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.
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.
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. 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
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. 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.
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.
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
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
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.
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.
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.
HMRC admitted that it needed to spend longer in the planning phase
to ensure projects are well scoped.
10. HMRC recognised that it needs to work with
a range of bodies to tackle tobacco fraud effectively.
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.
Similarly, overseas intelligence officers work with local law
enforcement agencies in foreign jurisdictions to facilitate seizures
overseas, and share intelligence with Border Force.
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
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. 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.
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.
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.
2 C&AG's report, para 2, 3 Back
C&AG's report, para 1.8 Back
C&AG's report, para 5 Back
Q 1 Back
Qq 5-6, 8; C&AG's report, para 1.20 Back
Qq 10-12; C&AG's report, para 2.3 Back
C&AG's report, Figure 8 Back
Qq 60, 96 Back
Qq 61-62, 86; C&AG's report, para 1.22 Back
Qq 19, 77, 84; C&AG's report, para 2.17 Back
Qq 18-20; C&AG's report, Figure 8 Back
Q 62 Back
Q 83 Back
Q 35 Back
Q 14 Back
Qq 20, 49-50, 56 Back
Qq 60-62, 64; Ev 20 Back
Q 73 Back
Ev 19 Back
Ev 19 Back
Qq 36-37; C&AG's report, para 1.26 Back