Principles of tax policy - Treasury Contents


Written evidence submitted by Imperial Tobacco Group plc

SUMMARY

1.1  Imperial Tobacco welcomes this opportunity to make a submission to the Treasury Committee inquiry into the fundamental principles of tax policy.

1.2  The coalition government has committed to developing a more balanced economy with manufacturing at its heart. We support this aspiration but recognise that it can only be achieved if the government creates a more competitive tax environment for businesses.

1.3  We also welcome the government's commitment to what is described as "the most competitive corporate tax regime in the G20". A competitive tax regime is not just about achieving the right levels of taxation but must also include the way policy is made and the quality of tax law.

1.4  Competitiveness, predictability, stability and simplicity should, as far as possible, be the fundamental principles underlying the UK tax system, supported by high levels of transparency and robust tailored tax impact assessments. We welcome the government's new approach to tax policy-making and its initiatives to date on simplification.

1.5  In addition to these opportunities, a number of serious concerns remain in relation to the taxation of tobacco products, which we hope the government will address.

BACKGROUND

2.1  Since first listing on the UK Stock Exchange in 1996, Imperial Tobacco has become one of the world's four largest international tobacco companies selling products in over 160 countries and employing some 38,000 people (including 2,500 in the UK), with a market cap of over £18 billion and an Enterprise Value (EV) of around £29 billion. Imperial Tobacco is the world leader in the sales of rolling tobaccos, cigars, rolling papers and tubes, and is the leading manufacturer and distributor for the UK cigarette market—our principal market—with a share of around 45%.

2.2  Listed amongst the UK FTSE's top 30 companies, Imperial Tobacco is headquartered in Bristol, where our UK market operations are also based. Our UK factory is in Nottingham and our international marketing department is in Farnham Royal, Buckinghamshire. Our vending business, Sinclair Collis, is based in Wolverhampton in the West Midlands.

2.3  Imperial Tobacco is a significant taxpayer and tax collector. In the UK alone for our financial year ended 31 September 2009 Imperial collected or paid some £5.5 billion (thousand million) in excise duties, VAT and employee-related taxes as well as paying business rates in the local economies of Bristol, Nottingham, Farnham Royal and Wolverhampton. For our financial year ended 30 September 2010 Imperial Tobacco collected duties (excise and VAT) of around £5.9 billion, with employee taxes and business rates on top.

COMPETITIVENESS, PREDICTABILITY, STABILITY AND SIMPLICITY

3.1  Imperial Tobacco believes that competitiveness, predictability, stability and simplicity should be fundamental principles underlying the UK tax system. The consistent application of these principles supports growth. These principles should be underpinned by transparency on policy, early consultation on changes to rates and legislation and robust tailored tax impact assessments.

3.2  Imperial Tobacco wishes to have more certainty over future tax levels in the UK, its principal market where it makes significant investments and collects significant duties. The UK tax system (with the notable exception of corporation tax) is overly complex, resulting in unnecessary compliance costs for business.

3.3  The coalition government's emergency budget in June 2010 sent a positive message to business that the government is serious about improving the competitiveness of the UK tax system. However, this must only be the start of a steady programme of significant reductions in the overall tax burden. The reductions in corporation tax, and the fact that these were announced in advance of introduction, are welcomed, as are the implementation of commitments to early consultation on draft Finance Bill clauses.

3.4  Imperial believes that taxes on company profits should be held down as much as possible in order to encourage investment and stimulate growth. We remain concerned by the current high rates of National Insurance which effectively penalise companies for employing more people. By providing a more predictable tax system with planned reductions in taxation over time, Imperial Tobacco (and other UK businesses) will be able to invest with confidence as part of our long term strategies.

3.5  For Imperial Tobacco and for many other large UK companies, a key area where predictability has been and is still lacking is in the taxation of foreign profits. This directly influences whether foreign businesses choose to locate in the UK and whether business that are already here choose to remain. We welcome the work of the government on reforming Controlled Foreign Companies, including the transparency of the Working Group, and hope that the timetable now set out for the implementation of new rules is maintained.

3.6  Another area of concern to Imperial is the unpredictability in the taxation of our products. Over the last ten years, tobacco excise taxes have risen by some 42%, and changes to excise and to VAT rates have been made on no fewer than 13 occasions. As with any business, unexpected changes to the market prices of our products make it difficult to set a clear business plan.

3.7  While successive Health Ministers, encouraged by enthusiastic but often uninformed tobacco control activists, have lobbied the Treasury to raise tobacco excise taxes in an attempt to reduce overall consumption, there is no clear statement of intent as to the policy objectives in relation to the taxation of our products and there are significant unintended consequences directly related to these tax increases.

3.8  The UK now has one of the highest tobacco excise rates in the world. This has created market distortion, damage to the Exchequer, an undermining of common policy objectives such as reducing youth smoking, and continuing increases in organised criminal activity with all the associated costs to society. For example, the associated rise in smuggled and counterfeit tobacco products being distributed in the UK creates tax losses of some £2.5 to £4 billion each year, according to HMRC estimates.

3.9  The UK has become a favourite target market for smugglers because the potential profits are so huge and the penalties relatively insignificant. This in turn increases overall consumption because of the sheer volume of cheap illicit tobacco that is available throughout the country and sold away from the controlled retail environment. The latest HM Revenue & Customs figures show that up to 22% of the cigarette market and 61% of the hand-rolling tobacco market still avoids UK duty.

3.10  We wish to see a clear statement of intent as to the government's objective for our products in regard to excise taxes and a more holistic approach to the setting of excise policy, with the interests of the vociferous but often uninformed tobacco control lobby balanced against those of key departments. In particular we believe that the government should include the following in considering the impact of future developments:

—  When considering duty increases, the impact on illicit trade should be a key factor;

—  Duty increases should be moderate and not further widen differentials with other EU countries; and

—  Over time duty rates should come more into line with those of other EU countries, particularly neighbouring markets such as Spain, France and Benelux.

3.11  Compared to the other 26 EU member states, the UK has by far the widest retail price gap between the most expensive and the cheapest cigarettes. After Ireland, the UK has the second highest cigarette retail price levels in the EU. These two factors combined have resulted in the category also being highly susceptible to consumer down-trading to cheaper products. Imperial Tobacco estimates that consumer down-trading cost the Treasury approximately £350 million in lost revenue in 2009. A Department of Health paper acknowledged this trend, and noted: "…the past decade has seen a proliferation of cheaper brands…" Imperial Tobacco believes that introducing a Minimum Excise Tax (MET), based on the Weighted Average Retail Price (WAP), would have significant benefits, including:

—  narrowing UK retail price gaps and protecting UK tax revenues from down-trading;

—  protecting UK tax revenues from price wars or cheaper brand introductions;

—  increasing tax revenues, whereas a higher specific ratio would lower revenues; and

—  increasing simplicity, in that when tax rates change, MET would automatically change too.

3.12  Withholding tax can create complexities for bank borrowing and in its application to interest paid to some overseas banks. In the interests of simplicity, and on the basis that it is sensible to encourage cash to flow back to the UK with knock-on benefits for the economy, the government should consider reviewing this area.

January 2011


 
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