Examination of Witnesses (Questions 280-299)
MR BEN STEVENS, MR NIGEL NORTHRIDGE, MR GARETH DAVIS AND MR DAVID DAVIES
12 JANUARY 2005
Q280 Mr Walter: The whole market grew.
Mr Davis: It only represents about
12% of total UK consumption. Paradoxically, however, it is a more
difficult one, because the vast majority of roll-your-own tobacco
that comes into this country is EU duty paid; i.e. it has borne
duty in another EU Member State. Basically, the inflow is largely
dominated by cross-border shopping and/or what we would call bootlegging,
which is product which has attracted duty in the intended country,
the destination market, but has been brought back in quantities
for the purpose of illegally reselling. In roll-your-own tobacco,
the vast majority of it has borne duty in some country of the
EU. With cigarette it is somewhat different, in that there is
a much wider field, as it were.
Q281 Mr Walter: This trade was, if you
like, the white van trade. What were Customs doing? In your opinion,
what were Customs doing in this period? Obviously not stopping
it.
Mr Davis: The thing that kicked
it into life was very much the entry into the Single Market in
1993. That is when it took off. As my colleague said, it perhaps
caught everyone a little by surprise and it took some time to
catch up with that. I think that the difficulty Customs have had—and
it has been a real difficulty—is the growth in indicative
allowance limits for British citizens exercising their free will
as EU citizens to travel to another Member State to purchase goods,
et cetera, and the difficulty in being able to differentiate
between the legitimate cross-border purchaser and the bootlegger.
As we know, the UK Government has taken a fair amount of stick
in recent years from the EU Commission, in terms of the enforcement
and the seizure regime that we have had at the ports. I think
that Customs have had to bear a lot of unfair criticism in trying
to control what is a particularly difficult area.
Q282 Mr Walter: Mr Stevens, do you have
a view on that?
Mr Stevens: Yes, I concur with
what Mr Davis and Mr Northridge have said. Smuggling of BAT brands
into the UK has never really been a problem, I have to say. The
amount of BAT product that has been seized, as a percentage of
the total seizures, is less than a third of 1%. So it is a very
small problem.
Q283 Norman Lamb: Why is it different
between different companies?
Mr Stevens: I have no idea why
it is different between different companies. I can guess. BAT
was not really in the UK market before 1999. It was only when
we merged with Rothmans that we entered the UK market. We have
a very low market share in the UK anyway. Our market share is
below 6%. When people do cross borders to smuggle brands, they
tend to smuggle market-leading brands. So the smaller manufacturers
tend to fall off the end of the equation—would be my guess.
Q284 Mr Walter: The estimate of non-UK-duty-paid
share of total UK cigarette consumption peaked in the year 2000
at 31%—which, if I were in the Treasury, I would be somewhat
concerned about. It seems to have slipped back now to about 27%.
Mr Gareth Davis, perhaps I could put this to you, because this
was in your submission. In terms of the smuggled element of that,
based on your pack collections you showed that cigarette smuggling
had slightly increased in 2003 to 18%, whereas Customs estimated
it had fallen to 15%. Have you looked at those figures with Customs,
to see why not only are your figures different but your trends
are different?
Mr Davis: The answer is yes. We
discuss the figures at our regular meetings with Customs. The
important thing is that, while there may be slight differences
over the estimates and the components of the non-UK-duty-paid
segment, directionally we broadly agree the way things are going.
Estimates of this nature in this type of trade are incredibly
difficult to attain, and it is very difficult to verify their
accuracy in total; nevertheless, they are estimates. Basically,
we establish our figures by three routes: via sales to trade in
the UK; via market research; and via pack collection exercises,
where we collect discarded packs. We collect around 10,000 packs
a quarter from pubs, clubs, football grounds, racetracks, et
cetera, and analyse those. There is a slight difference in
the estimated size of total consumption between the TMA, ourselves
and Customs and Excise. I think that they are largely about collection
period, timing differences. The other difference is that in our
figures we take the Customs number for what we would call official/legal
cross-border purchases. If we apply that figure of Customs to
our total estimate, we are left with a derived figure, which would
suggest 18% on our data, rather than the 15% of Customs. However,
overall, directionally, in macro terms, we would agree with Customs
that things are moving very much in the right direction.
Q285 Mr Walter: Why do you think that
is?
Mr Davis: If we look at the point
you made, Mr Walter, over the period that we are talking about
the trend has come down from 31% and we are in the mid-twenties
somewhere. Whether it is 24 or 26 or whatever, it is definitely
moving down. Certainly in the latest 2004 data from Customs, it
has moved down again to the figure they quote as around 15%. We
would not really take issue with it. We think that estimates are
notoriously difficult. The timescales and the periods of measurement
are somewhat different between some of the manufacturers and Customs,
and I think that accounts for most of the differences. Directionally
though, we do not disagree.
Q286 Mr Walter: Can I go back to the
Gallaher statement to us and quote? You say, "Taken alone,
Customs and Excise analysis of seizures suggests that contraband
cigarettes appear to be almost entirely sourced from outside the
EU. By contrast, the pack surveys and our analysis of pack discards
indicate that around 60% of non-UK-duty-paid cigarettes come from
markets inside the EU". What leads you to this view, which
seems to be in total contradiction with the Customs' view?
Mr Northridge: To be honest with
you, Mr Walter, it may be confusing in the way we have articulated
it, because I would not disagree with what Mr Davis was saying
or, indeed, indicatively with what Her Majesty's Customs have
been saying. We believe that the UK non-duty-paid element in the
UK market is somewhere around 25 or 26%, which is very similar.
We think that there are three sources to that. The thing that
has changed in the last five years is the source of that change.
Originally, some 80 to 90% of seizures were tobacco or cigarettes
coming in from outside Europe. That is now between 20 and 30%.
In terms of the huge growth in the UK non-duty-paid portion which
is coming from Europe, it is impossible for us to ascertain, or
indeed Customs, to what extent that is based on people legitimately
going and buying cigarettes for their own consumption as opposed
to bootlegging. We believe that an increasing portion of that
element is being bootlegged, as opposed to people buying for their
own consumption. We have a concern that, going forward, that may
increase, unless we can work together with Customs to try to reduce
that potential. Anecdotally, I read in a newspaper over the Christmas
holiday that a plane from Tenerife landed at Newcastle Airport
on Christmas Day; they did not expect there to be Customs officials
around on Christmas Day, and there were. They walked through the
airport, leaving their bags, and there were 2 million cigarettes
left on the carousel. Those are examples of what can happen—with
the realisation and the knowledge that if you only buy the 3,200
indicative allowance and you sell those cigarettes on, you can,
at full retail differentials, make £500. That will pay for
your weekend trip to Spain. I think that there is a real need,
if we can, to get the whole of Europe to apply a fixed limit which
you are allowed as an individual to have in your possession. I
understand that the French authorities are debating at the moment
whether that should be, for example, 1,000 cigarettes. If we had
tax harmonisation, this issue would not arise. Without that, with
differentials—for example in Spain, Portugal and Greece,
where people are increasingly travelling to on budget airlines
-they can acquire cigarettes at full retail price at less than
half the price of the UK. Without any indication as to what limit
they are allowed to bring back, I think that increasingly people
will be tempted to bring back more than they are going to consume
themselves, and find a business. The problem with that is that
it opens up illegal channels; it does not have the same control,
in terms of access to children; and the third is counterfeit,
which we have all mentioned, which is a very big and growing problem
for all of us. However, to me, it is still nowhere near the size
of the bootlegged issue, which is probably of greater concern
because those products have been manufactured by people who we
have known—
Q287 Mr Walter: So you stick by your
view that 60% of the non-UK-duty-paid cigarettes come from within
the EU?
Mr Northridge: Absolutely, but
I do not know what portion of that 60% are legally being purchased
by people, as opposed to being bootlegged.
Q288 Mr Walter: I appreciate that.
Mr Northridge: That is the differential.
I do not believe that Customs or my competitors here would greatly
disagree with that number. It used to be about two-thirds coming
from outside Europe; now it is 60% coming from within Europe,
but maybe only half of that is bootlegged—maybe not even
half of it. We simply do not know. I do not believe that Customs
could possibly know, because it is very difficult. There are 45
million trips by British people across to Europe every year. That
is a huge opportunity for people, with one little carrier bag,
to bring back more cigarettes than are for their own consumption.
Q289 Mr Walter: But Customs' estimate
is that only 15% is smuggled.
Mr Northridge: Yes, but that is
60% of the 22% or the 25%. In and of itself, it is about 15 and
then you have to add the small portion of cigarettes that are
still coming in from outside Europe, but that is declining very
quickly. So, in all, the numbers are not dramatically different.
We just wanted to bring attention to the fact that we, at Gallaher,
would very much like there to be some fixed limit, so that consumers
themselves knew what they were entitled legitimately to bring
back into the UK, as opposed to indicative figures—which
were 800 and then went to 3,200, and which I think has led to
a growth in this bootlegged business. Unfortunately, I cannot
prove it to you, other than anecdotally, reading newspaper articles,
and our sales force—300 people—going to a shop where
suddenly the business is decimated, and we think that it is maybe
because of a car boot sale, or a pub next door, or a house on
a housing estate where somebody is travelling weekly. I think
that increasingly they will go to the accession countries, where
you can buy cigarettes fully duty paid for less than £1.
You are only supposed to bring 200, but if you think that there
is a pretty good chance that you will be able to get an easyJet
or a Ryanair flight and walk through without being stopped, I
think that increasingly they will do so. If you see Customs, I
think that is a pretty big deterrent.
Q290 Norman Lamb: Do you all agree that
there should be a fixed limit rather than indicative levels?
Mr Davis: I would like to put
one further dimension on that. I think that the idea of a fixed
limit is laudable, but—
Q291 Norman Lamb: Is it lawful?
Mr Davis: That is the problem
as I see it. We then have to look at the pragmatic aspects of
it. In fact, the current debate in the EU Commission is to abolish
indicative limits, and it just becomes a free-for-all. So that
would be very much contra to the way the EU is thinking. I do
not think that the problem is with indicative limits; it is lack
of adherence to the indicative limits which is the problem. I
think that is what we have to do.
Q292 Norman Lamb: Other than equalising
tax rates, which is unlikely to happen given the political debate,
what else could be done to tighten it up? Are you talking about
much better Customs controls?
Mr Davis: I think that there are
a number of things in terms of recommendations. We very much believe
in closer frontline co-operation with Customs. We do not think
that the problem is just about container scanning or that type
of trade—the container trade coming in. We also think that
there is still a cross-Channel activity that needs to be controlled,
with closer frontline co-operation and resources.
Q293 Norman Lamb: Are there things that
Customs are not doing that you think they ought to be doing?
Mr Davis: There are a couple of
things that would very much help us and Customs in the activities.
We are promoting two of those things with Customs. One is the
ability for them to seize genuine product, where it has been diverted
by a third party—which they can do perfectly legally from
the country of destination, with correct paperwork, and the Customs
cannot seize the product. We have just undertaken two cases in
Holland and Belgium where, paradoxically, we have used intellectual
property law in order to seize that product in those countries.
Q294 Norman Lamb: This requires a change
in the law.
Mr Davis: Whether it be law or
the rules of engagement, I am not quite sure where it falls. Certainly,
if our Customs and indeed other countries' customs authorities
could have that power of seizure, and then when they have seized
it destroy it, where it has plainly been mis-declared or is an
illegal movement of product, that would help.
Q295 Norman Lamb: You said there was
another one.
Mr Davis: Extending the concept
of the European transit guarantee bond to a worldwide basis would
help, whereby monetary guarantees were put in place with the various
fiscal authorities throughout the world. That would flag up suspicious
movements much more clearly to the various Customs authorities.
Q296 Norman Lamb: Have you proposed this
to Customs?
Mr Davis: Yes, we are in discussion
with Customs on that. Obviously, it is not entirely within their
bailiwick. A lot of this would involve international customs authorities.
However, we would certainly be promoting it through those where
we have an MoU.
Q297 Norman Lamb: So that I understand
the scale of it in pounds, the 18% of the total UK market which
is smuggled—what is that in pounds, in lost duty?
Mr Davis: In lost duty, I think
the latest figure is around £3 billion.
Q298 Norman Lamb: Per year?
Mr Davis: Yes.
Q299 Mr Cousins: I wonder if I might
ask Mr Davies for some comments on the questions which have just
been raised by my colleague.
Mr Davies: May I first say that
indicative limits are a matter of great concern, but it cannot
be looked at in isolation. Several governments in Europe have
expressed the view to us that if one had clear rules about what
one could purchase and what one could bring home, that, in and
of itself, would reduce the amount of illegal cross-border selling.
There is a great deal of confusion about what one is allowed to
do and what one is not allowed to do. Looking at fixed limits
alone, however, leads one to miss opportunities. The first place
one has to start is the establishment of a secure distribution
network for cigarettes throughout the supply chain—from
manufacturers to logistics providers to wholesalers and to retailers.
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