Committee of Public Accounts

Press Notice No. 3 of Session 2002-03, dated 10 January 2003


Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today that Imperial Tobacco, which produces half of the cigarettes imported illicitly, must co-operate more fully with Customs to help reduce the enormous losses in revenue through tobacco smuggling.

Mr Leigh was speaking as the Committee published its 3rd Report of this Session, which examines Customs and Excise's strategy for combating tobacco smuggling, including the co-operation they receive from cigarette manufacturers.

The Committee found that smuggling of cigarettes is costing £2.8 billion a year in lost revenue (£3.5 billion if handrolled tobacco is included). Even if Customs meet their target for 2004-05 of limiting cigarette smuggling to 18%, there will still be a loss of VAT and duty of almost £2 billion annually. To reduce it further at tolerable cost will continue to require the full co-operation of the UK cigarette manufacturers in the supply of information and in applying export policies which discourage smuggling.

Since 1997 there has been a marked increase in the number of cigarettes manufactured by Imperial Tobacco being smuggled back into the UK, which has coincided with a substantial increase in the company's international profits. The company acknowledged that Customs had seized large quantities of their cigarettes in 2000-01 although they disputed the precise figures. On the basis of Customs' estimates, the tax and duty lost through smuggling from the two main Imperial brands affected was some £1.4 billion in 2001-02.

Against this background, Customs and Excise were understandably concerned about a perceived lack of co-operation from the company in assisting with their investigations into this state of affairs. The company need to take a positive approach to preventing smuggling, notably by providing more timely responses to Customs' requests for information and by exercising greater discretion in their choice of export markets. It cannot help Imperial Tobacco's good name if there is a question mark over their attitude in this matter.

Customs aim to agree Memoranda of Understanding with the manufacturers. They had done so with Gallaher, and have since done so with British American Tobacco. Imperial Tobacco need to offer a similar level of assurance on their business practices, so Customs can have sufficient confidence to complete a Memorandum with that company too. Pending the completion of a Memorandum, Customs should have unfettered access to relevant information held by Imperial, which should in turn be accessible to the Comptroller and Auditor General so that he can report as necessary to Parliament.

Customs have a difficult balance to strike in facilitating legitimate trade while at the same time deterring smuggling through seizure of assets or prosecution. Since 1999-2000 Customs have initiated fewer prosecutions, concentrating on those who smuggle significant quantities of cigarettes, while relying on seizure of vehicles and goods for lesser cases. The growing level of evasion suggests that Customs need to prosecute some of those engaged in lower level smuggling in order to emphasise the criminal nature of this offence, and act as a greater deterrence to others.

Mr Leigh said today:

"Imperial Tobacco's apparent reluctance to help Customs tackle smuggling is highly unsatisfactory. They persisted in exporting large volumes to places like Andorra and Kaliningrad when they must have known that the cigarettes could not possibly be for those domestic markets. And when Customs asked legitimate questions about this activity Imperial's approach was to fob them off. The company has a public duty to co-operate fully to help reduce these enormous losses to the public purse."

This report can be accessed via the internet from around 11.00 am on the day of publication.