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Pre-Budget Report
C&E 1
27 November 2002
The growth in cigarette smuggling has been stopped for the first time in a decade, the Economic Secretary to the Treasury, John Healey, announced today, but there would be no let up against those who abuse the tax system and threaten the revenue required for investment in UK public services.
Economic Secretary, John Healey, said:
In this Pre-Budget Report, the Government has renewed its commitment to create world-class public services and to tackle child and pensioner poverty. If people are paying their fair share towards achieving those objectives, they have the right to expect that everyone else will do the same, and that the Government will crack down hard on those who do not.
Two years ago, it was estimated that smuggling gangs, whose operations had been growing rapidly in recent years, would be supplying one out of every three cigarettes smoked in the UK by the end of 2002, if the Government had taken no action.
However, new figures published today show that - as a result of the Government's strategy to tackle tobacco smuggling launched by the Chancellor in March 2000 - the share of the market taken up by smuggled cigarettes has been held at 21 per cent and that the growth of cigarette smuggling has therefore been stopped for the first time in a decade. In addition, the Government announced that in 2001-02:
Protecting indirect tax revenues, a paper published today, explains how the same strategic approach to tackling tobacco smuggling is being applied across the excise duty regimes, with the launch of a major strategy designed to tackle the misuse of rebated fuels, and the formation of a new Joint Spirits Fraud Task Force through which the spirits industry now provides direct support to front-line Customs officers to help them detect illicit and counterfeit spirits. The paper also reviews the new package of measures announced by the Government in October to reinforce the rights of cross-Channel shoppers and strengthen the fight against cross-Channel smugglers.
Protecting indirect tax revenues also sets out the first ever concerted strategy to tackle the VAT revenue losses, which have a wide variety of causes from deliberate fraud and avoidance to simple error, which have been a standing feature of the VAT system for more than a decade.
Supported by the deployment of 1,000 staff to key problem areas, Customs will expand the support they give to help businesses meet their VAT liabilities, while cracking down hard on those who choose not to comply, who engage in abusive tax avoidance schemes, or who try to defraud the revenue.
This strategy is designed to reduce the proportion of VAT which goes uncollected, and produce more than £2 billion per year in additional VAT revenues by 2005-06 which - instead of being lost - will go to support increased investment and improvement in the public services. This is the Government's aim, but in line with the audited approach underlying public finances, it is incorporating a lower figure in the Pre-Budget Report public finance forecast.
In March 2000, the Government launched its Tackling tobacco smuggling strategy, which is designed to put tobacco smuggling into decline by 2003, with £209 million provided for investment in almost 1,000 front-line staff and investigators, and a national network of x-ray freight scanners designed to detect bulk consignments of smuggled tobacco.
After the first year of the strategy, when Customs succeeded in slowing the previously rapid rate of growth in the UK illicit cigarette market and held its share of the total UK market to 21 per cent, the key target for 2001-02 was to slow that growth further and hold smuggled cigarettes to 22 per cent of the total UK market.
The second-year results show that Customs have exceeded their key target, restricting the illicit market share to 21 per cent, and thereby stopping the growth in the illicit market for the first time in more than a decade. Customs have also seized 2.6 billion cigarettes in 2001-02, making a total of more than 5 billion cigarettes seized in the first two years of the strategy. Of the 83 major excise smuggling gangs broken up by Customs, 60 were involved in the large-scale smuggling and supply of illicit cigarettes.
Customs have also achieved a further 25 per cent reduction in the amount of revenue evaded through the cross-Channel passenger smuggling of tobacco and alcohol, following last year's 75 per cent reduction.
As a result of this success, cross-Channel smugglers have increasingly sought to pose as shoppers in their attempts to evade detection. In October the Government announced a new package of measures designed to be fair for honest shoppers, tough on criminal smugglers, and clear about the distinction between the two (see Notes for Editors).
Protecting indirect tax revenues, a paper by Customs published today:
Protecting indirect tax revenues also sets out the Government's new strategy to reduce the long-standing VAT revenue losses caused by fraud, avoidance, non-compliance and the failure of businesses to register for VAT.
These losses - measured as the proportion of the VAT that should be collected - rose fastest in the early 1990s, but have stabilised over the past six years at 12 to 14.5 per cent. The Government is determined to reduce this shortfall using the same strategic approach that it has applied successfully in relation to losses in the excise duty regimes.
The Government believes that businesses that abuse the tax system must not be allowed to compete unfairly with those who abide by it. It also recognises there is a difference between those businesses which have genuine difficulty complying with the VAT rules, and those which deliberately bend or break them.
The new VAT strategy is therefore based on an integrated approach which will continue to improve the service that Customs offers to businesses, make it simpler and less costly for them to comply with the requirements of the VAT system, and crack down hard on those who continue to abuse the system through fraud, abusive avoidance schemes and persistent non-compliance.
The strategy will be supported by the deployment of more than 1,000 staff to the key problem areas over the next three years, with which Customs will:
The strategy will seek to stop the long-term growth in the losses as a percentage of the VAT that should be collected, and cut them to 12 per cent by 2005-06, thereby reducing the size of the problem to the levels of ten years ago. The measures contained in the strategy are designed to produce more than £2 billion per year in additional revenues by 2005-06. This is the Government's aim, but in line with the audited approach underlying the public finances, it is incorporating in the Pre-Budget Report finance forecast a lower figure of £1.4 billion per year by 2005-06.
To accompany Protecting indirect tax revenues, the Government has also placed in the libraries of the Houses of Parliament a technical paper, setting out the methodology which has been used to produce estimates of leakages within the VAT system, and updating the methodologies relating to estimates of fraud in the excise duty regimes.
Click here for copies of Protecting indirect tax revenues. Copies of relevant earlier papers, Tackling tobacco smuggling (published 22 March 2000) and Tackling indirect tax fraud (published 27 November 2001) are also available at http://www.hm-treasury.gov.uk/ and http://www.hmrc.gov.uk/.
Copies of Protecting indirect tax revenues and Customs' technical paper on the methodology of its estimates, Measuring indirect tax losses, are also available on request from: Analysis Division, HM Customs and Excise, 7th Floor Central, New King's Beam House, London SE1 9PJ.
The key measures which will deliver the VAT strategy are as follows:
To protect the rights of honest cross-Channel shoppers to bring back as much tobacco as they want, for their own use, the Government announced in October that:
To strengthen the action taken against smugglers, the Government also announced that:
The full text of the speech on 29 October 2002 by John Healey is available at www.hmrc.gov.uk/pbr2002/ce1.htm
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