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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