Tobacco Products (Descriptions of Products) (Amendment) Order 2010

The Committee consisted of the following Members:

Chair: Jim Dobbin 

Birtwistle, Gordon (Burnley) (LD) 

Campbell, Mr Ronnie (Blyth Valley) (Lab) 

† Corbyn, Jeremy (Islington North) (Lab) 

† Crockart, Mike (Edinburgh West) (LD) 

Dakin, Nic (Scunthorpe) (Lab) 

† Dinenage, Caroline (Gosport) (Con) 

† Gauke, Mr David (Exchequer Secretary to the Treasury)  

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

Gray, Mr James (North Wiltshire) (Con) 

† Hart, Simon (Carmarthen West and South Pembrokeshire) (Con) 

Liddell-Grainger, Mr Ian (Bridgwater and West Somerset) (Con) 

† McCarthy, Kerry (Bristol East) (Lab) 

† McPartland, Stephen (Stevenage) (Con) 

† Nokes, Caroline (Romsey and Southampton North) (Con) 

Stringer, Graham (Blackley and Broughton) (Lab) 

† Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab) 

† Wilson, Phil (Sedgefield) (Lab) 

Wilson, Sammy (East Antrim) (DUP) 

Sarah Davies, Committee Clerk

† attended the Committee

Second Delegated Legislation Committee 

Monday 13 December 2010  

[Jim Dobbin in the Chair] 

Tobacco Products (Descriptions of Products) (Amendment) Order 2010 

4.30 pm 

The Exchequer Secretary to the Treasury (Mr David Gauke):  I beg to move, 

That the Committee has considered the Tobacco Products (Descriptions of Products) (Amendment) Order 2010 (S.I. 2010, No. 2852). 

It is a great pleasure to serve under your chairmanship, Mr Dobbin. The order amends the definition of certain tobacco products for duty purposes. It reduces the opportunity for tax avoidance to protect Government revenues and provide a fairer, simpler system. It will change the definition of hand-rolling tobacco, cigars and tobacco refuse. 

Pipe tobacco attracts less excise duty than cigarettes and hand-rolling tobacco. For example, the duty on a 25 gram pouch of pipe tobacco is £1.98, whereas the duty on a pouch of hand-rolling tobacco of the same size is £3.24. That difference of £1.26 per pack creates obvious incentives for tax avoidance. In fact, the industry raised its own concerns that some traders were selling pipe tobacco in the knowledge that smokers were using it to make hand-rolled cigarettes. There was no promotion of such practice, but word of mouth had led to the problem becoming more and more widespread. Some brands of so-called pipe tobacco have even started being stocked by major supermarkets due to the rapid increase in demand. Unfortunately, the drive to purchase cheaper tobacco has caused less tax to be paid than is rightfully due. Not only has that had an impact on the Exchequer’s revenues, but it is undermining our efforts to use tax policy as a means of reducing smoking prevalence, smoking being one of the largest causes of premature death in the United Kingdom. 

The major distinction between hand-rolling tobacco and other smoking tobacco is the width at which the leaf is cut. Currently, the threshold between hand-rolling tobacco and pipe tobacco is set at the point at which at least a quarter of the product is less than 1 mm in width; at that point, it attracts a higher rate of duty. Recent behaviour has shown that that threshold does not go far enough, so the order will increase the threshold to 1.5 mm. It is believed that the change will be sufficient to deter smokers from the inappropriate use of pipe tobacco. It should also deter importers and manufacturers from exploiting the definition. 

The order will also change the definition of cigars. That is not targeted at traditional cigars, but at another instance of tax avoidance that has become commonplace in other member states and could spread to the United Kingdom. Again, people have been attempting to disguise the true nature of products in order to pay less tax. Cigarettes were being manufactured using reconstituted

tobacco rather than paper, and were then being described as cigars. The order will not only remove the scope for such avoidance, but simplify the definition of cigars, which has become far too complicated. Cigar-like products with a threshed blend filler, reconstituted tobacco outer and a weight of less than 2.3 grams will no longer be classified as cigars. Previously, the definition extended to products of 1.2 grams and more, but that is no longer the case. The products have been removed from the European directive and the order will ensure that UK legislation remains aligned. 

Disguising the true nature of products and their use has one aim, which is to avoid the correct amount of duty payable, and that distortion of the tax environment gives rise to three separate problems. First, it artificially creates a market for lower-priced tobacco products. Secondly, it gives less conscientious suppliers an unfair advantage over retailers of legitimate products. Thirdly, it deprives the Treasury of much-needed revenue. The order aims to resolve those issues by redefining hand-rolling tobacco and cigars for duty purposes. Separate from that, it also defines tobacco refuse to resolve a long-standing issue surrounding the treatment of factory waste. 

When the order is in effect, the products will be taxed as intended and the unfair advantage from which many have been profiting unjustly will be removed. However, it is important to highlight that the measure will not impact on all product brands. It is targeted at those who have deliberately sought to exploit the rules for their own financial gain. I wish to clarify that while the order will help to stop actual and potential tax avoidance in Britain, it will ensure that UK legislation remains aligned with European directive 95/59, which has been amended. As members of the Committee are no doubt aware, the framework of the rates and structures of excise duty is agreed within the European Community, and changes to the tobacco directive have to be applied to the domestic laws of member states. The changes are intended to come into force on 1 January 2011 in the UK and throughout the EU. The order will help to ensure that everyone in Britain pays their fair share, and efforts to avoid paying taxes will not be tolerated. 

4.35 pm 

Kerry McCarthy (Bristol East) (Lab):  As always, it is a pleasure to serve under your chairmanship, Mr Dobbin. I do not intend to keep the Committee long, which I am sure is always good news for people who have been railroaded into attending Delegated Legislation Committees on a Monday afternoon, especially given that there is so much business in the Chamber today. 

As the Minister said, the order will amend and update the Tobacco Products (Descriptions of Products) Order 2003, which our party introduced when we were in government. The fact that the order has been brought back before the Committee is indicative of the need to be ever vigilant when it comes to people trying to find ways around the regulations in force, and the need to be always aware that people seeking to avoid duties will find ways of doing so. We will support the measure and will not press it to a vote today. It will ensure that tobacco products are classified correctly, and so attract the appropriate amount of tax. As the Minister said, it will also help us to try to discourage people from smoking as much. 

The Minister has given me assurances that the order will affect only those who seek to avoid paying the correct rate of tax on their products. I understand that Her Majesty’s Revenue and Customs has undertaken consultation, and has not been advised by people doing legitimate business, selling legitimate products, of any concerns about being unintentionally affected by the proposed changes. We Opposition Members have not received any such representations, either. 

I have a number of quick questions for the Minister. Will he advise the Committee what steps are being taken to keep on top of the issue and ensure that there will not be attempts to exploit other loopholes? I think that he was present at a recent debate on the Finance (No. 2) Bill in which we discussed the issue of long cigarettes. People could get away with making a cigarette that was twice the length of an ordinary cigarette, pay duty for only the equivalent of one cigarette and, when the cigarette entered this country, chop it in half and have two cigarettes. There was an issue in the Finance (No. 2) Bill to do with trying to tackle that problem. 

We now have cases of people wrapping lots of hand-rolled cigarettes up in one big reconstituted tobacco outer layer and describing the product as a cigar. The measure that we are discussing today will put a maximum weight on cigars, so that that can no longer be done. The notes mention an issue with cigar-coloured cigarettes and people trying to pretend that cigarettes were cigars. There is also the issue about the weight of the constituent bits of hand-rolled tobacco. Is the Minister satisfied that enough resources are being devoted to keeping on top of the issue? Is he aware of any other potential loopholes that could be exploited? 

On a more general note, and on a point that I think would be of interest to the Committee, will the Minister explain why pipe tobacco and cigars are taxed at a lower rate than hand-rolled tobacco and cigarettes? That is obviously in place for historical reasons. This is a point of curiosity as much as anything, but are there any plans to change that? Will there be any potential for further exploitation of the difference between hand-rolled and pipe tobacco? I appreciate that pipe tobacco is probably of better quality, and that the hand-rolled tobacco that was sold under the guise of pipe tobacco was of poorer quality, and was cheaper not just because it attracted pipe tobacco’s rate of tax. Does the Minister have any plans to revisit the distinctions between the different types of tobacco? Apart from that, we are quite happy to support the measure. 

4.39 pm 

Mr Gauke:  I am grateful to the hon. Lady for her support for the order. I anticipated that it would not prove too controversial, and I was pleased to hear that she supports it. She raises a fair point on the fact that we looked at this matter in the Finance (No. 2) Bill that we debated in October. That demonstrates that there is a need for HMRC to be alert in this area, that there can be opportunities for avoidance and that it is right that HMRC takes a proactive role in addressing this concern. This is a matter that has to be kept under constant review and one where we can benefit from shared experiences from elsewhere in the European Union. For example, the measures on cigars in this order are a consequence not of avoidance in this country,

but of experiences in other member states. HMRC works closely with enforcement agencies in all member states to identify risks as they emerge. HMRC also works collaboratively with the industry. By and large, the industry is supportive of the measures that we take. As I have mentioned, the industry raised concerns as to what was going on. 

HMRC continues to treat tobacco duty avoidance, and smuggling in particular—that is a different issue—as very important. HMRC’s spending review highlighted that we need to address that, because the potential loss to the Exchequer can be considerable. HMRC is currently refreshing its “tackling tobacco” strategy to see how we can address that. 

Jeremy Corbyn (Islington North) (Lab):  The Minister may be aware that my constituency used to suffer from a huge problem with illegal sales of smuggled tobacco. It was often adulterated with dangerous tobacco. Thankfully, as far as I am aware, that practice has more or less stopped. Can he reassure me that there will be enough HMRC staff to deal with that problem in the future, should it recur? With rising tobacco duties and prices, the incentives to smuggle and sell dangerous products—products even more dangerous than tobacco—increase. 

Mr Gauke:  The hon. Gentleman raises a fair point. On HMRC staff, he will be aware that although there are proposals to reduce HMRC’s overall budget over the course of the spending review period, HMRC’s position, in its discussions with us in the run-up to the spending review and the decision that Ministers took, was that there was a strong argument for reinvesting some of the savings into particular areas where it was important to protect revenue. One of those areas was the smuggling of cigarettes and tobacco. That leads into the different, but related, concerns that the hon. Gentleman raised. The problem is not as acute as it was, but it is vital that HMRC takes the issue into account. 

The second question from the hon. Member for Bristol East, on the difference in duty between cigars, pipe tobacco, hand-rolling tobacco and cigarettes, is interesting. There is a long-standing differential. We have inherited the position set out in previous Budgets. I am not fully aware of when this differential arose. One may speculate that it dates back to the time of Harold Wilson, but I am not sure that that would be entirely accurate. 

Kerry McCarthy:  Or the Secretary of State for Justice, the right hon. and learned Member for Rushcliffe (Mr Clarke). 

Mr Gauke:  Or indeed, my right hon. and learned Friend the Member for Rushcliffe. 

Jeremy Corbyn:  Or Tony Benn. 

Mr Gauke:  Or Tony Benn, although thankfully he was never Chancellor. That would have been the least of our worries. 

I note the point made; the differential may potentially give rise to avoidance opportunities, and the order is trying to address that. The changes in definition should

provide some clarity and simplification, and should improve the situation, with regard to where the demarcation lines fall. The hon. Member for Bristol East is perfectly right to say that we must always keep such matters under review. In conclusion, the order will simplify matters and will align tobacco product descriptions with those used across the European Union. I am grateful for the support of the Opposition and I hope that the order will be approved. 

Question put and agreed to.  

4.45 pm 

Committee rose.