indeed, there will be more jobs, so there will be the taxes from the jobs, including National Insurance at a higher rate shortly.
  (Mr Dibble) Absolutely.

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