Tobacco Tax Gaps: Illicit cigarettes a growing proportion of a declining market – enforcement funding cuts must be addressed
26 October 2017
Official estimates released today by HM Revenue & Customs show that while the size of the illicit market for cigarettes in 2016/17 has remained fairly stable since 2010, as smoking prevalence has declined significantly, it has become a higher proportion of the total market. More promisingly the amount and proportion of the handrolled tobacco market that is illicit has continued to fall. However, because cigarettes form the largest part of the market with the highest taxes, and taxes have increased over the years, this means the total tax gap has grown from £1.9 billion in 2010/11 to £2.5 billion today. 
In 2016 smoking prevalence fell to its lowest recorded level of 15.8%, 4 percentage points below 2010 when it was 20.2% of the adult population, with the biggest fall of 1.4 percentage points occurring between 2015 and 2016.  As a result the proportion of the market accounted for by illicit has increased between 2015 /16 and 2016/17 from 13% to 15% of cigarettes although it has continued to fall from 32% to 28% of handrolled tobacco.
In 2010/11 the volume of illicit tobacco on the market was estimated by HMRC to be 5 billion cigarettes and 4.2 million kilogrammes of handrolled tobacco, in 2016/17 it was 5.5 billion cigarettes and 2.7 million kilogrammes of tobacco. Although the published data appear to show a significant rise in the size of the illicit from 2015/16 to 2016/17 from 5 to 5.5 billion, these are rounded figures and the actual change is much smaller from 5.1 billion to 5.3 billion. 
In the long run achieving the Government’s objective of a ‘smokefree generation’ when fewer than 5% of adults smoke  will lead to declines in tobacco tax revenues. In the interim tax revenues can be maximised by continuing to drive down illicit trade and increasing tobacco taxes. However, cuts to local enforcement teams are undermining this opportunity.
HMRC’s illicit tobacco strategy has been in place since 2000 and has been well funded and effective. However the success of the strategy in recent years has been undermined by cuts in funding to local authorities, limiting their ability to carry out enforcement activity. In 2009 spending on trading standards was £213 million by 2016 this had fallen to £124 million.  Teams have been cut to the bone, with the NAO calculating that the number of full-time equivalent Trading Standards staff decreased by 56% in seven years, from 3,534 in 2009 to 1,561 in 2016, with 81% of trading standards teams reporting that funding reductions have had a negative impact on their ability to protect consumers in their area. 
There is also a pressing need for Government to do more to require the tobacco companies to control their supply chains. The majority of the illicit market is made up of tobacco company products smuggled in to the UK from other countries.
In response to these challenges ASH today calls on the Government to introduce a licensing system for tobacco manufacturers and retailers to provide funding for improved enforcement and other measures to reduce smoking prevalence. There is strong public support for the licensing of tobacco retailers (net support 76%) and for requiring tobacco manufacturers to pay for measures to reduce smoking prevalence (net support 71%).  Surveys of small retailers show strong support for licensing with 69% of retailers supporting the introduction of a tobacco license that retailers could lose if they broke the law. 
Deborah Arnott, Chief Executive of public health charity Action on Smoking and Health (ASH) said:
“Funding cuts to local authorities and the failure of the tobacco companies to prevent diversion of their products to the smuggled market have undermined the effectiveness of the Government’s anti-smuggling strategy for tobacco. We call on the Government to introduce licensing for tobacco manufacturers and retailers and to make the big tobacco companies pay for it. The US does this and there’s no reason why the UK can’t follow suit. It’s strongly supported both by the public and by retailers and would help achieve the Government’s ambition for a ‘smokefree generation’ as well as increasing tax revenues.”
While tobacco companies are keen to highlight the issue of counterfeit tobacco it is their legitimate product which makes up the largest share of the illicit market with counterfeit products estimated to be only around 8% of the illicit market. Over many years companies have been shown to be complicit in smuggling activity through a failure to control their own supply chains and at times supplying products knowing they will return to the UK market as illicit tobacco.  Better controls of the tobacco industry require both domestic and international action. The UK Government must ratify the Illicit Trade Protocol at the earliest opportunity to support the global effort to clamp down on the illicit market in authentic tobacco products.
Deborah Arnott added:
“The tobacco industry has a history of fuelling the trade in illicit tobacco, that’s why an international treaty has been negotiated to stop it doing so in future. Tobacco smuggling is a global problem and requires a global solution, the UK can’t succeed on its own and we call on the Government to ratify the Illicit Trade Protocol without further delay.”
Notes and Links:
Action on Smoking and Health is a health charity working to eliminate the harm caused by tobacco use. For more information see: www.ash.org.uk/about-ash
ASH receives funding for its programme of work from Cancer Research UK and the British Heart Foundation.
ASH staff are available for interview and have an ISDN line. For more information contact ASH on 020 7404 0242 or out of hours Deborah Arnott on 07976 935 987 or Hazel Cheeseman on 07754 358 593.
 HMRC. Tobacco Tax Gaps data. All figures based on mid-range estimates. October 2017.
 Office for National Statistics. Adult smoking habits in the UK: 2016. 15 June 2017.
 Data provided by HMRC to ASH.
 Department of Health. Towards a smoke-free generation: tobacco control plan for England. July 2017.
 CTSI. Total GB trading standards spend falls to £1.99 per person, per year. August 2016.
 National Audit Office. Report by the Comptroller and Auditor General: Protecting consumers from scams, unfair trading and unsafe goods. NAO. HC851. 2016.
 Opinion research by YouGov for ASH. Total sample size was 12696 adults. Fieldwork was undertaken between 16th February 2017 and 19th March 2017.
 ASH. Counter arguments: How important is tobacco to small retailers? ASH, October 2016.
 World Health Organisation Protocol to Eliminate Illicit Trade in Tobacco Products