FTG0008 - Evidence on Brexit: future trade between the UK and the EU in goods

Tobacco Manufacturers’ Association – Written Evidence (FTG0008)

Introduction

The Tobacco Manufacturers’ Association (TMA) is the trade association for the UK tobacco industry. The TMA’s members are British American Tobacco UK Ltd., Imperial Tobacco Ltd. and Gallaher Ltd. (a member of the Japan Tobacco Group of companies).[1]

The tobacco industry supports the employment of approximately 60,000 high value jobs, either directly or indirectly, throughout the UK. Tobacco manufacturers contribute around £12 billion in taxation (excise duties plus VAT) to the Exchequer each and every year, which equates to £400 for every taxpayer in the UK.[2]

The tobacco industry invests in the region of £158 million per annum in research and development, much of which is dedicated to next generation products like e-cigarettes. The industry also spends approximately £54 million a year in capital expenditure. For every £1 million spent by the tobacco industry, an additional £1.7 million of spending is supported in the UK economy.[3]

Importance of EU Trade to the Tobacco Industry

Trade with EU Member States is an important aspect of TMA member companies’ business activities. All of the TMA’s members have manufacturing facilities in other EU countries and produce tobacco products suitable for importation into the UK in these facilities. The decline and, recently, the elimination of the UK’s tobacco manufacturing base has made trading links with other EU Member States more important for the tobacco sector than was previously the case.

Tariff Barriers

Tariff barriers exist at present for tobacco products entering the EU from countries situated outside of the trading bloc. These barriers are set at different levels depending on the product and the status, in relation to the EU, of the country concerned. For example, all third countries, except those with favoured nation status, are subject to a tariff on cigarettes containing tobacco of 57.60%. Favoured nations are subject to a lower tariff of 40.30%.

The UK’s exit from the EU could result in the UK Government introducing import tariffs on tobacco products imported from EU Member States and other countries. This has the potential to have a significant impact on the UK tobacco market as a result of already high tobacco product prices and the declining (soon to be defunct) manufacturing base of the tobacco industry in the UK. Cigarette product prices in the UK are currently 2 to 3 times higher than in our nearest European neighbours, such as France, the Netherlands, Spain and Portugal, and price differentials between UK products and those of Eastern European Member States are even higher. Equally, hand rolling tobacco product prices in the UK are 2 to 3 times higher than in most other European countries.

The principal driver of high tobacco product prices in the UK compared to other European countries is the Government’s high tobacco tax policy, which increases taxation on tobacco products each year at a level above inflation. This is at the root of illegal tobacco sales. The relationship between the Government’s high tax policy and the illicit tobacco market is well understood.

Research carried out by the European Anti-Fraud Office in 2015 shows that 21% of consumers have been offered black market cigarettes in the UK and, of those who purchase such products, 70% do so because they are cheaper than their legal counterparts.[4] In a report published the same year by the Royal United Services Institute, the authors attributed the ‘persistence of the illicit tobacco trade…to the high – and increasing – level of tax on tobacco products in the UK, and the differences in price between the UK and countries in continental Europe.’[5]

We believe that, as part of the forthcoming trade negotiations between the UK and the EU, tobacco import tariffs should be carefully assessed within the context outlined above. The imposition of new taxes, in the form of tariffs on tobacco products entering the UK from other Member States in the EU, would have the potential to increase tobacco product prices and, as a result, the size of the illegal tobacco market.

Non-Tariff Barriers

Minimum Indicative Limits (MILs) are the most important non-tariff barrier to the inter-EU trade in tobacco products in the UK. These suggested limits govern the amount of tobacco products (cigarettes, cigars, hand rolling tobacco, etc.) that an individual can bring into the UK from another Member State for personal consumption without falling under suspicion of supplying the illegal tobacco market, which cost the Exchequer £2.4 billion in lost tax revenue in 2015/16.[6]

We believe that following the vote to leave the EU there is an opportunity to reform these rules. In particular, we would like to see hard, reduced limits put in place immediately for individuals bringing tobacco products into the UK from countries that do not meet the minimum criteria outlined in the EU Tobacco Tax Directive. This is permissible under existing EU law and a number of Member States, including Germany and Austria, have already introduced these hard limits. In the wake of Brexit, we would like to see these hard, reduced limits extended to cover all EU Member States.

Following the Government’s triggering of Article 50, we believe that it would be appropriate to introduce a transitional regime that gradually reduces the amount of tobacco product that can be imported by individuals into the UK from other EU Member States. The introduction of such a regime would be intended to prevent individuals from exploiting the large price differentials that exist between UK and other Member States’ products in order to stockpile non-UK duty paid products for consumption once the UK has withdrawn from the EU. In essence, this policy would be a simple and effective anti-tax avoidance measure.

EU Standards

Standards elaborated by the EU have come to play an increasingly significant role in the regulation of the UK tobacco market.

For example, the EU Tobacco Products Directive (TPD) (2014) made significant changes to labelling requirements throughout the trading block. The TPD requires all EU Member States to ensure that graphic health warnings with photos, text and cessation information will cover 65% of the front and the back of all cigarette and hand rolling tobacco packs by May 2017.

The TPD also requires that Member States enforce new rules in regard to minimum tobacco pack sizes. From May 2017, it will be illegal to sell cigarette packs possessing fewer than 20 cigarettes and hand rolling pouches containing less than 30 grams of tobacco. Although this will not represent a significant change for many national markets within the EU, for the UK (and Italian) market it will result in a significant degree of change. At present, the pack sizes that will be prohibited account for the overwhelming majority of the UK tobacco market. On this basis, we believe that the UK’s exit from the EU offer an opportunity for the Government to reconsider the EU-driven prohibition on smaller cigarette and hand rolling tobacco pack sizes.

The provisions contained within the TPD contributed significantly to the loss of hundreds of UK tobacco manufacturing jobs. It was a key factor in undermining the cost effectiveness of Japan Tobacco International’s production facility at Lisnafillan in Northern Ireland, which is due to close in 2017 with the loss of 800 high value jobs (500 of which have already been lost). The closure of Imperial Tobacco’s Nottingham production facility, which took place in 2016 with the loss of more than 500 high value jobs, was also in part the result of the pressure exerted by the TPD.

While perhaps not within the purview of this submission, we believe there is also an opportunity to reconsider the EU’s position regarding the regulation of e-cigarettes in order to avoid the sort of negative economic consequences outlined above. The TPD requires a disproportionate level of regulation for the e-cigarette sector, including unnecessarily restrictive constraints on advertising.

These restrictions are not supported by the emerging evidence in regard to the harm of e-cigarettes, relative to conventional tobacco products. Public Health England believes that e-cigarette products are at least 95% less harmful than conventional cigarette and hand rolling tobacco products.[7] According to TMA survey data, 28% of smokers use e-cigarettes at present and a further 23% have used them and intend to do so again in the future.[8] In 2015, sales of such products accounted for approximately £400 million in revenue for the retail sector.[9]

Conclusion

The imposition of tariff barriers on tobacco is unnecessary, since domestic taxes are already levied on tobacco products at the point of their release for sale in the UK, and non-tariff barriers would only complicate and further increase the cost of trade in these products. Any such additional costs could be passed on to UK consumers in the form of higher tobacco product prices.

The UK tobacco industry believes that the UK’s impending withdrawal from the EU offers an opportunity to reconsider EU regulation that is ill-suited to the state of the UK tobacco market and/or does not accord with the evidence available on emerging products.

The Government could also use the opportunity of Brexit to implement a new approach to personal imports of tobacco products from EU Member States in order to reduce the scale and cost to the Treasury of the illegal trade in tobacco products.

24 October 2016