Tobacco Tax Gaps: Small Rise Shows Need for New Government Action
October 16, 2014
Official figures released today show that the level of tobacco smuggling in the UK in 2013/14 has risen slightly since last year  According to HM Revenue & Customs, in 2013/14 an estimated 10% of cigarettes consumed in the UK were illicit compared to 9% in 2012/13. The figures for hand rolled tobacco were 39% in 2013/14 compared to 36% in 2012/13 (all figures mid-range estimates).
The figures show the need for the Government to act on recommendations on tobacco smuggling from the National Audit Office and the House of Commons Public Accounts Committee.  The PAC reported that “HMRC has not yet found the right balance in its enforcement action, which can range from prosecutions of organised criminal gangs to imposing fines or referring offenders to licensing authorities for those involved in local, small-scale operations”. The House of Commons Home Affairs Select Committee has also sharply criticised the Government and enforcement authorities for failing to prosecute any of the major tobacco firms in cases where they have over-supplied tobacco to particular countries with low tobacco taxes, knowing that it will be smuggled back into the UK. 
The tobacco industry has frequently claimed that standardised “plain” packaging of cigarettes and tobacco products could increase illicit trade, although all the key security features on current packaging would also be on standardised packs. These include covert anti-counterfeit marks that can be read by hand held scanners, and an alphanumeric tracking code on each packet that will be required under Article 14 of the EU Tobacco Products Directive, which must be implemented in the UK by May 2016. 
Commenting, Deborah Arnott, Chief Executive of ASH said:
“The latest HMRC figures on tax losses from illicit tobacco show the urgent need for a new focus by the Government and enforcement authorities on the issue. In particular the recommendations of the National Audit Office and Public Accounts Committee need to be acted on without further delay. The UK has had a good record in fighting illicit tobacco over the last ten years, but that progress could be reversed if the anti-smuggling strategy is not renewed and strengthened.
The tobacco industry routinely uses the threat of illicit trade to try to block tobacco control measures, despite its record of involvement in smuggling. It is still claiming that standardised packaging will make the illicit tobacco problem worse. In fact every security measure on existing packs will also be on standardised packs, so this argument is a complete red herring. Tobacco smuggling can and must be fought while we also cut smoking rates.”
Cigarettes: Illicit Market and Associated Revenue Losses
|Illicit Market Share
Mid-point of range
Hand Rolled Tobacco: Illicit Market and Associated Revenue Losses
|Illicit Market Share
Mid-point of range
The illicit tobacco trade rose from below 5% in the early 1990s to 20% in 2000 (mid-range estimates), in large part due to tobacco companies’ facilitating the smuggling of their own products. Around 80% of smuggled tobacco entering the UK in the 1990s was manufactured in the UK, exported and diverted to the black market, then smuggled back into the UK. In 2000, the UK Government introduced an anti-smuggling strategy and strengthened it in 2006, 2008, and 2011. Between 2004 and 2010, the European Union also concluded legally-binding agreements with the four biggest tobacco manufacturers, imposing large financial penalties if their own products were found to have been diverted into illicit channels.
 HMRC Tobacco Tax Gaps Estimates 2013/14
 National Audit Office: Progress in tackling tobacco smuggling. Report published 6 June 2013, and Public Accounts Committee – Twenty-Third Report HM Revenue and Customs: Progress in tackling tobacco smuggling Report published 4th September 2013.
 Home Affairs Select Committee: First Report, Tobacco Smuggling. Report published 11th June 2014
 The key security features on existing packaging that would also be present on standardised packaging are:
• a covert mark on each licit pack, which can be read by enforcement authorities using a simple scanner to determine whether or not a pack is counterfeit
• other security marks that vary between manufacturers, for example the configuration of marks on filter paper
• number codes printed on each pack as required under the Revised EU Tobacco Products Directive
Under a standardised packaging law, the Secretary of State would retain the power to include any features in pack design which the Government considers desirable as a protection against illicit trade.