The illicit trade in tobacco cost HM Treasury up to £2.9bn (1) in 2012/13, equivalent to £7.9m per day in lost revenue.
Smuggling on this scale can be traced back to the early 1990s when the introduction of an above inflation ‘duty escalator’ in combination with the creation of the Single Market, led to a rapid acceleration in the level of smuggled and legally cross border shopped tobacco products entering the UK.
According to HM Revenue & Customs (HMRC), in 2000/01 up to 24% of cigarettes and 69% of hand rolling tobacco consumed in the UK was estimated to be smuggled. The Tackling Tobacco Smuggling Strategy was put in place and with the removal of the duty escalator the level of illicit trade was gradually brought down over the following decade.
However, in response to the economic crisis, and a need to shore up dwindling tax revenues, the duty escalator was reinstated in March 2010. Cigarette prices have subsequently increased by 41% whilst discretionary household incomes have remained broadly flat, therefore, it is perhaps no surprise that the latest HMRC report reveals that the illicit trade in tobacco is rising again.
The sheer enormity of tobacco smuggling in the UK poses significant challenges for legitimate businesses, law enforcement agencies, public health organisations and our local communities, blighted by criminals distributing and selling illicit products to anyone, irrespective of their age. A tobacco control survey (2) revealed that 14 and 15 year olds are twice as likely to buy ‘illicit’ than adults which undermines public policy to prevent the under-aged from accessing tobacco products.
From a business perspective, the impact of illicit tobacco is particularly noticeable in the independent retail sector where tobacco can account for up to 30% of a store’s annual turnover. In 2012, of the 51,000 small shops across the UK that sell tobacco, it is estimated that around £44,000 (3) in sales per shop was lost to the illicit and cross border market, threatening the viability of many of these businesses.
A number of these smaller retailers operate in rural communities and therefore act as an important local hub (4). Lost tobacco sales, also means a loss in custom through the doors, and associated incidental spend (soft drinks, confectionery etc…) which has a further impact on a retailer’s turnover.
Adding to these existing challenges, retailers who operate in ‘small shops’ are facing a tobacco products display ban in April 2015, which means products will be hidden from view and hefty fines imposed for non-compliance. The Tobacco Products Directive, which is currently making its way through the EU Commission, could lead to the removal of entire product categories from retailers’ shelves, including cigarette packs of less than 20 and hand rolling tobacco in pouches of less than 40gr – which represents 77% of the market(5).
Not only will these measures impact customer numbers, but research(6) suggests that the illicit market will increase as consumers seek their preferred products elsewhere. Therefore, the independent retail sector faces many challenges both from the illicit tobacco market and the layering of regulation which will ultimately threaten the viability of many important small and local businesses.
Tackling tobacco smuggling also presents a significant cost to government, as demonstrated by the £917m investment announced in September 2010 to tackle fraud. A significant portion was directed at tobacco and whilst there has been a commendable increase in the level of prosecutions and impositions of civil wrong doing penalties, future governments will need to maintain a significant level of investment to tackle fraud, especially against a backdrop of rising prices and relatively weak disposable incomes.
In recent years tax revenues from tobacco have proven to be quite robust, but at the 2013 Budget, the Office for Budget Responsibility downgraded their forecast for 2012/13 by £200m and 2013/14 tobacco revenues also look set to miss their targets by a similar amount.
This may not be due exclusively to the shift to the illicit market, as some consumers have down traded within product categories, but it will be interesting to see what the government chooses to do at the 2014 Budget given that existing tax policy is proving to be counterproductive on so many levels.
Paul Stockall is the Communications & Intelligence Manager at the Tobacco Manufacturers’ Association
Notes:
- 1 HMRC Measuring Tax Gaps Report 2013
- 2 The Illicit Tobacco, North of England Study 2011
- 3 TMA estimates of non-UK duty paid revenue loss (May 2013)
- 4 Rural Scotland Key Facts 2011
- 5 Nielsen Full Year 2012
- 6 Oxford Economics – The economic impact of the Tobacco Products Directive from reductions in incidental purchases