UK Considers Tougher Sanctions Against Illicit Tobacco as it Prepares to Leave EU

The UK tax authority, HM Revenue and Customs (HMRC), has unveiled proposals for tougher sanctions against small-scale sellers of illicit tobacco, while at the same time putting in place its post-Brexit tobacco supply chain control measures.

The sanctions are linked to the UK’s track and trace scheme, which has been in force since May 2019 as one of the provisions of the EU Tobacco Products Directive (TPD). Under the scheme, every packet of cigarettes and hand-rolling tobacco manufactured in, or imported into the country must be marked with a unique identifier (UID) and anti-counterfeiting security features. These provisions also apply to all EU member states as part of an EU-wide traceability system.

The system allows compliant products to be distinguished from different types of illicit products (ie. smuggled, unregulated products not intended for sale in the UK; genuine brands that are duty-paid overseas and smuggled into the UK; and counterfeit goods), in that illicit products will not carry a scannable UID or genuine security markings.

‘The timings involved with the implementation of the UK’s track and trace system for tobacco products meant it was not possible to introduce anything other than basic sanctions at launch in 2019’, said a consultation document released by HMRC at the beginning of December. ‘It was decided the best approach was to fully embed this system before looking again at options for tougher sanctions.’

The small-scale retailer problem

The HMRC described the problem with small-scale illicit sales in the consultation document: ‘over recent years there has been an increasing trend of illicit sellers holding smaller quantities of product. This is a deliberate tactic to reduce their risks further, as it can make prosecution a disproportionate response and civil penalties less effective in changing behaviours and uneconomic to collect’.

‘For example,’ it continued, ‘a retailer may sell 10 packets of illicit hand-rolling tobacco each day but never keep more than two week’s supply (around 100 packets) on their premises. Uninterrupted, that retailer would sell 2,600 illicit packets a year, evading approximately £20,000 in excise duty (excluding VAT). Assuming the retailer makes £1 on each illicit sale, they would make a profit of £2,600. 

‘The duty evaded on 100 packs is an estimated £800, an amount HMRC is less likely to prosecute over. Furthermore, the maximum civil sanction (assessment and penalties) for a first offence would be in the region of £1,200, a figure which cannot guarantee a change in behaviour given the potential profits. 

‘We estimate there are 44,000 retailers selling tobacco in the UK. The prospect of that same low-level offender being identified for a second compliance intervention under HMRC’s national (risk-driven) targeting processes would be low. Even if a follow up visit was made, the outcome would most likely remain the same if the volumes of illicit product involved remained low’, advised HMRC.

Proposed solutions

Among the proposals described in the consultation document to address this problem is the extension of HMRC traceability enforcement powers to Trading Standards officers. These officers typically work at a local level, checking whether products are safe and labelled correctly, and prosecuting traders who break the law. HMRC believes that the Trading Standards’ ability to provide focused local activity and visibility, combined with local communications and knowledge, can help improve the public’s perception of effective enforcement.

A second proposal is to give enforcement agencies the power to seize any track and trace compliant tobacco products when they are found alongside products that do not comply with those requirements. HMRC currently only has powers of forfeiture over illicit products found on retail premises, which can mean that retailers who sell small quantities of illicit tobacco alongside legitimate supplies do so with minimal risk of losing their legitimate stocks. 

A new power to seize both compliant and non-compliant product would therefore be a significant disincentive to those retailers who persistently engage in illicit sales, as it would disrupt the business and the cost of replacing the lost legitimate product would be materially more expensive than the current penalties.

A third proposal is to revoke the economic operator identifier (EOID) of non-compliant retailers, which must be presented before they can buy tobacco products wholesale. The wholesaler must scan the products out of their facility, recording them against the retailer’s EOID. This is where the retailer’s obligations end and there is no requirement under the track and trace scheme for them to scan or record the tobacco sales they make to final consumers. 

A final proposal is to introduce a new penalty of up to £10,000 for holding or possessing products that do not comply with the track and trace requirements.

HMRC will take comments on the document at [email protected] until 23 February 2021, and would like to hear from representatives of businesses involved in the manufacture, distribution and sale of tobacco products, other government departments, devolved administrations, local authorities, enforcement agencies and public health groups.

Post-Brexit track and trace

In parallel to its plans for tougher sanctions against illicit trade, HMRC has issued a policy paper describing a measure that will give the UK full regulatory control of the traceability and security feature schemes on tobacco products in the UK. In doing so, the measure will enable the continued operation of these schemes following the end of the transition period when the UK will lose access to the EU system (ie. on 31 December 2020). 

In addition, the measure will implement obligations under the Northern Ireland Protocol, which requires the EU TPD to continue to apply in Northern Ireland, therefore requiring businesses in this country to form part of both systems.

Like the traceability system under the EU TPD, the new standalone system in the UK will continue to track tobacco products manufactured in or imported into the UK to the first retailer, through the use of a UID associated with every packet scanned throughout the supply chain. What will change, however, is that the track and trace data will be submitted to a new gateway in the UK – as well as to a new gateway plusthe EU system for products in Northern Ireland.

The supplier of the UIDs for UK products will continue to be De La Rue, which has been issuing the UIDs since May 2019, and which signed a new contract in May 2020 with HMRC to extend its solution to a full national scheme following the Brexit transition period.