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Tobacco firms oversupply in Europe for smugglers to return products into UK, avoids tax

Tobacco firms like to make loud calls to combat cigarette smuggling, while actively engaging in the highly profitable practice. A prime example has recently been reported in the UK: the strategy is to supply more than what is required to nearby low-tax countries such as Spain, Belgium, the Netherlands and Luxembourg, where individuals could purchase them and return to the UK for resale. Avoiding the high tobacco tax in the UK keeps the prices of the tobacco products low and affordable, allowing the tobacco industry to retain its market.

from Paul Peachey of the Independent:

Cigarette companies accused of supply black market in Britain

MPs say Treasury is being cheated by firms that deliberately flood European markets


Major UK cigarette firms are accused today of fuelling the multimillion pound black market in smuggled tobacco that cheats the taxpayer out of millions of pounds.

Companies oversupplied some European markets with hand-rolling tobacco by 240 per cent and then turned a blind eye when it was smuggled back to Britain, according to MPs.

They criticised the tax authorities for failing to prosecute or fine any of the big four tobacco companies, despite one, which HM Revenue and Customs (HMRC) has declined to name, failing to cooperate fully with the authorities to clamp down on the problem.

Only one letter of warning has been sent and a project set up to try to tackle the problem, with test purchases in “high-risk” countries, had to be scrapped after HMRC realised it did not have the powers to operate. The issue has contributed £660m to the £1.9bn loss to the public purse from avoiding tax on tobacco and cigarettes. “[HMRC] has failed to challenge properly those UK tobacco manufacturers who turn a blind eye to the avoidance of UK tax by supplying more of their products to European countries than the legitimate market in those countries could possibly require,” said Margaret Hodge, chairwoman of the Public Accounts Committee (Pac), which makes the claims in a report published today.

The Pac said companies that failed to cooperate should be publicly named, but HMRC said that it could only do so in “very limited” circumstances. The accusation by the MPs follows a near doubling in the consumption of hand-rolling tobacco in Britain despite an overall reduction in smoking. Nearly two-fifths of all tobacco used in Britain is considered illicit compared with less than 10 per cent of cigarettes, the report says.

The “high-risk” oversupply countries included the Benelux nations – Belgium, Netherlands and Luxembourg – and Spain, where many Britons go on holiday. A single “white van man” bringing back a load of illicit tobacco could cost the Exchequer £60,000 in lost revenue.

Over 1,000 tons of rolling tobacco has been seized in the last two years (Rex/Independent)

The MPs did not name the non-cooperative member of the big four – which includes BAT, Philip Morris International, Imperial Tobacco and Japan Tobacco. But it said the companies had a “poor record” of addressing the problems, had been slow to respond and provided little information to the tax authorities.

But the industry contested the claims and said Britain – despite having some of the most punitive taxes in the world – also had some of the highest profit margins. “We don’t oversupply, it wouldn’t make any sense to do that,” said Simon Evans, a spokesman for Imperial Tobacco. “The UK is one of our most profitable markets.”

He said that Imperial Tobacco was “joined at the hip” with tax authorities in trying to combat the illicit trade. The company had previously come under fire by the Pac when George Osborne accused it of being “crooks” or “stupid” by selling cigarettes to countries like Afghanistan and Moldova without thinking they would be smuggled back to the UK.

HMRC said that despite the concerns of the MPs, the illicit market in cigarettes had been more than halved with nearly 3.6 billion illicit cigarettes and more than 1,000 tons of rolling tobacco seized in the last two years. “Relentlessly disrupting criminal businesses is at the heart of HMRC’s strategy to clamp down on this illicit trade,” said a spokesman.

10 Oct 2013

from the Express:

Tobacco firms ‘over-supplying’

British tobacco manufacturers are fuelling the black market by deliberately over-supplying their products to European countries, MPs have warned.

Under supply chain legislation, tobacco firms have a legal obligation not to aid smuggling (PA/Express)

UK firms are supplying more tobacco to European countries than their markets need and is then finding its way back into the UK market without tax being paid, costing the country £1.9 billion a year, the Committee of Public Accounts said.

HM Revenue and Customs (HMRC), Britain’s tax office, is failing to tackle firms who “turn a blind eye to the avoidance of UK tax” through over-supply, which in some countries in 2011 exceeded demand by 240%, the Committee added.

Under supply chain legislation, tobacco firms have a legal obligation not to aid smuggling but HMRC has not fined any UK tobacco manufacturer for over-supplying products and has issued only one letter of warning.

Committee chair Margaret Hodge MP said: “The department (HMRC) has also failed to challenge properly those UK tobacco manufacturers who turn a blind eye to the avoidance of UK tax by supplying more of their products to European countries than the legitimate market in those countries could possibly require.

“The tobacco then finds its way back into the UK market without tax being paid.

“The supply of some brands of hand-rolling tobacco to some countries in 2011 exceeded legitimate demand by 240%.

“HMRC must be more assertive with these manufactures.

“So far it has not fined a single one of them.”

Under the 2010 Spending Review, HMRC did plan to launch a project to test how well manufacturers were preventing the over-supply of tobacco products to high-risk countries, such as Spain, Belgium, the Netherlands and Luxembourg.

But during the planning stage, HMRC realised that UK officials could not exercise their powers in another country in that way and the project was scrapped.

The Committee also said HMRC was failing to deter potential tobacco smugglers through its use of prosecution powers.

Tobacco fraud cost taxpayers £1.9 billion in 2010/11, the Committee said, with 9% of cigarettes and 38% of hand-rolling tobacco sold in the UK estimated to be sold on the black market.

But the group of MPs said there were “only” 265 prosecutions for tobacco smuggling in 2012/13 and prosecutions for organised crime fell from 62 to 51 in the last year.

HMRC does not know what level of enforcement action is needed to deter would-be offenders, the group of MPs added.

Ms Hodge said: ” HMRC is in the dark about the deterrent effect of its enforcement action.

“Despite the seriousness of tobacco fraud, in 2012/13 there were only 265 prosecutions for tobacco smuggling and, in the last year, prosecutions for organised crime actually fell from 62 to 51.”

She added: ” Tobacco smuggling is not a victimless crime.

“Each year it constitutes a theft of revenue to the tune of some £1.9 billion, 20% of the total sum collected through tax.

“It undermines drives to cut smoking and is also linked to the activities of organised crime.”

The group of MPs recommended HMRC and Border Force should publicise prosecutions and other enforcement action more widely to deter potential offenders.

The Committee said HMRC had made some ground tackling tobacco smuggling, with estimates showing a drop for illicit tobacco products between 2000/01 and 2010/11.

The expansion of HMRC’s network of overseas intelligence officers has been particularly successful, preventing £226 million of lost tax in the last two years for an initial investment of £4.6 million, it added.

but the group of MPs found HMRC’s proposals to tackle tobacco smuggling in the 2010 Spending Review investment were “over-optimistic” with three of the five projects delivering no benefit by March 2013.

An HMRC spokesman said: ” We have more than halved the size of the illicit market in cigarettes. In the last two years alone nearly 3.6 billion illicit cigarettes and over 1000 tonnes of rolling tobacco have been seized resulting in 432 prosecutions.

“Disrupting criminal businesses is at the heart of HMRC’s strategy to clamp down on this illicit trade. The tobacco smuggling gangs are constantly adapting to the huge downward pressure HMRC puts them under. This pressure has caused the long term decline of this illegal trade.

“Additional investment has been made by this Government to tackle tobacco smuggling, and our officers posted overseas have made a significant contribution to the drive against smuggling as the PAC recognises.

“The Government is reinvesting nearly £1 billion in HMRC to continue the fight tackling evasion, fraud and avoidance.”

10 Oct 2013

from David Barrett of the Telegraph:

Tobacco firms fuelling black market, MPs say

The Public Accounts Committee accused tobacco firms of “turning a blind eye” to smuggling which costs the country £1.9 billion a year. (Telegraph)

British tobacco companies are fuelling the black market by deliberately over-supplying their products to European countries, MPs have warned.

The Public Accounts Committee accused the firms of “turning a blind eye” to smuggling which costs the country £1.9 billion a year.

Margaret Hodge MP, chairwoman of the influential committee, said firms are supplying more tobacco to European countries than their markets could “possibly require” and the products are then brought into the UK market without tax being paid.

The firms are also failing to co-operate with a government crackdown to tackle the problem, the committee said in a new report.

It set out how the taxman did plan to launch a project to combat manufacturers over-supplying tobacco products to high-risk countries, such as Spain, Belgium, the Netherlands and Luxembourg.

But the scheme had to be abandoned because of “legal concerns”, MPs said, adding that Her Majesty’s Revenue and Customs (HMRC) has yet to fine any British manufacturer for over-supplying.

In some foreign countries manufacturers offer for sale more than twice as much tobacco as the local market requires, the report found.

Mrs Hodge said: “The department has also failed to challenge properly those UK tobacco manufacturers who turn a blind eye to the avoidance of UK tax by supplying more of their products to European countries than the legitimate market in those countries could possibly require.

“The tobacco then finds its way back into the UK market without tax being paid.

“The supply of some brands of hand-rolling tobacco to some countries in 2011 exceeded legitimate demand by 240 per cent.

“HMRC must be more assertive with these manufacturers. So far it has not fined a single one of them.”

Tobacco fraud cost taxpayers £1.9 billion in 2010/11, the committee said, with 9 per cent of cigarettes and 38 per cent of hand-rolling tobacco in Britain estimated to be sold on the black market.

Mrs Hodge added: “Tobacco smuggling is not a victimless crime. Each year it constitutes a theft of revenue to the tune of some £1.9 billion,.

“It undermines drives to cut smoking and is also linked to the activities of organised crime.”

The group of MPs recommended prosecutions should be publicised more widely to deter offenders.

10 Oct 2013

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