Supplementary written evidence from Japan Tobacco International [TOB33]
Issues for the Committee to consider
Taxation
Increases in taxation should be in line with inflation as a maximum. The plan to increase taxes by 2% above inflation in the 2014 Budget should be dropped.
Regulation
Minimum packs sizes of 20 cigarettes and 40g RYO will lead to a further increase in NUKDP, which would have a negative impact on the legitimate UK market. The UK Government should seek the removal of Article 13.1 from the proposals to the revised Tobacco Products Directive.
Resources
NUKDP is in growth and further increases in tax, coupled with a rise in travel and trade will enhance opportunities for criminals. Border Force requires sufficient resources to secure the UK’s points of entry and HMRC to tackle the problem inland.
Enforcement
While there has been a significant increase in prosecutions of those involved in tobacco fraud, we would like to see more. In addition, some of the sentences handed out do not, in our view, reflect the serious impact of the crime. Sentencing guidelines should be revised.
Other tobacco manufacturers, outside of the major manufacturers (BAT, ITL, JTI & PMI), should be pressed to sign the same type of legally binding agreements with the EU to tackle tobacco smuggling as we have.
Partnership
Law enforcement agencies and tobacco manufacturers must be able to work together to share information and knowledge to tackle the illicit market in order to protect tobacco tax revenue.
Addressing future threats to the UK tobacco market
What is non-UK duty paid?
Non-UK duty paid (NUKDP) is a catch-all phrase used to describe cigarettes and roll your own tobacco (RYO) found in the UK that have not incurred UK taxes. NUKDP can be legal or illegal.
Legal
This includes tobacco products brought into the UK by travellers which are for their own personal consumption. Cross-border shopping, as it is commonly referred to, is an integral part of the Single Market in operation in the EU.
UK residents make use of this right to purchase tobacco (and alcohol) from other EU Member States because of cheaper taxes. Official guidance1 states:
“You can bring an unlimited amount of most goods into the UK, for example, you can bring in any alcohol, tobacco, meat and dairy products – as long as they are for your own use and transported by you.”
Duty-free, available when travelling outside the EU, is subject to a strict limit of 200 cigarettes or 250g of tobacco.
Any tobacco products bought through cross-border shopping or duty free must not be re-sold, even on a not-for-profit basis, but they can be given as gifts.
Illegal
These are tobacco products (genuine, counterfeit or illicit whites*) that are smuggled into the UK with the express purpose of illegal sale. In many cases no taxes have been paid on them anywhere in the world.
Estimating the level of NUKDP is difficult enough, let alone estimating what proportion of NUKDP is legal or illegal. While HMRC does attempt to make such a differentiation, breaking down NUKDP into cross-border shopping and illicit, we refer to the whole as NUKDP.
* Illicit whites have been described by Northern Ireland’s Organised Crime Task Force as cigarettes that have been “manufactured for the purpose of smuggling”2
An explanation
What is the cause of NUKDP?
Since the start of 2009 the average price of cigarettes has increased by 17% in real terms, while discretionary income, measured through the ASDA Income Tracker3, has fallen by 13%. It is forecast4 that the squeeze on income will last until 2018.
For example, since the start of 2009 the price of a pack of 20 JTI cigarettes in the Value sector has increased from £4.20 to £6.86, with taxes accounting for £2.00 (75%) of the increase.
In terms of the impact on smoking habits, the Office for National Statistics recently noted that the “rate of smoking in Great Britain has remained largely unchanged over the last five years”.5
Many of the UK’s 10 million existing adult smokers have responded to increases in tax, combined with pressure on their income, by switching to cheaper cigarette brands, changing to RYO or increasingly using NUKDP channels - both legal and illegal.
Affordability of cigarettes
In real terms the cost of cigarettes is up by 17%, while discretionary income has fallen by 13%
How existing adult smokers respond to high taxes and low incomes
Cigarette prices across Europe
The UK is one of the highest taxed markets in the EU
What is the scale of NUKDP?
Many smokers have increasingly moved to NUKDP channels, either purchasing tobacco when they go abroad, or buying from illegal channels within the UK.
Given the economic backdrop, large tax increases and our assessment of the market, the rise in NUKDP reported by HMRC last month6 did not come as a surprise.
The latest figures from HMRC show that in 2012/13 up to 16% of cigarettes and up to 48% of RYO was NUKDP. JTI believes, based on its own analysis of trends in NUKDP, that HMRC’s upper estimate is a more accurate reflection of the likely level of NUKDP rather than the midpoint generally referred to.
While levels of NUKDP are down from the peaks of the early 2000s, the recent upward trend is a concern. We believe the decline in NUKDP over the 2000s was attributable to inflation-only tax increases over most of the decade and better enforcement action.
Cigarette NUKDP
HMRC’s latest estimates showed an increase in NUKDP in 2012/13 for the first time first since 2003/4
Following reductions in NUKDP in the 2000s, worsening economic conditions and high taxes made an increase in NUKDP inevitable
What’s the challenge facing HMRC and Border Force?
The completion of the EU Single Market in 1993 has meant that UK residents have had greater opportunities to travel and bring back cheaper alcohol and tobacco to the UK, subject to certain guidelines. UK residents made over 56 million visits abroad last year, compared to 31 million in 1990.7
Tax differentials that existed in 1993 still exist today, despite the EU setting minimum tax levels. For example, 50g of RYO that sells for £16.00 in the UK costs around one third of this in Belgium, while cigarettes in Spain are half the price of the UK.
While travel by individuals gives opportunities for small scale smuggling, the UK’s 110 commercial ports, which handled 10.7 million incoming unitised freight items in 20128, will be the route for larger scale criminality.
The economic recovery is likely to lead to increases in travel and trade volumes which will place further pressure on border controls. We believe that the Border Force need to be given resources to keep pace with any change.
Travel & Trade
UK residents’ travel abroad down by 19% since 2007, with trade down by 15%. But economic recovery will lead to an increase and put pressure on Border Force resources
How to secure the UK’s borders
So how are HMRC and Border Force doing?
Over the past five years (2008/9 to 2012/13) HMRC and Border Force have seized huge quantities of tobacco products destined for the UK - 8.8 billion cigarettes and 2,100 tonnes of tobacco.9
HMRC’s analysis of large-scale seizures shows the majority of these products are counterfeit or non-UK brands, including illicit whites. In 2012/13 genuine UK brands represented only 5% of the cigarettes and 17% of the RYO.9
Prosecutions for tobacco related fraud have increased (see opposite)10,11, but given the scale of the problem we believe the Crown Prosecution Service should take more cases forward.
Civil penalties provide a promising mechanism for tacking low-level tobacco fraud. 525 wrongdoing penalties with a value of £3.5 million were issued in the first quarter of 2013-14, with a further 475 duty assessments with a value of £1 million.11
JTI recommends that the Government makes further resources available to HMRC to help secure further prosecutions.
Enforcement
Prosecutions for tobacco related fraud were at their highest level for 5 years in 2012/13. Based on Q1 data for this year (203/14) a further increase looks likely
A huge achievement but more is still required
Trends in the illicit market
Illicit whites, while difficult to define, have perhaps been best described by Northern Ireland’s Organised Crime Task Force as, “manufactured for the purpose of smuggling”. 2
While they may be produced in compliance with local regulations (if they exist), the manufacturer does not appear to be concerned about who they sell the product to.
Jin Ling, manufactured in Kaliningrad, is one of the most well known of the illicit whites, accounting for half of all the illicit whites collected in 2012 through research conducted on behalf of JTI.
However, dozens of illicit white brands have been seen in the UK. The one thing they have in common is that all of them are on sale at very cheap prices, typically £3.00 but sometimes for as little as £2.50.
In 2012/13, non-UK brands (which includes illicit whites) accounted for 64% of HMRC’s large-scale seizures.9
Illicit whites
Trends in the illicit market
Where do illicit whites come from?
Trends in the illicit market
China was, and still is, a major source for counterfeit cigarettes but in recent years production has moved closer to where the demand originates - Europe.
One example is an illicit factory in Western Europe which was raided by local law enforcement bodies in April 2013. Machinery, tobacco, papers and cigarettes were uncovered.
It is thought that 10 million counterfeit cigarettes were being produced each week, from perhaps as far back as March 2011.
Over the two years of operation the profit could have been as much as €52 million.
Counterfeit products made on this production line have been recovered in Germany, Slovakia, Belgium, Poland, Austria, the Czech Republic, the Netherlands and also in Ireland and the UK.
Counterfeit production in mainland Europe
Trends in the illicit market
JTI’s policy is to destroy any equipment it no longer requires, this ensures that criminals cannot obtain machinery that has been decommissioned by us.
However, a trawl of the Internet shows any number of companies able to offer all the equipment required to set up a production line.
Where do they get the equipment from?
Trends in the illicit market
At least eight illegal production facilities that have come to light in the UK in the past two years. These have ranged from a RYO pouch stuffing operation in a residential property in Dundee,12 to a cigarette production line in Derbyshire capable of producing 625 million sticks a year.13
Counterfeit production of JTI’s Amber Leaf is a particular concern to us. Since the start of 2012 over 1.2 million empty counterfeit Amber Leaf pouches (sometimes with counterfeit tax stamps) have been notified to JTI after being seized by the Border Force, mainly at postal hubs. Tobacco, in ‘raw’ or semi-processed states, has also been seized. These components were destined to be combined somewhere in the UK and then sold.
Given that the same type of pouches, filled with tobacco, turn up in test purchasing, we believe the seizures represent the ‘tip of the iceberg’. Every one of these counterfeit pouches represents a tax loss to the Government of more than £11.
Counterfeit production in the UK
Trends in the illicit market
JTI was recently made aware of a seizure of stickers bearing JTI trademarks in the North West. Initially we were puzzled as to what they were intended for.
The likely purpose became clear when test purchasing in Northern Ireland and the Republic of Ireland found similar stickers on tubs of tobacco.
The tub, quite unlike anything produced by JTI, doesn’t carry any health warnings and the tobacco inside is not manufactured to the same high quality standards as the genuine product.
Production like this would be simple. Tobacco leaf can be bought from UK based websites for £30 per kg and tamper-proof food containers, like the one pictured opposite, can be bought for 14p each. The estimated cost of ‘production’, including a sticky label, is well under £1.00 per unit. With a sale price of £8.00 this represents a profit of up to £7.00.
Counterfeit production in the UK – the next stage
Trends in the illicit market
JTI conducts regular test purchasing from markets, pubs and retail outlets in order to assess the scale and nature of the illicit cigarettes and RYO on sale in the UK.
The results identify a mixture of genuine products (which have bought in another market and are being illegally resold), counterfeits and illicit whites on sale at prices well below those of legal UK duty paid products.
For example, in October 2012, to coincide with the publication of our report The Billion Pound Drop, we undertook a series of test purchases in the Midlands, the North West, the North East and Scotland.
190 products were bought from 131 different sources (all reported to HMRC) where we found illicit whites on sale from £2.50 for a pack of 20 and counterfeit RYO for as little as £3.50 per 50g. Typical price of JTI’s best-selling cigarettes and RYO are around £6.85 per 20 and £16.00 per 50g respectively.
Availability in the UK
Trends in the illicit market
Organisations tackling crime have noted the links between tobacco smuggling and organised crime. For example, Europol have said that tobacco is “Increasingly of interest to criminal groups as a low risk, high profit activity”.14
In August, HMRC published a list of its 32 most wanted tax fugitives. 13 of them were wanted, at least in part, in relation to activities related to tobacco fraud.15
Among the cases is that of an individual who was found guilty in 2012 for his part in a £26 million cigarette and RYO smuggling fraud.
Another man was found guilty in October 2011 for assisting the sourcing of a tobacco manufacturing and rolling machine and the smuggling of almost 16 tons of raw leaf tobacco into the UK.
The rewards attract serious criminals
What is JTI doing to tackle the illicit trade?
Our Know Your Customer (KYC) programmes and supply chain controls are designed to ensure that JTI products do not end up in illicit channels.
Of the seizures of JTI brands notified to us by HMRC so far in 2013, 98% have been counterfeit, the same as in 2011 and 2012 (see table opposite).
The quantity of genuine JTI products seized and reported to us by HMRC in 2012 was 0.7 million sticks. A 40 foot container, which can hold up to 9 million cigarettes, would hold more than 12 times this amount.
In cases where genuine JTI products have been seized we will take steps to review the supply of products to customers and ultimately may terminate supply.
Seizures of JTI products
The vast majority of seizures reported to JTI by HMRC are counterfeit, demonstrating that it is increasingly difficult for criminals to obtain JTI products due to our KYC and supply chain controls
Strengthening the security of our supply chain
What is JTI doing to tackle the illicit trade?
The Codentify ‘track & trace’ system helps us to work with law enforcement agencies to identify where any genuine JTI products they seize were a) manufactured, b) distributed, and c) sold to.
Codentify is currently the only working ‘track & trace’ system for tobacco products in operation anywhere in the world.
Codentify, which has been developed by the major tobacco manufacturers, also provides a verification system to help law enforcement to determine if products are genuine.
HMRC have been notified that JTI (together with other major tobacco manufacturers) will roll out Codentify in the UK market, as a product verification tool, by the end of 2014.
JTI believes that Codentify should be used by all manufacturers in the EU market.
Codentify
Unique human and machine readable codes help drive the only working ‘track & trace’ system for tobacco products in operation anywhere in the world
Securing our supply chain
What is JTI doing to tackle the illicit trade?
JTI is party to the Joint Anti-Illicit Working Group established as part of the Government’s Tackling Tobacco Smuggling strategy. This platform allows manufacturers and HMRC to work together to:
・ improve the collective understanding of the illicit market in the UK
・ assess current and emerging threats posed by the illicit trade
・ share insight into consumer and retail communication to educate and inform about illicit tobacco products
A revised Memorandum of Understand between JTI and HMRC has recently been signed which complements the UK’s supply chain legislation and the EU Cooperation Agreement.
Working with Governments
What is JTI doing to tackle the illicit trade?
We provide information to HMRC, OLAF and other law enforcement agencies around the world so that they can seize illicit tobacco products and mount prosecutions.
In the first 9 months of 2013 we have provided
・ HMRC with 82 reports containing information regarding a potential 3.4 billion cigarettes in transit to the UK
・ OLAF with 63 reports containing information regarding a potential 3.2 billion cigarettes in transit to the EU
・ other law enforcement agencies across the world with 285 reports containing information regarding a potential 10.1 billion cigarettes in transit
・ in addition, we have had 170+ approaches from Trading Standards and Police in relation to illicit tobacco products within the UK
Information provider
What is JTI doing to tackle the illicit trade?
In September this year JTI removed the gantry from Central Newsagents, a retail outlet in Cheltenham whose owner had been jailed for selling illicit tobacco products.
We believe this action sends out a clear message to retailers that there are commercial, as well as legal, consequences if they are convicted of selling illicit products.
JTI’s decision has been welcomed by the retail community and in the trade media, for example the cover story of a recent edition of Retail Express (see opposite).
Businesses convicted of selling illegal tobacco can also face the removal of their alcohol license and lottery terminal, as well as custodial sentences and fines.
Supporting enforcement action
What is JTI doing to tackle the illicit trade?
To help educate retailers and consumers about the issue of illicit tobacco products within their community, JTI (working with local stakeholders) develops informative, motivating messaging and campaigns that raise awareness of the problem with the aim of getting people involved to help drive down the level of illicit tobacco.
Promotion of the Customs Hotline is the key vehicle to get people to report illicit trade to the authorities.
Examples of recent local press and trade media campaign materials are shown opposite.
In addition, JTI is utilising digital platforms and radio infomercials to expand this campaign message to a wider audience.
Informing and educating the public and the retail community
Future threats
Taxation
We believe the recent increase in NUKDP has been a direct result of a high tax policy. Any further above-inflation tax increase in next year’s Budget will not help.
Revised Tobacco Products Directive
Proposals contained in the revised Tobacco Products Directive17 would have a huge impact on the UK market, in particular minimum pack sizes of 20 cigarettes and 40g for RYO.
A ban on packs of 10 cigarettes and 12.5g packs of RYO, which are the most popular in the UK accounting for 38% and 63% of respective pack sales,18 will exacerbate NUKDP by removing products in the legal market that are comparable in price with those on the illegal market.
In fact, the previous UK Government rejected a similar proposal in 2008 to ban packs of 10 cigarettes.
The Department of Health’s consultation report noted that some respondents warned “the measure would be worthless or even counterproductive unless the issue of the availability of cheap, illicit tobacco is addressed”.19
The latest figures from HMRC, showing an increase in smuggling, demonstrate that this is not the case.
It is our view that packs of 10 cigarettes and 12.5g packs of RYO help to ensure that smokers are retained in the legal market.
Ireland banned 10s packs in 2007 and levels of non-Irish duty paid consumption increased.
‘Supersizing’
It is also questionable whether making smokers ‘supersize’ their purchase is compatible with a policy to reduce tobacco consumption. As the Prime Minister said in response to a recent question about this issue, “It does not, on the face of it, sound a very sensible approach”.20
Taxation and regulation
Recommendations
Taxation
Increases in taxation should be in line with inflation as a maximum. The plan to increase taxes by 2% above inflation in the 2014 Budget should be dropped.
Regulation
Minimum packs sizes of 20 cigarettes and 40g RYO will lead to a further increase in NUKDP, which would have a negative impact on the legitimate UK market. The UK Government should seek the removal of Article 13.1 from the proposals to the revised Tobacco Products Directive.
Resources
NUKDP is in growth and further increases in tax, coupled with a rise in travel and trade will enhance opportunities for criminals. Border Force requires sufficient resources to secure the UK’s points of entry and HMRC to tackle the problem inland.
Enforcement
While there has been a significant increase in prosecutions of those involved in tobacco fraud, we would like to see more. In addition, some of the sentences handed out do not, in our view, reflect the serious impact of the crime. Sentencing guidelines should be revised.
Other tobacco manufacturers, outside of the major manufacturers (BAT, ITL, JTI & PMI), should be pressed to sign the same type of legally binding agreements with the EU to tackle tobacco smuggling as we have.
Partnership
Law enforcement agencies and tobacco manufacturers must be able to work together to share information and knowledge to tackle the illicit market in order to protect tobacco tax revenue.
What does JTI recommend?
References
・ Notice 1: Travelling to the UK. UK Border Agency, October 2011
・ 2012 Annual Report & Threat Assessment. Organised Crime Task Force, July 2012
・ JTI calculations based on HMRC’s Tobacco Bulletin & ASDA Income Tracker
・ ASDA Income Tracker. A Special Report. CEBR for ASDA, September 2013
・ Opinions and Lifestyle Survey, Smoking Habits Amongst Adults, 2012. Office for National Statistics, September 2013
・ Tobacco tax gap estimates 2012/13. HMRC, October 2013 & information provided by HMRC
・ Office for National Statistics website, 2013
・ Department for Transport website, 2013
・ Progress in tackling tobacco smuggling. National Audit Office, June 2013 & previously published data
・ Written Answer. Hansard, 10 June 2013 38W
・ Tackling tobacco smuggling. Quarter 1 outputs (April to June 2013). HMRC, 2013
・ Dundee tobacco factory sees three arrested after raid. BBC News, 27 September 2012
・ Fake tobacco factory gang jailed. HMRC Press Release, 31 January 2012
・ OCTA. EU Organised Crime Threat Assessment. EUROPOL, May 2011
・ Gallery of Most Wanted tax fugitives published as another is caught after almost 10 years on the run. HMRC Press Release, 9 August 2013
・ Nine million smuggled cigarettes seized at Felixstowe. Home Office / Border Force Press Release, 22 April 2013
・ Proposal for a Directive of the European Parliament and of the Council on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco and related products. COM(2012) 788 final. European Commission, 19 December 2012
・ Nielsen MarketTrack, 12 months to September 2013
・ Consultation on the future of tobacco control: consultation report: December 2008. Department of Health, December 2008
・ Prime Minister’s Questions. Hansard, 9 October 2013 Col. 160