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

2  Progress in delivering the tobacco strategy

15.  The expansion of HMRC's network of overseas intelligence officers under the 2010 Spending Review has yielded a significant return on investment, preventing an estimated £226 million of lost tax for an initial investment of £4.6 million— a benefit to cost ratio of 49:1.[23]

16.  HMRC recognised that there was scope for increasing the profile of enforcement action to increase the impact on deterrence.[24] It had strengthened the enforcement and compliance aspects of its strategy by introducing civil assessments and penalties. These enable HMRC to impose financial sanctions, in addition to the value of lost revenue on those caught smuggling tobacco, and to increase the volume of criminal prosecutions which target smaller players.[25] However, HMRC noted that it had to weigh the higher cost of prosecuting people, against the use of civil penalties and assessments in deciding the best course of action to take in combating tobacco fraud.[26]

17.  Although prosecutions for small scale offences involving tobacco increased from 105 in 2011-12 to 214 in 2012-13, prosecutions for organised crime fell from 62 to 51 over the same period, making a total of 265 prosecutions for tobacco fraud in 2012-13.[27] The total number of convictions for tobacco fraud has been static year-on-year.[28] HMRC had processed only 1% of potential cases for assessments and penalties successfully in 2011-12, rising to 28% in 2012-13.[29] HMRC acknowledged the need to enhance its work to tackle tobacco smuggling in the UK by rolling out campaigns supported by more sophisticated intelligence and by working closely with the police and with trading standards.[30]

18.  In addition to serving as a deterrent, prosecutions can also reveal valuable intelligence about organised crime networks which can then be used to improve the effectiveness of the other strands of the strategy, for example, by informing the targeting of overseas activities.[31] UK tobacco manufacturers have had a responsibility not to facilitate smuggling since the introduction of supply chain legislation in 2006, which was designed to minimise the over-supply of tobacco products to overseas markets. HMRC works with the tobacco manufacturers and can impose sanctions on manufacturers in cases where they fail to meet their obligations.[32] HMRC considered that this work had contributed to a 64% reduction in the over-supply of cigarettes to high-risk countries between 2008 and 2012.[33]

19.  No UK tobacco manufacturers have been prosecuted under supply-chain legislation and HMRC has issued only one letter of warning.[34] However, HMRC told us that it still had concerns about the over-supply of tobacco products, particularly of hand-rolling tobacco, to high-risk markets overseas.[35] HMRC explained that one of the challenges it faces in applying the legislation is that it only comes into effect if the manufacturers do not co-operate.[36]

20.  Over the first two years of the 2010 Spending Review, HMRC has secured a total return in terms of reduced revenue losses of £328 million on an initial investment of £11 million; less than two-thirds of the expected benefit.[37] It told us that it currently expects to deliver around £900 million of the initial target of £1.4 billion, a return on investment of around 30:1, which is considerably above the average across HMRC of around 11:1.[38]

21.  HMRC uses a basket of measures to assess the impact of its work to tackle tobacco smuggling.[39] At present, tax gap data used to monitor long-term trends is subject to an 18-month time lag. However from autumn 2013, HMRC plans to publish new data with a time-lag of six months.[40] The availability of more up-to-date and timely data on the tax gap should enable HMRC to adapt more quickly to changing conditions.[41] However, there are significant inaccuracies in HMRC's estimates of the impact of its criminal investigations.[42]

23   Q 51; C&AG's report, Figure 8 Back

24   Qq 28-29 Back

25   Qq 27, 119 Back

26   Q 58 Back

27   Q 31; C&AG's report, Figure 13 Back

28   Q 33; C&AG's report, para 2.41 Back

29   Q 31 Back

30   Qq 27, 33 Back

31   Q 57 Back

33  32   Qq 63, 113 Back


34   Q 91 Back

35   Qq 43, 60, 92, 95-97 Back

36   Qq 63, 98; Ev 20\ Back

37   Q 85; C&AG's report, para 12 Back

38   Qq 81, 83, 86, 90 Back

39   Q 47 Back

40   Q 44 Back

41   Qq 38, 47-48 Back

42   C&AG's report, para 15 Back

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Prepared 10 October 2013