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Session 2007 - 08
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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, † Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 15 May 2008


[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

9 am
The Chairman: I welcome all hon. Members to our sitting on this rather dull day. I apologise that the weather has broken, but at least it is a little cooler, so perhaps we will make even faster progress.

Clause 10

Rates of tobacco products duty
Question proposed, That the clause stand part of the Bill.
Justine Greening (Putney) (Con): I want to make a few comments about the clause. We recognise that it introduces an inflationary increase to maintain the price of cigarettes and hand-rolled tobacco, and we support that. However, will the Minister give us an update for the record on where we are in terms of duty in relation to tax revenue maximisation, and how the proposed increase relates to that?
During the Public Bill Committee debate on last year’s Finance Bill the then Financial Secretary, the hon. Member for Wentworth (John Healey), said 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.”——[Official Report, Finance Public Bill Committee, 10 May 2007; c. 73.]
It would be helpful to have the Minister’s statement on whether that is still the Government’s position and whether the aim of this inflationary increase is to continue to be somewhere close to the tax revenue maximisation point. In addition, will the Minister give us a brief update on the Revenue’s understanding of the impact of the smoking ban on consumption and duty?
A key point is that the Government are considering their smuggling strategy, having had one in 2003-04, but it seems that progress on bearing down on smuggling has plateaued, although I recognise that there was some progress. I understand that that is why the Government are considering the matter again. However, the Tobacco Manufacturers’ Association said:
“The increase in tobacco tax announced today will do little to reduce the level of tobacco smuggling and cross border shopping which lost the Treasury £4.5 billion in revenue last year. The decision helps to maintain the UK’s position as one of the world’s most profitable destinations for tobacco smugglers and this is of great concern to the TMA and its member companies.”
We can put those comments in the context of who is making them, but smuggling takes a hell of a lot of money that would have gone to Her Majesty’s Revenue and Customs in duty. The latest estimates show that up to 18 per cent. of cigarettes and 62 per cent. of hand-rolled tobacco consumption is smuggled, and that 70 per cent. of all large-scale cigarette seizures are counterfeit. On top of that, many other smokers choose to buy their tobacco products from elsewhere in the EU where taxes and prices are considerably lower. That is another statistic provided by the Tobacco Manufacturers’ Association.
Smuggling is not an issue only for the Treasury, and I am interested in the Minister’s response because of my broader concerns. Other people who are hit by smuggling are smaller tobacconists and shopkeepers, and those who trade in legitimate cigarettes but are often undercut by those who do not.
I understand that much of the smuggling strategy is focused on border control and some of the more major mainstream franchises or smuggling outfits—the big business involved in smuggling. The end destination of cigarettes and hand-rolled tobacco is often small traders, and I want to find out whether the reworked smuggling strategy will have more focus on tackling smaller traders who are happy to sell smuggled products and often undercut competitors and small shopkeepers who prefer to sell only legitimate cigarettes. Can the Minister give us some clarity on that?
I want to follow up some parliamentary questions that I tabled a few months ago and perhaps to get some clarity from the Minister on the issues raised in them. I tried to find out the level of resourcing for the smuggling strategy and how many customs officers there were in HMRC. I assumed that the answer would be quite straightforward until I got an answer back saying:
“There is no separate group of staff identified as ‘customs officers’.”—[Official Report, 18 December 2007; Vol. 469, c. 1482W.]
To help me table parliamentary questions that will get answers, let me say that I was talking about the men who are generally at ports and airports and who tend to be dressed in uniforms—
Mr. Mark Todd (South Derbyshire) (Lab): Some of them are women.
Justine Greening: And women. As we go through customs, these people tend to stop us and occasionally go through our luggage to see whether we are smuggling cigarettes. My assumption was that they are called customs officers, but if the Treasury does not agree, I would be keen to know what they are called so that I can table parliamentary questions that will get a proper answer. I look forward to hearing what the Minister has to say.
Mr. Jeremy Browne (Taunton) (LD): Good morning, Sir Nicholas. Tomorrow is the 10th anniversary of my giving up smoking, so I do not know whether I need to declare an interest any longer. If I might say something unfashionable, however, I quite enjoyed smoking and I sometimes regret that I gave it up in the first place. However, giving up was no doubt good for my health.
I have two brief points. First, will the Minister confirm that the purpose of tobacco taxation is twofold—to disincentivise people to buy the product and to raise revenue? Will he also confirm that those two objectives are not incompatible? The second point has already been touched on by the hon. Member for Putney. What is the Government’s assessment of the impact of tobacco taxation on the smuggling of illegal tobacco products? What impact does that have in turn on the legitimate retailing of tobacco products?
The Exchequer Secretary to the Treasury (Angela Eagle): It is a pleasure to respond to the debate. It is a pity that the day is dull, although that was fairly predictable, given that this is the first day of the test match between England and New Zealand. An awful lot of disappointed people, myself included, will be looking at the skies this morning.
Clause 10 increases the duty rates on all tobacco products in line with inflation. Together with VAT, the increase is equivalent to 11p on the price of a typical pack of 20 cigarettes and 4p on a pack of five cigars. Our decision to raise duty rates, which the Committee does not oppose, is in line with inflation in the Budget and will maintain the real price of such products. It will thereby continue to encourage people to smoke less or to give up, as the hon. Member for Taunton did, and I congratulate him on his ability to break the habit.
Duty rates form an important part of the Government’s strategy to reduce smoking prevalence to 21 per cent. by 2010, alongside measures such as NHS stop-smoking services, the ban on smoking in public places, which came into effect on 1 July 2007, and raising the legal age for purchasing tobacco from 16 to 18 in October 2007. Budget 2008 retains the reduced rate of VAT that applies to smoking-cessation products. That point has not been raised, but the measure should be acknowledged. When it was originally introduced, it was time limited, but it will now continue beyond 30 June 2008.
When we set duty rates for tobacco, the potential impact on smuggling, which has been on hon. Members’ minds this morning, is an important consideration. As has been acknowledged this morning, the tackling tobacco smuggling strategy, which was introduced in 2000 and refreshed in 2006, was very successful in reducing the size of the illicit markets for cigarettes over the five years to 2005-06 from 21 per cent. to an estimated midpoint of 13 per cent. Since the start of the strategy, we have seized nearly 17 billion illicit cigarettes and more than 1,000 tonnes of hand-rolling tobacco.
The hon. Member for Putney is right to say that we are looking at hand-rolling tobacco, where there is clearly an issue that needs to be dealt with. However, to answer her question about where we are in respect of revenue maximisation, there is always a balance between excise duties and the smuggling phenomenon, as Committee members know. As my predecessor said in the debate on the 2007 Budget, duty rates are close to revenue maximisation, which is why there has been no greater increase than revalorisation in the Budget. That means that any large real increase in the duty rate would increase smuggling and probably increase the availability of cheap tobacco, which would obviously be a perverse result. That is what HMRC’s model demonstrates.
Angela Eagle: That is the midpoint of a range; that is how HMRC tried to measure something that is difficult to measure. It is clear, from the level of seizures, that the percentages of smuggled goods are down, but it is hard to be deadly accurate about such things, because one does not know how much illicit product is targeted at us. However, we can make estimates from the illicit product that we intercept and by checking what is on sale and what can be picked up in the country. There are ways of doing this.
It is also important to make the distinction between smuggling legally made products—our memorandums of understanding with the tobacco-producing companies have greatly assisted us in dealing with that—and the increasing threat of counterfeit product, which the hon. Gentleman mentioned, which in some cases can have the most interesting things mixed in with it that would do nothing to improve one’s health.
The hon. Member for Putney mentioned her asking further parliamentary questions about Revenue and Customs officers. We do not have Revenue and Customs officers at UK borders whose sole purpose is to tackle tobacco smuggling: they multi-task and do other things as well. Those officers perform numerous roles in protecting the UK from smuggling of all types, be it drugs or other illicit substances, people, money or other things. Such smuggling routes can be used to transfer all sorts of things and it makes sense to have the border authority taking over this aspect of the work to multi-task in that way.
We do not differentiate between HMRC officers at ports and those who are working from elsewhere. However, I am happy to write to the hon. Lady on the overall figures on officers, if she wants me to, rather than pursue the matter through parliamentary questions.
Justine Greening: Obviously, one major change in the smuggling strategy will be that the inland strategy is presumably largely overseen by HMRC, whereas the border authority deals with smuggling after items have entered the UK. Will the Minister tell us how the Government plan to ensure that those two groups work together effectively, given that I believe they will be in different Departments? They will need to liaise closely and share intelligence.
9.15 am
Angela Eagle: We have already put that in place—in fact, in the person of the Minister for Borders and Immigration, who now has a post in the Treasury as well to examine the UK Border Agency. I assure the hon. Lady that a great deal of organisational work is going into ensuring that there is proper liaison between the agency, the Serious Organised Crime Agency and the various other crime squads in question.
The nature of smuggling as a phenomenon means that when one deals with it in a particular place, it morphs into something else. There has been a marked increase in the smuggling of counterfeit cigarettes, as the hon. Member for Cities of London and Westminster pointed out. Some 70 per cent. of large seizures made by HMRC are now counterfeit.
To prevent counterfeit products from penetrating the legitimate retail sector in a bottom-up way, which would greatly increase smugglers’ profit, covert anti-counterfeit markings were introduced for all cigarette packs from October 2007. That will be extended to hand-rolling tobacco products this October, enabling us to tackle the problem from the retail supply end as well as at the borders. I assure the hon. Lady that a great deal of work is being done to ensure that there is co-operation both at the border and inland to detect and seize all such products.
With those reassurances, I hope that the Committee will accept that clause 10 should stand part of the Bill.
Question put and agreed to.
Clause 10 ordered to stand part of the Bill.
Clauses 11 and 12 ordered to stand part of the Bill.
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