1.  The Tobacco Manufacturers' Association (TMA) is the trade association for those companies which manufacture tobacco products in the United Kingdom. The TMA represents the industry as a whole in matters concerning trade and taxation. It does not deal with matters which are features of competition between manufacturers. It does not promote smoking but does defend the freedom of adults to choose to smoke. The Principal Members of the TMA are Gallaher Ltd., Imperial Tobacco Ltd. and Rothmans (UK) Ltd; British American Tobacco, Philip Morris Ltd., R J Reynolds Tobacco (UK) Ltd and Japan Tobacco Inc. are Associate Members.

  2.  The UK market for tobacco products is in chaotic disorder, as a consequence of tobacco bootlegging and smuggling which is being committed on a massive and ever increasing scale. Estimates of the extent of bootlegging and smuggling are made both by HM Customs & Excise (HMC&E) and the UK tobacco industry. The TMA derives its estimates from a combination of industry data, research and modelling and although the Government's estimates each year have initially been lower than those of the TMA, those estimates have subsequently been amended upwards (Table 1).

  *  These estimates include "other" forms of smuggling—not just cross-Channel bootlegging.

  1  Tobacco Advisory Council. Chancellor's Budget 1993: Tobacco Industry Submission. October 1992.

  2  Tobacco Manufacturers' Association. Chancellor's Budget November 1994: UK Tobacco Industry Submission. October 1994.

  3  Tobacco Manufacturers' Association Chancellor's Budget: Tobacco Industry Submission 1995. July 1995.

  4  Tobacco Manufacturers' Association. The Chancellor's 1996 Budget: Tobacco Industry Submission. June 1996.

  5  HM Customs & Excise. Figures of Excise Smuggling. Press Release 19 September 1996.

  6  HM Customs & Excise. Smuggling of Alcohol and Tobacco. Press Release 26 September 1997.

  7  HM Customs & Excise. Estimates of Cross—Border Shopping and Smuggling of Alcohol and Tobacco. November 1998.

  8  Tobacco Manufacturers' Association. The Budget—1999: Tobacco Industry Submission. January 1999.

  9  Hansard 9 March 1999 col 185.

  10  Hansard 18 May 1999 col 335-336.

  At the end of the day, there has been general agreement between HM Customs & Excise and the TMA asto the extent of bootlegging and smuggling and the consequent loss of revenue. The TMA estimates that the "black market" now accounts for 80 per cent of total UK consumption of hand-rolling tobacco and for over 20 per cent of cigarettes; more than 4 million people regularly purchase non-UK taxed tobacco products from illegal sources. In terms of revenue lost by the Treasury, this equates to a projected shortfall of £3 billion in 1999.

  3.  The thriving and still growing "black market" has most serious implications for UK manufacturers and for retailers, many of whom have consequently been forced to close (the average confectioner, tobacconist and newsagent relies on tobacco products for 30 per cent of turnover). But the implications are arguably much greater and more serious for government and society as a whole. The Government no longer has the ability to exercise control over the total size of the UK market, either in terms of the number of people who smoke or the amount that they smoke; it lost, on its won estimate for 1998, as much as £1.7 billion by way of excise duty and and value added tax; the industry estimates that the figure is likely to be close to £3 billion in 1999. There are also serious social and law and order implications arising from the cynical disregard which is being shown for the law, not simply by illegal traders but by the buyers of their goods. Organised crime with local and international tentacles is involved in large scale smuggling and fraud operations.

  4.  The value of seizures of tobacco products by HM Customs & Excise remains only the tip of the iceberg. The value of tobacco product seizures alone are not published. In 1997/8 the total value of tobacco and alcohol seizures was £62 million. The tax revenue estimated to have been lost on tobacco alone in 1997 was £790 million, and in 1998 £1.7 billion. The seizure rate, therefore, would seem to be no better than 5 per cent.

  5.  The reaction of government has not been to deal with the root cause. Instead, it has sought to deal with the situation by attempting to increase the operational efficiency of HM Customs & Excise, whilst at the same time imposing resource constraints upon HM Customs & Excise that fail to recognise the spectacular scale of the problem and the amount of lost revenue involved.

  6.  The root cause of the disorder in the market for tobacco products is the ever-higher level of tobacco taxation in the UK, which has driven both the tax burden and the real price of products to the point where they are amongst the highest in the world. The contrast with the levels applying in other Member States of the EU is striking, as is the widening degree of divergence of UK taxation from the rest of the world.

  7.  The Single Market came into being on 1 January 1993. It was not accompanied by the approximation or harmonisation of the level of tobacco taxation amongst Member States. The disparity between the tobacco taxes in the UK compared with those in other Member States has increased significantly since January 1993. In his 1993 Budget Statement, the Chancellor introduced a minimum 3 per cent per annum real price escalator on tobacco taxation. This escalator was increased to 5 per cent in 1997. No other EU Member State has progressively increased its tax levels in the same manner.

  On 1 January 1993 (Chart A), the UK was the fourth highest amongst current Member States as regards the tax per 20 cigarettes in the most popular priced category (MPPC); by 1 July 1999, the UK was far and away the highest (Chart B).

  Since the advent of the Single Market, UK taxation has moved significantly further away from the average of the rest of the EU (Chart C). These difference in taxation provide highly profitable incentives to anyone who is willing—as many thousands clearly are—to flout the law or to abuse the freedom of movement of goods which the introduction of the Single Market has brought about.

  8.  The arrangements for the movement of tax paid goods by individuals in the Single Market limited the powers of HM Customs & Excise to control the flow of tobacco goods entering the UK from other Member States. The indicative levels for the personal import of duty paid purchases of tobacco (800 cigarettes; 1kg of hand-rolling or pipe tobacco; 400 small cigars) were quickly seen as a charter for illegal trade, at first on a small scale, then developing into the "white van" and more organised trade, usually involving tobacco outlets in Belgium. Whilst more recently additional powers of seizure of vehicles have been afforded to HM Customs & Excise, it is generally recognised that it is simply not possible to ensure full compliance with the indicativelevels of imports. In any event, they are indicative only and cannot be applied as if they are limits laid down by law. The Financial Secretary also announced earlier this year that the Government did not propose to make any changes in the indicative levels.

  9.  Cigarette duty free prices were lower than duty paid prices in both France and Belgium, and enterprising regular travellers and criminal operators sought a share of the increasingly buyoyant "black market" in cigarettes. Between 1993 and 1998, duty free purchases doubled. Duty free allowances for intra-EU travellers were discountinued on 1 July 1999. The industry anticipates that purchases formerly made duty free will be replaced by duty paid purchases to which the indicative levels of imports (i.e. 800 cigarettes) will apply, rather than the former vendor controlled duty free limit (i.e. 200 cigarettes).

  10.  Organised crime did not take long to recognise and realise the huge profit potential that was available from exploitation of the thriving and rapidly growing "black market" in the UK. During 1997 it became apparent that organised crime had become involved in smuggling and fraud on a substantial, international scale. The country of origin of some of the smuggled tobacco products is not confined to the Member States of the EU. There is increasing evidence of a proliferation of non-UK brands being sold on the "black market" and smuggled cigarettes have been identified as originating from such distant places as Eastern Europe, Asia, South America and South Africa. Such products are often smuggled into the UK by the container load or in cunningly concealed and mis-described lorry loads. It is understood that HM Customs & Excise are now giving their highest priority to large scale smuggling and fraud. Given the limited resources available to HM Customs & Excise, this has the inevitable consequence of more minor crimes, such as the illegal sale of personal imports, receiving less attention that they otherwise would. However, the TMA firmly believes that further action against the grass roots distribution level of tobacco bootlegging an smuggling is very necessary.

  11.  HM Customs & Excise are faced with a virtually impossible task. No effort whatsoever has been made by the Government to tackle the root cause of tobacco bootlegging and smuggling, which is high taxation. Yet, as bottlegging and smuggling has increased, so has Government revenue begun to decline, both in actual and real terms. The UK Government's own figures predict a futher substantial fall in tobacco tax revenue in the current financial year (Chart D).

  Such additional resources as Government has provided to HM Customs & Excise to increase HM Customs & Excise's effectiveness, have been very modest and wholly inadequate, particularly given the earlier reductions in financial resources imposed by the Government, In any event, the additional resources that have now been allocated are dwarfed by the loss of potential revenue as a result of smuggling. Furthermore, the scale of smuggling and the rate of growth of the illegal market is likely to overwhelm any practical timetable to introduce improved counter measures. The scope for the latter is, in important regards, limited by the EU Treaty and internal market commitments to certain trade and customs principles which are inimical to optimum control. Public attitudes to the illegal trade in tobacco products are also less censorious than is thecase with other forms of crime. The view that there is nothing wrong in buying cigarettes on which UK tax has not been paid has become increasingly strongly rooted in the public's mind, as the illegal market has grown and high UK tax rates have been perceived as being wrong and unfair. Penalties for smuggling tobacco are lighter than those for smuggling illegal substances and it is therefore not surprising that highly organised criminal gangs have switched to tobacco smuggling from activities which carry the risk of much higher penalties.

  12.  The UK tobacco industry is being seriously damaged by bootlegging and smuggling. That may not concern some, but it is ultimately the interests of the UK which are harmed most. Significantly for the government's health objectives, it is believed that total tobacco consumption in the UK is increasing, as a direct result of the availability of much cheaper smuggled products. It should also be borne in mind that illicit traders have no regard for the law concerning the sale of cigarettes to children. The banning of tobacco advertising , which the Government intends to implement before the end of this year, will further increase the disorder in the UK market by diminishing the loyalty to established UK brands and thereby increasing the propensity to purchase foreign manufactured cheaper "black market" products.

  13.  Tobacco wholesalers and retailers are being deprived of turnover, profitability and the ability to sustain jobs by the increasing penetration of non—UK duty paid cigarettes and other tobacco products. Since the introduction of the Single Market, many thousands of jobs have been lost amongst tobacco retailers as a direct result of illicit sales by illegal traders. The job losses were relatively modest in 1996. They have risen sharply since then following the spectacular increase in the size of the "black market". Small shops, often providing a most valuable service to local communities, have been closed and all categories of tax revenue have been lost, as legal and overt sales have been translated into illicit and convert sales at street level, often conducted from households and car boots. There is no evidence establishing or suggesting that legitimate retailers have been or are engaged on any significant scale in the sale of non-UK duty paid tobacco and cigarettes.

  14.  It is in the interests of the UK tobacco industry as a whole to do everything it can to assist HM Customs & Excise. Under the aegis of the Alcohol and tobacco Fraud Review (ATFR), the manufacturing industry has intensified its long-standing interaction with HM Customs & Excise. Quarterly meetings continue to be held with the National Investigation Service (NIS) and athe National Intelligence Division (NID), to monitor trends and to provide a forum for the exchange of views. The industry has provided HM Customs & Excise Economics and Statistics Division (ESD) with market data and suggested means of modelling the growth in the "black market " in cigarettes, based on the experience of the market for hand-rolling tobacco. In addition, the methodology of additional market research techniques has been submitted for comment. The companies also provide intelligence to HM Customs & Excise, much of which is acquired through "Crimestoppers", which the industry has long supported. The manufacturers are generally able to assist with the swift and accurate identification of illegal imported products from their packaging marks and subsequent witness statements from the companies allow successful prosecutions to be made.

  15.  Within the population there is now a massive and, it seems, ever-expanding market for smuggled tobacco goods. There is virtually no corner of the country in which smuggled tobacco and cigarettes cannot be bought at prices substantially lower than legitimate retail prices. The products concerned are far from always being well know brands which are on sale from legitimate retailers in the UK. Increasingly, overseas brands new to Britain are being smuggled and bought, "on the streets". It appears that most of those sales take place in or from private homes or from the boots of cars, and not through legitimate tobacco retailers. So long as this grass-roots market for smuggled goods is allowed to exist and flourish, it is most unlikely that the trade will be stemmed. As one smuggling possibility might be closed, another will be opened. The quick and substantial profit that can be made by selling smuggled tobacco and cigarettes in the UK is a huge incentive. It would appear that the effort, manpower and costs that HM Customs & Excise requires to investigate and institute proceedings against small-scale sellers and buyers are prohibitive in terms of existing resources, albeit that hundreds of leads are provided to HM Customs & Excise each year by the industry and through "Crimestoppers".

  16.  The European Commission takes the view that it is for individual Member States to deal themselves with the consequences of their tobacco taxation policies. The prospect of tax harmonisation is as distant as ever.

  17.  The only truly effective means of destroying the "black market" and of reducing bootlegging and smuggling is for the Government to have the courage to tackle root cause—the difference in tax levels between the UK and most other Member States of the EU. Other countries—Sweden and Canada—have reduced tobacco taxation, thereby successfully reducing the levels of tobacco smuggling and restoring tobacco tax revenue. Reducing tax is not tantamount to condoning criminality. It gains respect for the law and restores order to a market which is rapidly threatening to undermine the Government's health and law and order policies. The consequences of current UK tobacco tax policy are unintended but inevitable. Measures taken to increase the effectiveness of HM Customs & Excise can, in the current circumstances, only be palliatives, with the distinct possibility that HM Customs & Excise will be rapidly overwhelmed by the continued spectacular growth of this illegal trade.

1 October 1999