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Tobacco companies breathed a sigh of relief on Wednesday as George Osborne stepped back from imposing a levy on their profits.
However, smokers had less reason to cheer as the UK chancellor raised taxes on cigarettes by 2 per cent above the rate of inflation in his Budget as expected.
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Shares in Imperial Tobacco, the UK’s leading seller of cigarettes, and British American Tobacco, which makes Dunhill and Lucky Strike, rose more than 2 per cent as Mr Osborne delayed making a decision on a tobacco levy.
At the Autumn Statement in December, Mr Osborne announced a consultation on a levy arguing it was “fair to ask the tobacco industry to make a greater contribution” given the harm their products cause.
However, on Wednesday he qualified his statement and said “it is essential that this is done in the most effective way”. Imperial Tobacco has said that the cost of a levy would probably be passed on to consumers in the form of higher cigarette prices. The decision removes one of a host of regulatory pressures facing the tobacco industry in the UK. A ban on smoking in cars in England will come into force this year, while the ban on cigarette displays in shops will be extended to smaller retailers in April. More importantly, branding on cigarette packs will be banned from May next year after the government passed plain packaging legislation this month. However, Mr Osborne did announce a range of measures designed to tackle the illicit, or untaxed, trade of cigarettes, including a registration scheme to track users and dealers of raw tobacco.
Chancellor George Osborne’s sixth Budget takes place less than two months before what is shaping up to be the most unpredictable general election in living memory
Antismoking charity Ash welcomed the expected duty rise but said it was disappointed by the lack of progress on a tobacco levy, a policy that was first put forward by the Labour party last year. At the Labour party’s conference in September, leader Ed Miliband called for a 15 per cent tax on tobacco profits, which he said would be spent on the NHS.
A typical premium pack of cigarettes cost £8.99 in the UK, according to the Tobacco Manufacturers’ Association, which criticised the tax increase as “a continuation of a failing tobacco tax policy”.
“The illegal market is clearly growing as price-conscious consumers seek cheaper products elsewhere,” said Giles Roca, the director-general of the TMA. Although duty increases are unwelcome for smokers, they are less of a concern for tobacco companies who typically use them as an opportunity to increase prices without attracting the ire of customers.
During the course of this parliament the proportion of tax on a premium packet of cigarettes has fallen from almost 77 per cent to 74 per cent before the Budget. In 2001, the proportion was 80 per cent. About half of the increase on a packet of cigarettes between 2006 and 2009 was due to tobacco companies increasing prices, according to researchers from the University of Bath.