Tobacco duty

What is Tobacco Duty?

Properly referred to as Tobacco Products Duty, but more widely known by its shortened name, Tobacco Duty is an excise duty charged on purchases of tobacco products.

The following tobacco-based goods are liable to Tobacco Duty: cigarettes, cigars, hand-rolling tobacco, pipe tobacco and chewing tobacco. Snuff and "herbal" smoking products are not liable to Tobacco Duty, although orally-taken snuff was banned in 1989 under EU law.

The rate of Tobacco Duty is adjusted annually by the Chancellor of the Exchequer as part of the Budget, with changes coming into force that day under the terms of the Provisional Collection of Taxes Act 1968.

In March 2012, the Chancellor announced that duty on all tobacco products would rise by 5 per cent above inflation.

The changes, effective from 6 p.m. on 21 March 2012, add 37 pence to the price of a packet of 20 cigarettes, 37 pence to a packet (25g) of hand-rolling tobacco, 12 pence to a packet of 5 small cigars, and 20 pence to a packet (25g) of pipe tobacco.
 

Background

Tobacco Duty is perhaps the oldest excise duty in existence. It dates back to around 1660, with the introduction of tobacco to Britain from the New World. It has long been subject to political vicissitudes: James I dramatically increased the rate of duty from 2d per pound under the late Tudors to 6s 8d, on account of his dislike of the "obnoxious weed". Rates also soared during the Great Plague of the 17th Century, when tobacco smoke was believed to afford protection.

Although domestic production of tobacco has never been prolific, it was formally banned as a threat to Royal revenues coming in from the plantations of Virginia. As such, the Tobacco Duty regime has almost from the start been in conflict with smuggling.

Smuggling was so rife during the 18th Century that by 1815, duty stood at 400 per cent of the actual value of tobacco. Adulteration of tobacco products with other material was also a serious concern. In response to this problem, a laboratory was set up in 1842 by the Excise Board. This body, which was a precursor to the Department of the Government Chemist, conducted research which led to strict conditions on additives to tobacco products adopted in 1863.

Cigarettes first began to be consumed on a large scale in the UK after 1854 when the first factory was opened. Production took off after 1884 with the mechanisation of the process in the USA.

In the 20th Century, as before, Tobacco Duty has been seen as a ready source of revenue for governments, and it has risen accordingly. In 1947, concerns about the level of duty saw the introduction of "tobacco tokens" for pensioners struggling to pay for their habits, but this system only lasted for 11 years.

It was only from around 1950 that the health effects of tobacco came to be understood. Indeed, prior to that time it was actually assumed to be a healthy activity. From that time, governments began to justify increasing duties as a public health measure. On coming to power in 1997, Labour promised to raise the annual rate in Tobacco Duty's increase from 3 per cent to 5 per cent.

Between 2003 and 2008 tobacco duty rates were increased in line with inflation. In Labour's last Budget in March 2010 it was announced that tobacco duty rates would increase by 1 per cent above inflation from that date and by 2 per cent above inflation for the following four years.

Following the election of the Coalition government in May 2010 the Chancellor, George Osborne, published an emergency Budget in June 2010 in which he announced that technical changes would be made in the Finance Bill introduced in the autumn to the definition of cigarettes to take account of the recently revised EU tobacco directive. Clause 23 of the bill changes the process for calculating duty on long cigarettes.

In the March 2012 Budget, the Chancellor announced that duty on all tobacco products imported into, or manufactured in, the UK would rise by 5 per cent above retail price inflation (RPI). 

Controversies

Many smokers resent the high and regularly rising prices that they have to pay for tobacco products as a result of Tobacco Duty. Nonetheless, the principle of government taxing tobacco heavily as a source of revenue and to provide a price-based deterrent to smoking is widely accepted as legitimate.

However, a significant problem of smuggling has emerged in recent years. The causes of this phenomenon are disputed, but perhaps the most important is the desire of large sections of the public to pay less for tobacco and its willingness to evade paying duty to do so. In 2004, it was widely accepted that around 25 per cent of all cigarettes and as much as 75 per cent of hand-rolling tobacco consumed in the UK were non-UK duty paid. Independent retailers put the cost to them of this trade at £1.2 billion per annum in sales. In 1999, a study showed that smuggling cost the Treasury £2.5 billion in lost revenue.

Some critics of the UK's Tobacco Duty regime put the problem down to the differential rates in the UK and the rest of Europe. This has certainly generated the problem of the "white van man", who makes money by buying large quantities of tobacco in France, coming back across the Channel, taking advantage of the permission to import tobacco "for personal consumption", and then selling it on - a practice known as "bootlegging".

However, others - including HM Customs - warn that there is a bigger problem in respect of tobacco smuggled from outside the EU, which has therefore not been subject to any duty at all and which is frequently found to be counterfeit. In the late 1990s, Andorra was found to be a major conduit for smuggling into the EU, as were a number of Balkan states. Although EU crackdowns have stopped much of the smuggling using these routes, the Baltic states and a number of African countries are widely thought to have taken their place.

It has been alleged that some tobacco manufacturers are complicit in this trade. Reports by Commons Select Committees have produced some evidence in this regard, but the companies deny wrongdoing.

The massive sums to be made in tobacco smuggling have led to its development into a worldwide trade involving the illegal movement of containers of millions of cigarettes. The trade is largely controlled by criminal gangs.

Governments have, however, remained determined to continue to raise Tobacco Duty in the interests of public health. Not all EU governments have taken this position: some, for example Denmark, have considerably reduced their own rates of duty in an attempt to address smuggling.

Statistics

Legislation will be introduced in Finance Bill 2012 to revise the rates of duty on tobacco products.

The revised rates of duty are:

Cigarettes: an amount equal to 16.5 per cent of the retail price plus £167.41 per one thousand cigarettes.
Cigars: £208.83 per kilogram.
Hand-rolling tobacco: £164.11 per kilogram.
Other smoking tobacco and chewing tobacco: £91.81 per kilogram.

Source: HMRC - 2012
 

Quotes

"Smoking remains the biggest cause of preventable illness and premature death in the UK.

"There is clear evidence that increasing the cost of tobacco encourages smokers to quit and discourages young people from taking it up."

Chancellor George Osborne; Budget statement - March 2012 

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