New sanctions to tackle illicit tobacco duty evasion
Published 12 June 2023
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Who is likely to be affected
Individuals and businesses involved in the manufacture, distribution and sale of tobacco products.
This will include those who contravene the requirements of the Tobacco Track and Trace system.
General description of the measure
This measure provides new powers to HMRC for tougher sanctions for contravening the requirements outlined in ‘The Tobacco Products (Traceability and Security Features) Regulations 2019’.
The measure also builds on the existing successful collaboration between HMRC and Trading Standards, who will now be able to make referrals to HMRC where they find evidence that a contravention of the Tobacco Track and Trace system has occurred.
HMRC will manage the administration and issuing of the relevant sanctions under the new powers.
The sanctions operate on an escalating model for repeated behaviour which also reflects the quantity of illicit tobacco products detected.
Policy objective
To help tackle tobacco duty evasion, the government is introducing tougher sanctions to tackle the sale of illicit tobacco, with a focus on deterring those small-scale regular offenders who play a key role in street level distribution.
Those who sell only legitimate products and fully comply with Tobacco Track and Trace will benefit from a more level playing field where currently they are undercut by illicit tobacco suppliers.
Background to the measure
Although large criminal gangs coordinate the supply of illicit tobacco, most illicit sales are made by small scale operators, usually retail outlets and individuals. This makes the scale of illicit distribution difficult to contain.
High duty rates reduce the affordability of tobacco products and so support the government’s public health objective to reduce smoking prevalence. Illicit sales damage legitimate business, undermine public health and facilitate the supply of tobacco to young people.
At Budget 2020, the government announced a package of measures for tougher, more visible street level enforcement. The announcement included a grant of about £1 million to support Trading Standards’ anti-illicit tobacco projects. The announcement also announced plans to consult on new sanctions linked to the Tobacco Track and Trace system.
The consultation proposed the sanctions be used in collaboration with Trading Standards to enhance enforcement activity. Respondents supported both the introduction of tougher penalties and extension to Trading Standards.
Tobacco Track and Trace system was introduced in 2019 and gives HMRC the ability to monitor the manufacture and supply of legitimate tobacco products. This helps identify where genuine product is diverted towards the illicit market and prevents illicit products infiltrating legitimate supply chains.
In line with the government’s manifesto commitment, primary legislation setting out powers for the new sanctions was introduced in Finance Act 2022.
The provisions in Finance Act 2022 provide powers to make regulations to issue penalties of up to £10,000, to seize product involved in a contravention of applicable law, to exclude retailers from Tobacco Track and Trace system therefore restricting their ability to buy duty paid tobacco for retail purposes, and to make future administrative amendments to Tobacco Track and Trace system regulation.
HMRC has considered the comments in response to the consultation, and with Trading Standards has worked to develop the legal and operational requirements to implement the measure.
The Tobacco Products (Traceability and Security Features) (Amendment) Regulations 2023 will implement the new sanctions and confer investigation functions on Trading Standards.
Draft regulations were published for comment from 11 April to 23 May 2023.
The sanctions will be imposed and administered by HMRC based on referrals by Trading Standards. Trading Standards will carry out investigations and will be able to refer evidence of contraventions to HMRC for action.
Detailed proposal
Operative date
The measure will take effect from 20 July 2023.
Current law
The Tobacco Products Directive 2014 and its implementing legislation, The Tobacco Products (Traceability and Security Features) Regulations 2019, introduced track and trace, and security features for cigarettes and hand-rolling tobacco from 20 May 2019.
Section 93 Finance Act 2022 introduced primary legislation, giving powers to make regulations setting out new sanctions linked to Tobacco Track and Trace. The provisions provide powers to issue financial penalties, seize any tobacco products found at non-compliant premises and exclude retailers from Tobacco Track and Trace.
Proposed revisions
The instrument is an exercise of the powers in the Tobacco Products Duty Act, inserted by Finance Act 2022 to make regulations in relation to the Tobacco Track and Trace system and new sanctions for detections of illicit tobacco products.
It will amend the Tobacco Products (Traceability and Security Features) Regulations 2019, to provide for tougher sanctions for breaches of those regulations. These include:
- a financial penalty of up to £10,000
- forfeiture of legitimate stock where found alongside illicit tobacco
- removal on a temporary or permanent basis of a Tobacco Track and Trace ID
The amending regulations also give Trading Standards a discretionary function to investigate compliance with the Tobacco Products (Traceability and Security Features) Regulations 2019 and to share information with HMRC where breaches are uncovered.
In order for Trading Standards to exercise their investigative functions these regulations will be added to the list of enforcer’s legislation already set out in Schedule 5 of the Consumer Rights Act 2015.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 |
|---|---|---|---|---|---|
| empty | empty | empty | empty | empty | empty |
The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
These proposals have no impact on compliant individuals. They are designed to support action against the illicit tobacco market and associated criminality and to reduce associated harm to individuals, communities and legitimate business.
Customer experience is expected to remain broadly the same as this measure is aimed at non-compliant individuals. Compliant individuals will see no change to how they currently interact with HMRC. Given tougher and increased penalties, there could be an impact on family formation, stability or breakdown as a result of the financial impact of the sanctions.
Equalities impacts
There will be no effect on individuals who purchase tobacco legally.
Impact on business including civil society organisations
This measure may have a positive impact on compliant business as it will reduce the number of products available on the illicit tobacco market.
This measure is designed to support action against the illicit tobacco market and associated criminality and to reduce associated harm to individuals, communities, and legitimate business. Customer experience is expected to remain broadly the same as there is no change in how compliant businesses interact with HMRC.
This measure is not expected to impact civil society organisations.
Operational impact (£ million) (HMRC or other)
HMRC will incur costs to change IT systems. These have yet to be fully quantified but are estimated to cost up to £1.11 million.
Further work is ongoing to quantify HMRC staffing and administration related costs.
Other impacts
A justice impact test has been undertaken and there is expected to be minimal impact.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through ongoing stakeholder engagement and with Trading Standards.
Further advice
If you have any questions about this change, contact the Tobacco Sanctions Team by email: [email protected]
Declaration
Gareth Davies MP, Exchequer Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.