 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeThursday 10 May 2007(Afternoon)[Mr. Roger Gale in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)Clause 6Rates
of tobacco products
duty
Question
proposed [this day],That the clause stand part of the
Bill.
1
pm
Question
again
proposed.
Mr.
Paul Goodman (Wycombe) (Con): Welcome back to the
proceedings, Mr. Gale. At the end of the previous sitting, I
was about to ask the Financial Secretary what discussions the
Government have held with other Governments that already use
track-and-trace technology and with third sector organisations in the
UK, such as ASH.
Mr.
David Gauke (South-West Hertfordshire) (Con): It is a
pleasure to see you back in the Chair, Mr. Gale. I want to
pursue the point relating to hand-rolled tobacco raised by my hon.
Friend the Member for Braintree, particularly with regard to the
difference between the duty on hand-rolled tobacco and that on
manufactured cigarettes. I have been approached in respect of the
matter, as I suspect other members of the Committee have been, by
Philip Morris Ltd. Unlike most of its competitors, Philip Morris does
not produce any hand-rolled tobacco, although it is a substantial
producer of manufactured cigarettes. It has therefore taken an unusual
position for a business because it is in favour of higher taxes to
equalise the position of hand-rolled tobacco with that of manufactured
cigarettes.
The figures
that Philip Morris presented to me raise an interesting point. It
provided them before the increases in the last Budget, but those
changes did not fundamentally change the position. According to the
figures, the tax on a packet of 20 manufactured cigarettes was
£4.07, whereas the tax on an equivalent amount of hand-rolled
tobacco was £2.15. That is clearly a substantial difference,
which must be one of the causes of the substantial increase in the use
of hand-rolled tobacco as a percentage of overall tobacco use in this
country, to which my hon. Friend referred. As he said, the proportion
appears to have doubled.
I have seen
two sets of Government figures. Both show that in 1990 the use of
hand-rolled tobacco represented 11 per cent. of tobacco use. That has
increased to either 22 per cent., according to an answer given by the
Minister of State, Department of Health, the hon. Member for Don Valley
(Caroline Flint), to a written parliamentary question, or 24 per cent.,
according to the Treasury’s pamphlet “New Responses to
New Challenges: Reinforcing the Tackling Tobacco Smuggling
Strategy”, which was published in March 2006. There is clearly a
substantial increase in the relative use of hand-rolled tobacco. It is
worth pointing out that in the 16 to 24-year-old age group, the use of
such tobacco among males increased from 10 per cent. in 1990 to 25 per
cent. in 2005, and from 2 to 12 per cent. among females in the same
period.
I assume that
those increases are largely driven by the different taxation system. I
suspect that the Government have a good reason for having lower
taxation for hand-rolled tobacco, namely smuggling. I should be
grateful if the Financial Secretary could confirm
that.
Mr.
Brooks Newmark (Braintree) (Con): To carry on my hon.
Friend’s theme, the White Paper “Smoking Kills”,
to which I referred, said that the Government’s objectives were
to help existing smokers to quit the habit and to help children and
young people to avoid becoming addicted in the first place. If, as he
suggests, more and more people, particularly children, are using
hand-rolled tobacco as an alternative to filtered cigarettes, is not
hand-rolling tobacco much more dangerous than filtered cigarettes to
the health of children and
adults?
Mr.
Gauke:
I am grateful for that intervention. My hon. Friend
may well be right; I do not know whether hand-rolled tobacco is
essentially more dangerous to people than manufactured cigarettes, but
none the less it appears to be a growing market. We come back to the
tension that sometimes exists, which my hon. Friend the Member for
Windsor explored with regard to alcohol. Sometimes there is tension
between raising revenue and discouraging a certain type of behaviour. I
believe that the reason why the Government have kept hand-rolled
tobacco duties at a lower level is because of the fear of smuggling. As
my hon. Friend the Member for Braintree pointed out, something like
half the consumption of hand-rolled tobacco is from smuggling sources.
It would appear that it is easier to smuggle hand-rolled tobaccos
simply because of the way in which it is packaged, and in many other
European countries the rates of duty on hand-rolled tobacco, as with
ourselves, are somewhat lower than for manufactured cigarettes. In
relative and absolute terms, the difference is even greater, so there
is a difficulty.
However, there are one or two
problems, and I would be grateful if any figures are available to
clarify matters. Given the relative increase in the use of hand-rolled
tobacco over the last 16 or 17 years or so, what cost to the Treasury
has resulted in that increase of use? Going forward, has the Treasury
considered, given the different taxation systems that apply, that that
relative use may increase even further, thus reducing revenues? I was
also struck by the figure quoted by a number of hon. Members that the
cost to the Exchequer of
smuggling cigarettes was something like £2.9 billion. Does that
figure take into account the fact that the duty on hand-rolled tobacco
is kept low, presumably to try to reduce smuggling? I assume that it
does not. No criticism is meant by that, but the problem would appear,
in some respects, to be worse, given that steps are being taken to
reduce it.
The
Treasury’s paper on tackling tobacco smuggling refers to how, in
2000, the Government believed that the range of actions taken could be
successful in reducing smuggling both of cigarettes and of hand-rolled
tobacco. It
states:
“However,
as HMRC’s knowledge and understanding of the market has
improved, it has become clear that the market for smuggling methods for
HRT are different from those for cigarettes and different responses are
needed.”
Specific
policies were announced within that paper, which was produced a year
ago, and a specific operational target was set out for hand-rolled
tobacco, reducing the size of the UK illicit market by the equivalent
of around 20 per cent. by 2007-08. We are now halfway through that
period, and I would be grateful if the Financial Secretary could give
us some information on what progress has been made.
It is also worth pointing out
Sweden has abolished the distinction between the two levels of duty.
They have now, in effect, a unified rate, and I do not know whether the
Treasury has made any study to see what the consequence of that has
been, and whether that has resulted in an increase or decrease in
smuggling. As I also mentioned, there is an issue to do with a
differential rate throughout the European Union, and I would be
grateful to know whether the Government are in discussions with our
fellow European countries on that to see whether any thought has been
given to a co-ordinated approach to raising duties.
I also give
the Financial Secretary an opportunity to scotch one myth, if indeed it
is one. The duty on hand-rolled tobacco is lower because traditionally
it was seen as being consumed by the poorest sections of society and
the Government did not want to impose costs on them. I wonder whether
the attitude of the Home Secretary in thinking that tobacco provides
some pleasure in an otherwise unpleasurable life in certain sections of
society influences Government policy. I am not saying that it does. I
should be grateful if the Financial Secretary could confirm that
smuggling has caused us to have a rate of duty that appears to
encourage more and more people to smoke hand-rolled tobacco. It is one
area in which the Government’s anti-smoking policy appears to be
failing.
Mr.
Colin Breed (South-East Cornwall) (LD): We will not oppose
the duty increases; indeed, we support them. I want to add to the case
made by the hon. Member for Wycombe and others in respect of smuggling
and counterfeit products, which make up what can be called the illicit
market.
I will come
to the obvious aspect of tax losses in a moment, but the duties have
two other effects. They undermine one sector of the retail
trade—the small-time tobacconists, which have lost a lot of
their business to supermarkets. They are also losing out because of
smuggled branded and counterfeit products, which still get into the
country. Another, subliminal, effect is that it erodes people’s
integrity if they find no difficulty in purchasing
cigarettes and tobacco products which they know to be avoiding tax, and
think nothing of it. That should not be encouraged, and we need to
recognise the effect that it can have on people’s views of
citizenship and so
on.
On
tax losses, the Minister will know that I tabled some questions to him
recently which ultimately referred me, very helpfully, to the
“Measuring Indirect Tax Losses— 2006” report and,
specifically, to tables 3.3 and 3.4, on cigarettes and hand-rolled
tobacco. I will not go into the details of individual figures, but the
report helpfully provides some mid-point estimates—the figures
are obviously not accurate, and guesstimates have to be made.
The mid-point
range of the illicit market share in cigarettes has changed from 21 per
cent. in 2001 to 14 per cent. 2004-05, the latest year for
which figures are available. The underlying estimates of the revenues
necessarily have a rather large range: from £2.1 billion to
£3.3 billion in 2001 and from £1.2 billion to
£2.5 billion in 2004-05. Whatever the mid-points of those
figures ultimately turn out to be, they are very significant. The
losses on hand-rolling tobacco were estimated to be in the range of
£500 million to £850 million in 2000-01 and
£680 million to £970 million in 2004-05, which are not
insignificant figures.
I hope that the problem of
smuggled and counterfeit products, the potential losses of revenue and
the other consequences that I mentioned will exercise the minds of the
Treasury. The smuggled market in Britain is beginning to be brought
under control, but it is still a significant problem. It has been
compared with that in countries such as Turkey. It has a market five
times the size of the United Kingdom’s and is clearly
geographically far more vulnerable, but it has the problem under much
tighter control. There is a growing sense that the UK needs to put a
solution in place as soon as
possible.
1.15
pm
Reference has
been made to track-and-trace technology, which I understand is a proven
solution to the problem of smuggled and counterfeit goods. It is a
means of putting a covert marking on to products to enable enforcement
orders to determine the point of diversion at which the product enters
the illicit market. Voluntary measures, such as the memorandum of
understanding, are insufficient on their own. They need strict
compliance systems and legally enforceable sanctions if they are to be
effective.
So far,
the Treasury and Her Majesty’s Revenue and Customs have been
unable to provide a sufficiently compelling explanation as to why the
UK is the only member state not to have signed up to the agreement with
the European Commission, referred to as the Philip Morris agreement.
What is the
reason?
Let
me turn to the counterfeit market, which is becoming a greater problem.
By definition, counterfeit goods will not be the same as the branded
products. Thus, if there is a health problem in relation to branded
tobacco products, there could be an even greater one in relation to
counterfeit products that are not manufactured under the conditions
that apply to branded products. The issue is substantially more complex
than smuggling. However, it is the loss of potential tax revenue that
needs to be at the forefront of our thinking today. There
is broad agreement that voluntary arrangements are insufficient; there
is a clear need for real protection. Every country that has implemented
track-and-trace technology or its equivalent has seen a successful
outcome as a direct consequence. In most cases, its introduction has
been led by the Ministry of Finance or whatever the equivalent is in
the country concerned.
Smuggling and
counterfeit are both continuing problems. I note that in the 2006
Budget, the Chancellor published “New responses to new
challenges: Reinforcing the Tackling Tobacco Smuggling
Strategy”, which announced new measures further to strengthen
the anti-smuggling strategy, including working with tobacco
manufacturers to tighten controls along the supply chain. I shall be
interested to learn what results that has produced. What meetings,
discussions and agreements have taken place with the manufacturers and
what controls have been tightened along the supply chain? The effective
remedies probably boil down to three things: effective enforcement,
international co-operation and tough penalties. Getting just one right
will not do. We need action on all three if we are to stem tax losses
and protect what is left of the retail sector of confectioners,
tobacconists and newsagents, and the health of people who smoke
counterfeit
products.
As a self-confessed, lifelong
anti-smoking crusader, I could not resist the temptation to contribute
to this part of the Committee’s proceedings, and to welcome the
increases in duty. In my perusal of all the clauses, I have not been
able to find any reference to the welcome measure announced in the Red
Book of a reduction in the rate of VAT on smoking cessation products. I
understand that there will be a reduction from the normal rate to a
concessionary rate of 5 per cent., but for only one year from 1 July
according to the Red Book. That is welcome, and sets a useful precedent
for similar reductions in VAT to encourage good environmental
behaviour—I shall come to that on later clauses.
Will the Financial Secretary
explain why there is no reference to that reduction in the Bill? In
case we do not have a further opportunity to discuss the matter, will
he also explain why it will be in place for only one year? That seems
perverse, particularly when it has been established through freedom of
information requests that almost half of primary care trusts in this
country cut their stop-smoking budgets in real terms during the
financial year just ended. That VAT measure may provide some modest
relief to help to restore the position, and it is an important means of
reducing the amount of smoking by encouraging people to take up devices
such as nicotine patches to help them to beat the habit, which I am
sure we all want to
see.
Adam
Afriyie (Windsor) (Con): I want to try to establish again
the Treasury’s direction of thought. What is the objective of
the changes in duty? We have heard about the balance between smuggling,
law and order, and illicit and legitimate cigarettes. Is the objective
to stop smuggling—I am sure that the answer is, to a certain
degree, yes—or is it revenue raising? We all accept that there
is an element of revenue raising, which is understandable, but is there
also a health objective to reduce the number of smokers in Britain
by increasing the price and deterring consumption? Is there a
demand-reduction
goal?
The
answer may be that there are three, four, five or six objectives, but
if it is a combination of multiple objectives, will the Financial
Secretary tell us how his Department deals with the conflict in
objectives? To give a hypothetical example, if the anti-smuggling
measures worked, all cigarettes were purchased legitimately and duty
was being paid, the amount of duty would rise. But if there were a
reduction in the amount of duty—this goes back to elasticity of
supply—how would he resolve the conflict between raising revenue
to the Exchequer by encouraging more smoking and the health objective
of reducing the number of smokers? I want to probe the
Government’s thinking to find out how that conflict resolution
would take place when there are multiple objectives in the
clause.
The hon. Member
for South-East Cornwall made a reflective contribution. He mentioned a
concern that I am well aware of because I see the Tobacco Alliance
every year in the run-up to the Budget, but which no one else has
mentioned—the impact of smuggling and bootlegging on independent
tobacconists and corner shops. I am conscious of how they are
profoundly undermined by illegal tobacco and bootleg sales.
Nevertheless, part of the pressure on them is a result of our shopping
habits and the change in the way we lead our lives. It is not due just
to tobacco duty or the level of
smuggling.
The hon.
Gentleman quoted a number of statistics that we published alongside the
pre-Budget report just before Christmas on the level of the illegal
market in the UK. The mid-point of the illicit market in
2004-05—he was not certain about this—was 14 per cent.,
which is down from 21 per cent. four years earlier when we launched our
anti-tobacco smuggling strategy. If we had not taken action, it would
probably have risen to 36 per cent.
Members are
right to question the Government on whether the measures that we are
taking are sufficient, whether they are having the necessary impact and
how they are working—that applies particularly to the new ones.
The hon. Gentleman called for legally enforceable sanctions and tough
penalties in voluntary memorandums of understanding with UK tobacco
manufacturers. I think that he served on last year’s Finance
Bill. It might have slipped his mind, but at that stage we legislated
for a framework that gave the Government the ability to raise penalties
of up to £5 million on tobacco companies that do not follow the
agreements and obligations when controlling their supply chains. I am
glad to say that we have not had cause to use those yet, but we will
not hesitate to invoke those penalties if necessary. I am sure that he
accepts that they could be an important weapon in our
armoury.
The hon.
Gentleman is right also about counterfeits being a growing problem.
According to the latest figures, in 2005-06, 51 per cent. of
large-scale seizures made by HMRC were of counterfeits. I continue to
believe, and to argue, that the UK’s memorandums of
understanding are better than that struck between the EU and Philip
Morris, because the latter does not cover counterfeit tobacco and
cigarettes.
I shall turn briefly to the
point made by the hon. Member for Ludlow. If he is a lifelong
anti-smoking crusader, I congratulate him—this must be an
important year for him. I am sure that he is pleased at the prospect of
the smoking ban in July.
Mr.
Dunne:
To clarify, I voted against the smoking ban in
public places. I agonised over that decision, as the Minister will
understand, because it put into conflict two vital
principles—the freedom of the individual and the desire to
reduce smoking. I am afraid that the freedom of the individual won out
on that
occasion.
John
Healey:
It is interesting to hear how the hon. Gentleman
wrestled with his principles. To rephrase, no doubt he welcomes what
everyone anticipates—a reduction in levels of smoking as a
result of the ban. Many on the Government Benches supported the
measure, even if he did not when it came before the House. The
provisions for reducing VAT this year on products that help people to
give up smoking and to reinforce and support the ban are not in the
Bill because we will introduce them under secondary legislation. Those
regulatory powers are in
legislation.
Mr.
Newmark:
I wanted only to make a short quip: the Minister
said that hon. Members supported the legislation, but was that before
or after they went down to the smoking
room?
John
Healey:
As they say, some of my best friends are smokers.
I know that it will not be easy for them in the coming
months.
The hon.
Members for Windsor, for Braintree and for South-West Hertfordshire
tussled with what is undoubtedly a complex interaction—between
duty, demand, revenues and levels of smuggling—and a complex set
of considerations when weighing up the situation. The model that we
use, which we developed with assistance from independent academic
experts and had peer-reviewed by them, was published in December 2004.
If the hon. Member for Braintree is interested in receiving a copy, I
will ensure that he gets one. It shows that the inflation increase that
we propose in this Bill will not increase smuggling, that the prices
and duty levels of cigarettes are historically high in the UK and that
the cigarette duty rates are close to revenue maximisation
point.
1.30
pm
The hon. Member
for Wycombe kindly quoted my making this case during the consideration
of last year’s Finance Bill, so I need not repeat myself. The
effect of the measure means that any big rise in the rates of tobacco
duty will reduce revenue and increase smuggling, so that is a central
consideration for us as we weigh up these duty decisions. He is right
to believe that my view and assessment of that has not
changed.
Since 2000,
the tax on hand-rolling tobacco has been increased by the same rate as
the duty on cigarettes. As with cigarettes, our modelling and analysis
suggests that a real increase in the duty on hand-rolling tobacco would
significantly increase the smuggling problem and undermine our wider
Government health objectives.
The duty level on hand-rolling tobacco is higher here than in Sweden,
and it is also close to revenue maximisation
point.
That
is the context in which we considered the duty decisions in the run-up
to the Budget in March. The clause would increase the rate of duty on
cigarettes, cigars, hand-rolling tobacco and other smoking and chewing
tobacco in line with inflation. We are conscious in all this that
smoking kills more than 100,000 people a year and is the single
greatest cause of preventable early deaths in this country. Therefore,
the increase supports the wider Government aim of reducing smoking
levels by maintaining the real price of
cigarettes.
As
a result of the real-terms duty increases both under this Government in
previous years and under earlier Governments, tobacco prices in the UK
are now at record high levels. The duty decision will maintain that
real price and will continue to encourage people to smoke less or to
quit. It should also therefore continue to help to discourage children
and young people from taking up the habit in the first place, and it
sits alongside what I think all members of the Committee might
recognise as a significant investment in national health services to
support people who are trying to give up smoking.
In 2006, my own area of
Rotherham’s stop smoking service saw more than 2,500 people,
half of whom quit smoking as a result. As we approach the prospect of
the smoking ban—this may also be the experience of other members
of the Committee—there have been increasing calls on that
service. I hope that it will be able to help an increasing number of
people to give up the habit.
Julia
Goldsworthy (Falmouth and Camborne) (LD): I am entirely
supportive of the comments that the Financial Secretary is making about
how the duties are used to support Government policy in helping to cut
smoking. I am not sure how they are consistent with the comments that
he made about alcohol, especially those relating to particular types of
alcohol, such as special brew lagers. Such lagers are clearly linked to
people with specific problems. Why does he feel that the same
principles that he just explained in relation to tobacco should not and
do not apply in specific cases relating to
alcohol?
John
Healey:
I have two things to say on that. I am sorry that
the hon. Lady was not present for this morning’s debate, because
it was quite a detailed debate about the elasticities and
inelasticities of demand, and how they differ for beer, cigarettes,
cars and houses. That is the economic reality. The other fact is that
within our beer duty regime we tax according to the strength of beer
and lager, so that strong lagers are taxed more heavily than weak ones.
So an element of the system of tax on beer and lager already reflects
the concerns that she
has.
Alongside our
duty decisions there is the prospective smoking ban in public places in
July, the NHS stop smoking services and the fact that, in October, we
shall raise the minimum age at which young people can buy tobacco from
16 to 18. I want to pay tribute in passing, Mr. Gale, to my
hon. Friend the Member for Barnsley, East and Mexborough (Jeff Ennis),
whose constituency
sits between mine and that of your co-Chairman. He has been one of the
leading advocates and campaigners for just such a
rise.
We
are very conscious when we set the duty levels about the potential
impact on smuggling. We are confident that this inflation-only increase
will not lead to a rise in smuggling. The impact of the anti-smuggling
strategy since we introduced it in 2000 has been quite significant. It
first of all stabilised and then drove down the illicit market share.
It is clear that we need to do more on hand-rolling tobacco, as we
announced in the Budget last year. We are also tightening up the
provisions we put in place through the memorandum of understanding and
the legislation last year. I was asked specifically about the Philip
Morris International agreement. Apart from the fact that that was
negotiated between the European Commission and 10 of the member states,
as was pointed out to the Committee earlier, in part by dropping legal
proceedings against the company in the US, the main strengths of our
legislation to control the supply chain contrast with the Philip Morris
agreement in various respects.
First, our arrangements apply
to all tobacco manufacturers, not just to Philip Morris. Secondly, the
Philip Morris agreement excludes any tobacco products on which duty is
paid in another member state. Nearly all hand-rolling tobacco in the UK
comes from other parts of the EU and has duty paid in those countries,
so it would not be touched in this case. Thirdly, unlike in many other
member states, Philip Morris has only about a 5 per cent. share of the
market in the UK. Fourthly, as I explained to the hon. Member for
South-East Cornwall, our penalties can range up to £5 million if
companies under our arrangements are not following their obligations.
Finally, as I have also pointed out, the Philip Morris agreement does
not cover counterfeit tobacco, and counterfeit is clearly a growing
problem about which we and manufacturers are
concerned.
In relation
to questions of track and trace and markets, we announced at the
Budget—I hope that members of the Committee will not have missed
it, but judging by some of their comments they may have
done—that we had reached an agreement with the tobacco
manufacturers in this country voluntarily to introduce covert markings
on packs of tobacco products. That will enable the counterfeit products
to be identified and traced more effectively. I expect those markings
to begin to be introduced on packets during the course of the year. The
hon. Member for Wycombe asked how we came to that judgment and this
agreement. We consulted very widely, including with ASH, the tobacco
manufacturers, other countries and potential suppliers of the sort of
technology that we were interested in
using.
In summary,
this is a duty increase that continues our policy of maintaining a high
price for cigarettes without hampering our efforts to tackle smuggling.
It will help to reduce smoking. It will help to lower the costs
associated with smoking. I am glad of the indication from both the
Liberals and the Tories that they will not seek to oppose this
clause.
Question
put and agreed
to.
Clause 6
ordered to stand part of the Bill.
|
| |
| ©Parliamentary copyright 2007 | Prepared 11 May 2007 |