HM Revenue & Customs: Progress in tackling tobacco smuggling - Public Accounts Committee Contents

1  Developing the tobacco strategy

2.  Tobacco smuggling is a significant risk to tobacco duties which generated £9.9 billion of revenue in 2011-12. HMRC estimates that duty was not paid on some 9% of cigarettes and 38% of hand-rolling tobacco smoked in the UK in 2010­11, with associated revenue losses of around £1.2 billion and £0.66 billion respectively. Tobacco smuggling undermines government initiatives to reduce the prevalence of smoking, as it makes smoking more affordable. It can also be linked to organised criminal gangs involved in other crimes, such as drug smuggling and people trafficking.[2]

3.  Since 2000 HMRC has had a strategy to tackle tobacco smuggling which has contributed to a decline in the market share for illicit tobacco products. HMRC estimates that in 2000-01, duty was not paid on 21% of cigarettes, and 61% of hand­rolling tobacco smoked in the UK, with associated revenue losses of £2.7 billion and £0.67 billion respectively.[3]

4.  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 delivery while Border Force is responsible for the seizure of illicit tobacco at the border.[4] On the basis of a Report by the Comptroller and Auditor General, we took evidence from HMRC and Border Force on their renewed strategy to tackle tobacco fraud.1

5.  As part of the 2010 Spending Review, HMRC allocated an additional £25 million, to be spent between April 2011 and March 2015, to tackle tobacco fraud by organised criminal gangs.[5] HMRC increased its total spending on tackling tobacco fraud from £66 million in 2010-11 to £68.9 million in 2011-12, including £3.2 million of Spending Review investment. However, HMRC spent only £67.4 million in 2012-13, despite reporting that it had spent £7.7 million of additional Spending Review funds on tackling tobacco fraud in that year.[6]

6.  HMRC told us that overall spend on tackling tobacco fraud had reduced because it had made efficiency savings, which had reduced its spending on business-as-usual activity. However, the Department of Health withdrew its funding of six overseas intelligence officers in 2010, leaving HMRC to meet these costs from its budget.[7] It is unclear how much of the new money is being used for cuts in expenditure elsewhere in the area of tobacco smuggling policy.

7.  HMRC planned to use its Spending Review investment to deliver five projects with a total expected benefit of £1.4 billion by March 2015. However, by the end of 2012-13, three of the five projects had delivered no benefits.[8] One of these unsuccessful Spending Review projects was intended to test the effectiveness of manufacturers' activity to prevent the over-supply of tobacco products to high-risk countries, such as Spain, Belgium, the Netherlands and Luxembourg, through test purchases.[9] However, during the planning stage, HMRC realised that UK officials could not exercise their powers in another country in that way. HMRC has re-scoped the project and now expects the project to deliver much-reduced benefits, down from £465 million to around £100 million.[10]

8.  HMRC and Border Force also cancelled a proposed project to provide a mobile unit to examine freight consignments at a number of UK ports, after assessing that the project was unlikely to deliver the expected benefits. The Border Force's postal screening facility, designed to examine a greater volume of incoming post without disrupting Royal Mail services, was also two years late coming on-line due to technical and supplier problems.[11]

9.  HMRC and Border Force conceded that their assumptions for these projects had been over-optimistic, but explained that these projects were innovative and that this had made it difficult to estimate the likely benefits.[12] HMRC admitted that the projects were put together quickly and told us it had learnt lessons, both in terms of assessing and challenging potential benefits, and in project testing.[13] HMRC admitted that it needed to spend longer in the planning phase to ensure projects are well scoped.[14]

10.  HMRC recognised that it needs to work with a range of bodies to tackle tobacco fraud effectively.[15] HMRC and Border Force said they have a good working relationship, for example they are working together on a further revision of the tobacco strategy.[16] Similarly, overseas intelligence officers work with local law enforcement agencies in foreign jurisdictions to facilitate seizures overseas, and share intelligence with Border Force.[17]

11.  HMRC also told us that it had worked well with UK tobacco manufacturers to reduce over-supply to Europe. However, it accepted that it had much further to go. In particular, one UK tobacco manufacturer had a poor record of engagement with HMRC: it had not notified HMRC of any firm plans to address HMRC's concerns; it had been very slow in responding to HMRC; and it had provided very little useful information. HMRC told us it had raised its concerns with the tobacco manufacturer, and would monitor its response.[18]

12.  HMRC considered that it has good working relationships with its European partners, as evidenced by the introduction of lower minimum indicative tobacco limits for personal use.[19] We asked HMRC about its relationship with the European Anti-Fraud Office (OLAF). HMRC told us that it works with OLAF at both a strategic and an operational level. However it was considering how best to increase co-operation given that OLAF does not currently have the capacity to instigate criminal investigations within European member states.[20]

13.  HMRC also noted that it had contributed to the recent EU strategy to tackle cigarette smuggling through informal discussions with the European Commission ahead of the strategy's publication. This had included making a number of general observations and specific comments on the strategy in the context of the UK illicit market. The strategy will be negotiated over the coming months and HMRC told us that it would be working closely with the European Commission and member states on the detail of the proposals to ensure that the actions complement and add value to HMRC's UK strategy. HMRC noted that the strategy is subject to Parliamentary scrutiny procedures and that it had prepared an explanatory memorandum to brief Parliament on the European Commission's proposals and their implications.[21]

14.  HMRC has started to improve its strategy to tackle tobacco smuggling within the UK, and has seen positive results from a pilot scheme involving health, trading standards and police services, which was the first large-scale attempt to cut public use of illicit tobacco. However, this has not yet been implemented on a wider scale, some four years after the pilot was launched in 2009. HMRC accepted that there is more to do to develop its work in the UK.[22]

2   C&AG's report, para 2, 3 Back

3   C&AG's report, para 1.8 Back

4   C&AG's report, para 5 Back

5   Q 1 Back

6   Qq 5-6, 8; C&AG's report, para 1.20 Back

7   Qq 10-12; C&AG's report, para 2.3 Back

8   C&AG's report, Figure 8 Back

9   Qq 60, 96 Back

10   Qq 61-62, 86; C&AG's report, para 1.22 Back

11   Qq 19, 77, 84; C&AG's report, para 2.17 Back

12   Qq 18-20; C&AG's report, Figure 8 Back

13   Q 62 Back

14   Q 83 Back

15   Q 35 Back

16   Q 14 Back

17   Qq 20, 49-50, 56 Back

18   Qq 60-62, 64; Ev 20  Back

19   Q 73 Back

20   Ev 19 Back

21   Ev 19 Back

22   Qq 36-37; C&AG's report, para 1.26 Back

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Prepared 10 October 2013