Excise fraud – a growth industry

Gavin McFarlane of Titmuss Sainer Dechert and London Guildhall University looks at the rising cost of duty evasion and observes that the government must start by being honest with the public if it is to have any hope of tackling excise fraud.

There is good reason to believe that fraud in the industries subject to excise duties is now reaching epidemic proportions. Measures introduced in the budget by the Chancellor of the Exchequer this spring mean that a packet of 20 cigarettes now costs around UK£4.20, a packet of small cigars UK£2.78, and 25 grammes of hand-rolling tobacco has risen in price by UK£0.25. The reaction from the tobacco manufacturers was, predictably, highly critical. The increases were a little above the figure of 5.5 per cent over inflation which the government has said is to be its policy towards tobacco duty. The manufacturers say, with some justification, that the increases in duty will simply exacerbate its fraudulent evasion. Gallahers has complained that the system of cigarette taxation operated in the UK is way out of line with what prevails in other European states and indeed the rest of the world. A representative of Imperial Tobacco commented recently that the incentive to smuggle will remain so long as the vast tax disparity exists; this was confirmed by the senior police officer at the port of Dover during a television interview. Around 25 per cent of all tobacco products sold in the UK are estimated to have been smuggled; the position is even worse for hand-rolling tobacco where the figure is now thought to be over 35 per cent. Much the same discouraging response to the duty increases was given by the alcohol industry. The Campaign for Real Ale stated after the budget that “yet another penny increase on the beer duty is an open invitation to the growing army of smugglers”. A director of the Wine and Spirit Association claimed that the increases in alcohol duty will make this kind of fraudulent evasion even more lucrative, “The consequences for the Chancellor are that by introducing this measure, he could actually end up losing more money than he takes.”