Sin Taxes’ Yield More than Doubles to £2.6bn

Treasury is cashing in on the UK’s smokers and drinkers, says UHY Hacker Young

THE ADDITIONAL REVENUE collected from HMRC’s investigations into the underpayment of ‘sin taxes’ on alcohol and cigarettes has more than doubled in a year to £2.6bn in 2017/18, up from £1.25bn the previous year.

The rise in receipts from these tax investigations comes as price increases drive demand for smuggled and bootleg cigarettes and alcohol, to avoid paying full excise duty on them, according to UHY Hacker Young figures.

The latest HMRC data shows that the UK tobacco tax gap stands at £2.5bn in 2016/17, up from £2.4bn the previous year. The UK has one of the highest tax rates in Europe on cigarettes, with tax making up approximately 84% of the average cost of cigarettes in the UK.

In the Autumn budget 2017, Chancellor Philip Hammond announced a 2% above inflation tax increase on cigarettes, following the May 2017 ban on the sale of 10-packs of cigarettes in the UK.

Examples of successful investigations into unpaid excise duty in the past 18 months include:

• Ten men have been arrested in Birmingham for running a bootleg cigarette factory, which cost HMRC £138m in lost excise duty every year. The site was capable of producing 35m cigarettes a month.
• Two London shop owners evaded £46.5m in excise duty over five years, after smuggling wine in from Italy to sell in their shop. In June 2017 a man was jailed following an investigation, after owing up to £359,000 in excise duty from attempting to smuggle 1.6m counterfeit cigarettes into the UK.
• In July 2017, HMRC shut down an illegal vodka distillery in Liverpool, which owed up to £45,000 in excise duty.

Clive Gawthorpe, tax partner in UHY Hacker Young’s Manchester office says: “Extra compliance revenue from these ‘sin taxes’ doubled in the past year – but the black market for these products is still thriving. Following the tax hikes on cigarettes and alcohol, and the resulting price increases, taxpayers who are unwilling to pay the full amount of duty could be driven to smuggling these sin products.”

He added: “A hard Brexit could also contribute to increased smuggling as leaving the customs union would result in importers paying an extra levy to move goods into the UK, resulting in higher prices. The personal allowance would also likely be dropped to old duty-free levels, which could lead to an increase in smuggling amongst individuals.”

The rise in ‘sin tax’ take is partly driven by the Alcohol Wholesaler Registration Scheme (AWRS), introduced to reduce the wholesale of illicit alcohol. This makes retailers responsible for buying from registered sources.