Conclusions and recommendations
The Tobacco Strategy
1. HM Customs and Excise (the Department)
has succeeded in reducing the market share for illicit cigarettes
from 21% to 16% over four years, and estimates that in 2003-04
it collected an additional £2.1 billion in tobacco duty.
But tobacco fraud remains significant and the Department estimates
that £2.9 billion revenue was lost in 2003-04. The additional
funding to support the Tobacco Strategy in the three years from
2000-01 to 2002-03 was £209 million. The Department and the
Treasury should carry out a cost benefit analysis on what could
be achieved in reducing further the loss from tobacco fraud by
devoting more human and technical resources to the task.
2. Counterfeit cigarettes represent about
one quarter of the illicit cigarette market and account for half
the cigarettes seized by the Department.
The cigarettes are manufactured in the Far East and Eastern Europe
and then distributed in the UK outside normal retail outlets.
The Department is working with overseas revenue authorities in
an effort to disrupt the supply of counterfeit cigarettes at source
and in transit. It should co-ordinate its strategy with local
authorities trading standards departments to tackle the distribution
networks for this tobacco.
3. Counterfeit tobacco is of inferior quality
and presents an additional health risk to consumers.
The Department should seek to reduce the demand for counterfeit
cigarettes by working with the Department of Health on a joint
publicity campaign to raise public awareness of the particular
health risks associated with counterfeit tobacco.
4. The seizures of genuine UK brands have
fallen significantly, from 75% of large seizures in 2001 to 35%
in 2005. The Department has updated its
Memoranda of Understanding with the leading tobacco manufacturers
to combat the smuggling of their products. It also proposes to
seek statutory backing to the agreements, introducing fines for
loss of revenue where manufacturers' brands are being illegally
sold in the UK. The Department should set a separate target to
achieve a further reduction in genuine cigarettes smuggled into
the country.
5. Revenue losses from hand-rolling tobacco
are currently estimated to cost the Exchequer £0.7bn a year.
Leading brands of hand-rolling tobacco despatched to other countries
in the European Union are being smuggled back into the UK. The
Department has now extended its Memoranda of Understanding with
leading manufacturers to cover hand-rolling tobacco. The Department's
Public Service Agreement target on cigarette smuggling should
be extended to include all tobacco products.
6. Tobacco manufacturers consider that the
Department underestimates the non-UK duty paid share of the cigarette
market by 3% to 4%. Different data sources
are used by the Department and the manufacturers, so assessments
on the overall level of tobacco fraud are likely to differ. The
Department should work with manufacturers and distributors to
achieve a better understanding of the trends in tobacco fraud,
to identify emerging threats and therefore deploy its resources
more effectively to counter tobacco fraud.
VAT debt management
7. Debt recorded on the Department's Trader
Register, its case management system, increased from £2.0
billion in March 2002 to £2.6 billion in March 2005.
The un-collectable elements, relating to missing traders, ongoing
criminal investigations, or debt under dispute by the trader,
increased from £822 million to £1,641 million over the
same period. The Department's success in bringing new debt onto
the Trader Register is undermined by its inability to bring it
into collection. The Department needs to establish clear procedures
to review un-collectable debt cases regularly, with targets set
for their resolution.
8. In March 2005, some £1.3 billion of
debt recorded in the Department's VAT Mainframe accounting system
had not been transferred on to the Trade Register.
£400 million was due to timing differences, but some £900
million represented debt that should have been transferred to
the Trader Register and actively managed. The failure to align
the two systems undermines the Department's efforts to improve
its recovery of VAT. The Department should promptly notify and
record all VAT debt on the Trader Register so that it can actively
manage it.
9. As a result of the Department's actions
the overall level of recoverable debt has decreased from £1,240
million in March 2002 to £913 million in March 2005.
This improvement in performance followed the introduction of some
150 additional staff on debt management activity. The Department
should see how its performance on the collection of VAT debt now
compares with that of other EU Member States.
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