Not just a VAT increase – It’s a stealth tax on tobacco

Commenting on the impact of the VAT hike on New Year’s Day, Christopher Ogden, Chief Executive of the Tobacco Manufacturers’ Association (TMA), said:

“Independent research[1]that was presented to the Treasury in October predicts that smuggling will increase by 15% and up to an additional £300 million in revenue will be lost to the illegal market as a result of this tax increase. In spite of this evidence, the Government have decided to allow this potentially disastrous tax hike.”

“When VAT was reduced in December 2008, tobacco and alcohol excise duties were increased to leave prices broadly unchanged. However, when VAT returns to 17.5% on New Year’s Day, there will not be a compensatory reduction in these excise duties. So this is not just a VAT increase, it is effectively a tax on a tax.

“As a result, the price of a pack of 20 cigarettes will rise by up to 18 pence, the largest single increase in ten years. We are extremely worried that this “stealth tax” will increase tobacco smuggling and organised crime, especially against a backdrop of rising unemployment and falling incomes, and the independent research supports this view.

Since 2001, a policy of gradual tax increases in line with inflation, combined with a positive working relationship between TMA member companies and enforcement agencies has seen consumption of products not paying UK taxes gradually fall. However, according to HM Revenue & Customs, up to 23% of the cigarette market and 61% of the hand rolling market are avoiding UK taxes, costing the Government up to £10 million per day in lost revenue.

Mr Ogden added:

“There is an alarming increase in new forms of smuggled product. Counterfeit cigarettes and “cheap whites”[2] have a typical street price of £2.50 per pack, less than half that of legitimate brands. We are worried that this latest “stealth tax” will enable criminals to increase their sales of cheap tobacco even more. In light of all the evidence we strongly urge the Chancellor to adopt the approach recently taken by the Irish Finance Minister[3] and freeze tobacco taxes rather than raise them even higher.”

[1] Estimating the impact of a tax increase on the legal and illicit tobacco markets, Centre for Economics and Business Research ltd, October 2009

[2] HMRC defines “cheap whites” as brands produced by smaller, overseas manufacturers that make no legitimate supplies of any tobacco products to the UK. There is often little or no legitimate market for these brands anywhere in the world. Effectively, these products – commonly known as “cheap whites”– are produced for smugglers.

[3] During his Budget speech on the 10 December 2009, the Irish Finance Minister Brian Lenihan stated: “I have decided not to make any changes to excise on tobacco in this Budget because I believe the high price is now giving rise to massive cigarette smuggling.”

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For further information and/or interviews please contact:

Dirk Vennix, Director of Communications t: 020 7544 0109 m: 07872 376748
e: dvennix@the-tma.org.uk or
Zoe Walker, Corporate Affairs Manager t: 020 7544 0115 m: 07790 060041
e: zwalker@the-tma.org.uk

Notes to Editors:

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)
HMRC figures released at last year’s PBR showed that in 2007/08 up to £3.7 billion in revenue was lost through smuggling and crossborder shopping in tobacco products and over the last ten years these losses exceed £45 billion.
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.
The Memoranda 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.
Further information can be found on the TMA’s website – www.the-tma.org.uk.
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