Giles Roca is Director General of the Tobacco Manufacturers’ Association (TMA).
The TMA recently published its third annual anti-illicit trade survey.
This is the largest study of its kind. It measures 12,000 smokers’ attitudes, awareness and behaviours in regard to illegal and non-UK duty paid tobacco. The results reveal the true extent of how the Government’s high tobacco tax policy is shifting consumer purchases from the legal, duty paid market to other sources. Counterfeit, smuggled and cross-border purchases cost the Treasury billions of pounds in expected tobacco tax revenue every year and fund criminal networks that make substantial profits from the illegal trade.
As this is the third year that the TMA has carried out this research, we know that the problem is getting worse, which is unsurprising when tax on tobacco continues to rise each year and consumers have increasing access to cheap, often illegal, sources through social media as well as through more traditional avenues. This year’s survey shows that 71 per cent of UK smokers admitted to buying tobacco products from ‘non-shop’ sources. This means that rather than going to a supermarket or corner shop and paying UK tax, a huge proportion of smokers are electing to buy some of their tobacco from abroad, from friends of family, in pubs, in the street, at car boot sales, in vans, at work, in ‘fag houses’ (private houses selling tobacco) or online.
Official government figures estimate that this behaviour costs the Treasury £2.1 billion in lost tax revenue every year with a further £500 million lost because of cross border shopping. To put this into context, this is the second largest loss to the Treasury after VAT avoidance. However, this research tells us that the amount and value of non UK duty paid tobacco being bought by smokers is increasing. It also suggests that people are, in effect, stockpiling larger amounts of tobacco to avoid UK tax. This is as troubling for legitimate retailers, especially small and independent shopkeepers, as it is for the taxman, because around a third of convenience store revenue comes from tobacco sales.
The results clearly show us that price is the key driver behind this behaviour. Eighty-five per cent of smokers believe tobacco tax is excessive. And you can see why. Over the past five years, tax on tobacco has risen 50 per cent and now accounts for 80 per cent of the price of a packet of cigarettes, the highest amount of taxation on tobacco in the whole of the EU. This price difference means that smuggling tobacco into the UK and selling it on has become a highly lucrative operation. Current figures means that a single suitcase of cigarettes bought in Bulgaria and sold on in the UK will deliver a tidy profit of around £1,200. This pattern of small-scale smuggling has accelerated with the relatively free movement of people across EU borders. The rapid acceleration of UK tax on tobacco has driven consumers to find cheaper sources of tobacco, and also diverted organised crime groups from drug and gun smuggling into tobacco smuggling.
We also know that this is a rapidly changing market. Up to seven per cent of smokers are now buying tobacco online, a number that has doubled in the space of just two years. This brings its own challenges. With multiple sites offering cheap tobacco, the internet is much more difficult to police than other, more conventional sources of illegal tobacco. Trying to stop illegal sellers is, therefore, becoming more and more difficult. As much as anything, this is the result of a lack of urgency amongst smokers to report the presence of illegal tobacco in their locality. One in five of smokers were aware of illicit tobacco being sold in their area, but a clear majority thought it was none of their business to report it to the authorities or simply did not know who to report it to.
So what’s driving this? Successive governments under pressure from powerful health lobbyists have adopted a high tobacco tax policy without giving proper consideration to the potential impact on the illicit market, tax revenues or indeed the legitimate retail sector. It’s clear from this research that high taxes are not having the desired deterrent effect as smokers are simply searching out alternative, cheaper ways of buying tobacco. In addition, over the past two decades, governments have passed legislation on tobacco without properly taking into consideration or understanding the cumulative impacts on smuggling, plain packaging being the latest of these measures that will simply exacerbate the problem.
The Government’s high tobacco tax policy has fundamentally failed. The only beneficiaries of this approach are organised crime groups and terrorist networks that operate counterfeit tobacco brands and smuggle tobacco products across borders. The global illicit tobacco industry is one of the world’s foremost criminal enterprises and it is essential that the new government looks at the reasons for this if it is to make any meaningful impact.
There are solutions. The annual tax escalator on tobacco should be replaced with a more practicable system of optimising the tax rate, which should have the dual aim of maximising tax revenues and minimising smuggling profits. The meagre punishments for those tobacco smugglers who are caught should be replaced with tougher sanctions that will act as a real deterrent. Finally, HMRC’s ‘guidelines’ on how much tobacco can be brought into the UK from the EU should be replaced with formal limits. This would work to reduce illicit trade in high risk countries such as Romania and Bulgaria, which have very low cost cigarettes and very high incidences of counterfeit goods.
As an industry, we want to work with the Government to stamp out the illicit trade in tobacco products, which will ensure that the Treasury receives the excise revenue it is entitled to and reduce funding for criminal and terrorist networks that rely on the black market. More fundamentally, the Government must ask itself whether the high tobacco tax regime that it continues to pursue is actually working. The evidence suggests otherwise.