Tobacco tax increase – A return to the bad old days

Commenting on the Chancellor’s decision to signal the largest tax increase on tobacco products in ten years, Christopher Ogden, Chief Executive of the Tobacco Manufacturers’ Association (TMA), said:

“When VAT was temporarily reduced in December 2008, tobacco and alcohol excise duties were increased to compensate, leaving prices broadly unchanged. However, when VAT returns to 17.5%, there will not be a compensatory reduction in excise duty. Therefore, the raising of VAT from 1 January will have a unique impact on the tobacco and alcohol sectors. It will lead to increases of between 13-18 pence on a pack of cigarettes, representing the largest single tax increase since March 2000, when smuggling was at its peak. Not only will this increase be significantly above inflation, but it will also take place against a backdrop of rising unemployment and falling incomes, providing further incentives to criminals to illegally import and distribute cheap tobacco to adult smokers and potentially children.

“Our fears are supported by independent research , which clearly shows that the Government decision will lead to a significant increase in smuggling and associated criminality, threatening the viability of retailers and impacting on the economy as a whole. In spite of this evidence, which was presented to the Treasury in October, the Government are persisting with this ill-conceived tax measure.

Since 2001, a policy of fiscal restraint, combined with greater enforcement has seen levels of non-UK duty paid (NUKDP) consumption gradually fall. However, the TMA estimates that 24% of the cigarette market and 62% of the handrolling market is still NUKDP, and within the NUKDP market there has been a noticeable increase in counterfeit product and the appearance of ‘cheap whites’ .

The TMA believes that the high level of tobacco tax, the root cause of the high level of tobacco smuggling, needs to be addressed and a fundamental review of fiscal policy must be undertaken. Raising tobacco taxation above the rate of inflation is counter productive and will only increase smuggling. Evidence from the UK‘s recent history proves this point.

Mr Ogden added:

“We strongly recommend that the Government reverses this tax increase at the next Budget, otherwise the expected surge in illicit trade will undo all the hard work that the TMA’s member companies and enforcement agencies have undertaken in recent years in tackling the illicit trade in tobacco.”

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For further information and/or interviews please contact:

Zöe Walker, Corporate Affairs Manager
t: 020 7544 0115 m: 07790 060041 e: zwalker@the-tma.org.uk

Notes to Editors:

1. The TMA is the trade association for tobacco companies that operate in the UK. Our members are British American Tobacco UK Ltd (www.bat.com), Gallaher Ltd (a member of the JTI Group of companies – www.jti.com), and Imperial Tobacco Ltd. (UK). (www.imperial-tobacco.com)

2. HMRC figures released at last year’s PBR showed that in 2006/07 up to £4.1 billion in revenue was lost through smuggling and crossborder shopping in tobacco products and over the last ten years these losses exceed £45 billion.

3. The UK has the second highest cigarette taxation in the European Union, behind the Republic of Ireland. Despite a stronger exchange rate and a substantial excise increase in June 2009, cigarette retail prices in Spain are still less than half of those in the UK.

4. The Memorandum of Understanding (MoU) between the TMA’s member companies and HMRC creates a comprehensive framework for co-operation aimed at combating the smuggling of both genuine and counterfeit tobacco products into the UK as well as seeking to deter all aspects of the illicit trade in tobacco products. Under the MoU there is an undertaking that both industry and HMRC will work together to identify and assess technologies that could be of benefit in tackling the trade in illicit tobacco products – the introduction of covert anti-counterfeit technology is a prime example of the benefit of the MoU approach in identifying particular concerns and quickly arriving at effective solutions.

5. Further information can be found on the TMA’s website – www.the-tma.org.uk.