Conclusions and recommendations
1. Tobacco
duties generated £9.9 billion of revenue in 2011-12, but
tobacco smuggling represents a significant risk to revenues. It
undermines initiatives to reduce smoking and it is linked to the
activities of organised criminal gangs. HMRC estimates that duty
not paid on tobacco smoked in the UK in 2010-11 resulted in revenue
losses of around £1.9 billion. HMRC launched the latest iteration
of its tobacco strategy in April 2011. This is a joint strategy
with Border Force; HMRC has overall responsibility for delivering
the strategy while Border Force is responsible for the seizure
of illicit tobacco at the border.[1]
2. HMRC appears to have used some of the funding
from the 2010 Spending Review, earmarked for investment in new
initiatives to tackle tobacco smuggling, for business-as-usual
funding of its tobacco strategy. HMRC's
2010 Spending Review settlement included £25 million over
four years to invest in new initiatives to tackle tobacco smuggling.
However HMRC was also required to find efficiency savings so total
spending on HMRC's tobacco strategy in 2011-12 rose by only £3
million to £68.9 million and fell to £67.4 million in
2012-13. HMRC claims to have made efficiency savings but admitted,
for example, that some of the money it earmarked for new initiatives
actually funded six overseas intelligence officers already in
post.
Recommendation: HMRC
should be transparent about the extent to which its Spending Review
investment is truly additional to the funding required for business-as-usual
and where it has been used to make up any shortfall in funding
elsewhere.
3. By the end of 2012-13, three of the five
projects to be funded by investment from the 2010 Spending Review
had yielded nothing. One of the projects,
designed to tackle the fact that tobacco supplies far in excess
of local demand are sent overseas, and are then available for
smuggling back in to the UK, was abandoned because of legal concerns.
HMRC and Border Force have been painfully slow in implementing
new proposals designed to improve performance. HMRC achieved benefits
of £328 million from reduced revenue losses by the end of
2012-13 from the five new initiatives, less than two-thirds of
the benefit expected by that time (£527 million).The Committee
welcomes innovative approaches to delivering benefits; however,
HMRC and Border Force did not subject their plans to proper scrutiny
or make a realistic assessment of the benefits achievable and
their timing.
Recommendation: HMRC
and Border Force should encourage innovative solutions to tackle
problems, but these must be based on clear, well thought through,
evidence-based proposals that can be implemented when funding
is available.
4. We are not convinced that the 2010 Spending
Review projects will deliver the £900 million benefit, in
terms of revenue loss prevented, that HMRC now predicts they will
achieve by March 2015. There are significant
weaknesses with some of the data on which HMRC relies to demonstrate
its impact. In particular, there are significant inaccuracies
in HMRC's estimates of revenue-loss prevented from criminal investigations
work, which limits its usefulness as a performance indicator.
Recommendation: HMRC
should include its data sources, and a clear quantitative analysis,
when providing its assessment of the financial impacts achieved
by March 2015 from its projects funded by the 2010 Spending Review.
5. HMRC has not yet found the right balance
in its use of prosecutions and other enforcement action to deter
potential offenders. Tobacco fraud cost
taxpayers £1.9 billion in 2010-11, with 9% of cigarettes
and 38% of hand-rolling tobacco sold in the UK estimated to be
illicit. Yet there were only 265 prosecutions for tobacco smuggling
in 2012-13 and prosecutions for organized crime actually fell
from 62 to 51 in the last year. A campaign of targeted enforcement
action and associated publicity could have a wider deterrent effect,
but HMRC does not know what level of enforcement action is required
to deter would-be offenders. HMRC has not yet found the right
balance in its enforcement action, which can range from prosecutions
of organised criminal gangs to imposing fines or referring offenders
to licensing authorities for those involved in local, small-scale
operations.
Recommendation: HMRC
and Border Force should develop a clear and coherent rationale
for the use of prosecutions and other enforcement action within
the UK, based on good evidence of the deterrent effect. They should
also publicise prosecutions and other enforcement action more
widely to deter potential offenders. HMRC needs better relationships
with Local Authority trading standards officers to achieve this.
6. HMRC must do more to work with other agencies
to tackle tobacco smuggling in the UK. Joint working of this nature
will improve enforcement activity, reduce supply and educate the
public about the risks of purchasing illegal products. A
pilot scheme launched in 2009 to tackle tobacco smuggling, by
cutting public use of illicit tobacco in the UK and which involved
health, trading standards and police services, produced positive
results. However, despite this success the scheme has not yet
been rolled out across the UK.
Recommendation: HMRC
should implement effective examples of joint-working more quickly
across the UK.
7. There is still a significant problem with
the over-supply of hand-rolling tobacco, in particular, to high-risk
countries. HMRC is concerned that some
UK manufacturers, of hand-rolling tobacco in particular, are greatly
over-estimating the size of the legitimate European market for
their products and are not co-operating with HMRC to tackle the
smuggling of hand-rolling tobacco. HMRC estimated that the supply
of some brands of hand-rolling tobacco to some countries exceeded
legitimate demand by 240% in 2011. But HMRC has not fined any
UK tobacco manufacturer for over-supplying products and failing
to control its supply-chain and has issued only one letter of
warning. HMRC is focusing on improving cooperation with manufacturers
but it must also become more assertive in using its powers where
necessary and consider whether it has the full range of powers
and tools at its disposal to take action.
Recommendation: HMRC
should apply the supply-chain legislation to its full extent.
It needs to identify and seek to correct any shortcomings in the
legislation to put a stop to the abuse of exports by tobacco manufacturers.
It should consider naming and shaming those manufacturers who
fail to co-operate fully with the Department.
1 C&AG's Report, Progress in tackling tobacco
smuggling, Session 2013-14, HC 226, paras 2, 3, 5 Back
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