Minding the Tax Gap: cigarettes and whisky and...

Ah yes, sin taxes (sort of). The sort of taxes that the tee-total, non-smoker really rather prefers, and an issue that my friends at Liberal Vision bang on about at some length.Taking this in two parts;

Beer and spirits

Excise duties on alcohol are fairly easy to collect most of the time. After all, beer is brewed generally in big things called breweries - hard to move about, easy to find, and the profit tends to be in volume. Likewise for distilleries, especially as most people prefer to drink named brands. And for small breweries, producing under 60,000 hectolitres per annum (about 10 million pints), beer duty is charged at a lower rate anyway.

I have to note, on a personal level, as an ale drinker, it never ceases to amaze me how many HMRC staff like a drop of real ale - a small, illegal operation stands little chance of escaping, I suspect.

Much of the tax gap is linked to smuggling, and the means are fairly obvious, amounts carried in on lorries, individuals bringing in amounts way beyond what might reasonably be considered sufficient for personal use only - that sort of thing. In a recession, when governments are looking for means to raise funds, excise duties are an easy target, reducing the incentive to smuggle anyway. Only where a significant price difference appears - French wine, perhaps - does an obvious incentive emerge.

For those reasons, and doubtless many more, the tax gap in 2009/10 for beer and spirits duties is estimated as being no greater than £1.2 billion, and probably in the region of £0.7 billion.

Cigarettes and tobacco

Whilst alcohol duty losses are probably at the tolerable end of the scale, tobacco duties are different. I would guess that it is easier to smuggle something that can't be easily broken and has a relatively high profit margin. The United Kingdom has one of the highest levels of tobacco duty in the world (in 2010, 24% of the retail price plus £119 per thousand cigarettes), and given that smokers tend to feel a bit persecuted by government anyway, avoiding tax might be seen as a legitimate response (NOTE: 'The View from Creeting St Peter' does not condone such behaviour, for fairly obvious reasons).

Given the tax losses from beer and spirits duties, the estimated loss in terms of tobacco duty evaded might surprise you. Yes, as noted above, the rates are high, yet the incidence of smokers relative to drinkers in the populations is relatively low. HMRC estimates the tax lost as being approximately £1.7 billion, and is particularly concerned about duties on hand rolling tobacco, where they suggest that the illicit market share is between 41 and 50%. Yes, nearly half of all rolling tobacco consumed in this country is probably illicit and, to make matters worse - or better if you're the Government - the figures have been improving significantly, from between 55 and 64% in 2005/06.

This offers an interesting challenge for those that believe that sin taxes are a legitimate way to claw back the public monies spent on additional healthcare costs brought about by drinking and smoking. If you take such a view, is it worth increasing the number of stops at our ports, levying higher fines? And, if you take the viewpoint that employing staff to do so is a good investment, what length of increased monitoring is appropriate?

Oh yes, and one last point of interest. For those of you who wonder what happens to the cigarettes and hand-rolling tobacco that gets confiscated, they get burned as fuel for the National Grid...