Pre-Budget Report: Tackling tobacco smuggling



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Thursday 20 November 2008

Background
In the March 2008 Budget, the Chancellor announced that the new UK Border Agency, working with HM Revenue & Customs, would develop a new strategy to tackle tobacco smuggling, to be published as part of the November Pre Budget Report. This briefing sets out what is likely to be included in the new strategy and the measures ASH believes should be adopted.

Currently tobacco smuggling is costing the UK economy around £2.4 billion a year in lost revenue. Tobacco smuggling also undermines health policy and exacerbates health inequalities: Recent research commissioned by ASH found that 1 in 4 poorer people buy illicit tobacco compared to 1 in 8 of the most affluent.

The Government’s Tackling Tobacco Smuggling strategy was launched in 2000. Under this plan the Government allocated £209 million for extra staff and resources to tackling tobacco smuggling. The strategy was updated in 2006 in which it was stated that an additional 200 operational staff would be deployed. However it is not clear whether these extra staff were in addition to the staffing levels established in 2000 as there are concerns that staff were redeployed in the intervening years to tackle VAT fraud. Targets were set to reduce the illicit market share of cigarettes to no more than 13% (from 16% in 2002/03) and to reduce illicit hand-rolled tobacco to the equivalent of about 20% market share (from 56% in 2005/06) by 2007/08.

Trends since 2000
The existing target for a reduction in the illicit trade in cigarettes has been achieved but there has been little change in the market share of smuggled hand-rolling tobacco. The rate of decline for smuggled cigarettes was 1.3% per annum in the 5-year period 2000-2005.
Since the implementation of legislation in October 2006 placing obligations on tobacco manufacturers to control the supply chain of cigarettes and hand-rolled tobacco, it appears that the proportion of genuine UK brands smuggled back into the UK has fallen but there has been an increase in seizures in counterfeit cigarettes.

What the new strategy is likely to include

International Co-operation
It is expected that the new strategy will include pledges to strengthen co-operation between the UK and international partners. The Government has been working with the European Commission and providing input into negotiations for an Illicit trade protocol as part of the international treaty on tobacco control (the Framework Convention on Tobacco Control). This work is expected to continue.

European Union-tobacco industry agreements
It is possible that the strategy will include a commitment to signing the EU-tobacco industry agreements. [1] The UK is the only country in the European Union not to have signed the binding agreements between the tobacco industry and the European Commission which require tobacco companies to control the illicit trade or face a hefty fine if their products continue to be smuggled. If the Government does not become a party to these agreements the UK could lose substantial revenue from fines paid by tobacco companies for the illicit trade in their products.

Targets
To date there has been no indication from Government that new targets for the reduction in market share of illicit tobacco will be set. New targets may be set for seizures which give an indication of the level of effectiveness of interceptions at the point of entry into the UK.

ASH’s ‘Wish List’ for the new strategy

Targets
ASH and the public health community believe much tougher targets need to be set. In a report endorsed by over 100 health and welfare organisations [2] ASH recommended that a target be set for a reduction in cigarette smuggling to 8% of total market share by 2010 and to 3% by 2015. This would achieve an illicit market share for cigarettes last seen in the early1990s.
For hand-rolled tobacco, ASH believes that it would be preferable to set new targets as a percentage of market share (as is the case for cigarettes) rather than in tonnage. New targets should be set to reduce the illicit market share of hand-rolled tobacco to 45% by 2010 and 33% by 2015.

Multi-Agency Strategy
In order to effectively tackle tobacco smuggling an inland as well as a border strategy is required which needs the involvement of the Border agency, HM Revenue & Customs, the police and Serious Organised Crime Agency, local government (Trading Standards officers) and the Department of Health. At regional and local level, greater collaboration is needed between the NHS, local government, the police and UK Border Agency. This can be achieved via local strategic partnerships and crime and disorder reduction partnerships.

EU Agreements
The UK’s isolation from the EU agreements makes no sense at all. Since the take-over of Gallaher (Britain’s second biggest tobacco company with a market share of almost 40%) by Japan Tobacco International, the UK stands to lose millions of pounds in lost revenue. In 2005-06 of the 2 billion smuggled cigarettes seized by customs, about 200 million were Gallaher brands. If the agreement had been in force at the time, the UK would have received over £100 million in seizure payments from Gallaher.

International Protocol on Illicit Trade
As a signatory to the FCTC the Government must actively support the development of a legally enforceable, comprehensive illicit trade protocol, with a timetable for adoption by 2010. This will cover the marking of tobacco products so that they can be tracked from manufacturer to point of sale. The Protocol should also include licensing of participants within the supply chain, obligations on manufacturers to control the supply chain and heavy fines for any infringements, and enhance law enforcement measures.

Deborah Arnott, Director of the health campaigning charity ASH, said:

“A good deal of progress has been made in tackling tobacco smuggling but much more still needs to be done. We hope that the new Government strategy will include challenging new targets, more resources to help achieve those targets, and a commitment to sign the EU anti-smuggling agreements.”

Notes and links:
[1] For background information on the JTI and Philip Morris agreements see:
www.ash.org.uk/current-policy-issues/taxation-smuggling/smuggling/international-tobacco-smuggling
[2] Beyond smoking kills. ASH, 2008 www.ash.org.uk/beyondsmokingkills (pdf)