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.