Consultation outcome

Sanctions to tackle tobacco duty evasion: summary of responses

Updated 20 July 2021

1. Executive summary

Type of respondent	Number of responses
Public health bodies or anti-smoking groups	5
Local Government (including Trading Standards or other enforcement agency)	14
Manufacturers of tobacco products and their representative bodies.	11
Retail sector	4
Private Individuals	2
Other (Academic)	1

Details of the consultation

The public consultation sought views on proposals for additional sanctions to tackle tobacco duty evasion.

This report provides an overview of the responses received to the questions in the consultation document and the government’s response.

Annex A lists the respondents to this consultation. The government is grateful to everyone who took time to respond. A total of 37 responses were received, which can be broken down into the following categories:

Type of respondent	Number of responses
Public health bodies or anti-smoking groups	5
Local Government (including Trading Standards or other enforcement agency)	14
Manufacturers of tobacco products and their representative bodies.	11
Retail sector	4
Private Individuals	2
Other (Academic)	1

Throughout the consultation period, HM Revenue and Customs (HMRC) Tobacco Policy section continued to discuss the operational practicalities of the proposals both with internal and external operational colleagues. Feedback from these discussions has been considered as part of the consultation response.

2. Introduction

Background

Since 2000, the government’s anti-illicit tobacco strategies have successfully reduced the tobacco tax gap from 22% to 9% in 2018 to 2019. Revenue losses reduced from an estimated £3.4 billion to £1.9 billion per year over the same period.

This is a significant achievement, but tobacco fraud remains a problem, with HMRC estimating that 2.5 billion illicit cigarettes and 3,500 tonnes of illicit hand-rolling tobacco are consumed in the UK each year. These illicit sales damage legitimate business, undermine public health and facilitate the supply of tobacco to young people.

HMRC’s long-term success has been largely built on our ability to focus efforts on the criminal elements behind the fraud who control the top-level national and international networks, disrupting their distribution supply chains and increasing their operating costs.

Although international and national criminal gangs coordinate the supply of illicit tobacco, most illicit sales in the UK are made by small scale operators. Within this group there remains a perception that tobacco is low level fraud with perpetrators facing minimal risks.

Despite this, in recent years there has been an increasing trend of sellers of illicit product holding smaller quantities of product. This is a deliberate tactic to reduce their risks, as it can make criminal prosecution a disproportionate response and HMRC’s existing civil penalties less effective in changing behaviours and uneconomic to collect.

In 2017, a consultation on sanctions to target small scale repeat offenders established an appetite for a tougher approach. The majority of respondents believed that additional sanctions, including increased financial penalties, would deter repeat offending. Respondents also expressed interest in sanctions that could be jointly applied by HMRC and Trading Standards.

Following that consultation, HMRC undertook to work with other enforcement agencies on the design of possible sanctions and to assess how these could be introduced alongside other policy developments, such as tobacco traceability.

Since May 2019, the UK’s track and trace system (TTS) has required every packet of cigarettes and hand-rolling tobacco manufactured in, or imported into the UK, to be marked with a unique identifier (UID) and anti-counterfeiting security markings. The installation of scanning technologies throughout the supply chain allows each dispatch and receipt of tobacco products to be recorded.

An ID Issuer (appointed by HMRC) registers all economic operators and operators of first retailer outlets within the supply chain, issuing them with an economic operator identifier (EOID). Once registered, the EOID can then be updated with identifiers for each facility where tobacco products are manufactured, stored or placed on the market.

Illicit tobacco is tobacco on which UK duty has not been paid when legally due. It comes in many forms but can be broadly grouped in to one of 3 categories: smuggled unregulated products not intended for sale in the UK; genuine market leading brands which are duty paid overseas and smuggled into the UK; and counterfeit tobacco products. Products within each category will not comply with the requirements of the TTS, as they will not carry a scannable UID or genuine security markings.

The consultation sought views on how we could use TTS as a tool to target illicit tobacco and provide for tougher, more effective, sanctions to tackle and deter those small-scale regular offenders who play a key role in street level distribution.

The potential new sanctions that were consulted on were:

• extending the ability to enforce selected sanctions attached to TTS to Trading Standards
• a new penalty of up to £10,000 for holding or possessing products that do not comply with TTS requirements
• power to seize any TTS compliant tobacco products where they are found alongside product that does not comply with TTS requirements
• the withdrawal of the TTS EOID from those retailers who are found with products that do not comply with the track and trace requirements
• the withdrawal of the TTS EOID from retailers that have had their ability to sell tobacco restricted or curtailed under other tobacco control legislation

Two possible models were included in the consultation to demonstrate how the new penalties and additional sanctions could be applied:  

Penalty table 1

	New penalty (Category A)	Estimated current duty based sanction (Category A)	New penalty (Category B)	Estimated current duty based sanction (Category B)	New penalty (Category C)	Estimated current duty based sanction (Category C)	New penalty (Category D	Estimated current duty based sanction (Category D)
1st Offence	£2,500	£1,000	£5,000	£3,000	£7,500	£5,000	£10,000	£10,000
2nd Offence	£5,000	£1,500	£7,500	£4,500	£10,000	£7,500	£10,000	£10,000
3rd Offence	£7,500	£1,500	£10,000	£4,500	£10,000	£7,500	£10,000	£10,000
4th Offence	£10,000	£1,500	£10,000	£4,500	£10,000	£7,500	£10,000	£10,000

Penalty table 2

	New penalty (Category A)	Seize genuine (Category A)	Remove EOID (Category A)	New penalty (Category B)	Seize genuine (Category B)	Remove EOID (Category B)	New penalty (Category C)	Seize genuine (Category C)	Remove EOID (Category C)	New penalty (Category D)	Seize genuine (Category D)	Remove EOID (Category D)
1st Offence	£2,500	N	N	£5,000	y	N	£7,500	Y	N	£10,000	Y	N
2nd Offence	£5,000	Y	N	£7,500	Y	N	£10,000	Y	Temp	£10,000	Y	Temp
3rd Offence	£7,500	Y	Temp	£10,000	Y	Temp	£10,000	Y	Temp	£10,000	Y	Perm
4th Offence	£10,000	Y	Perm	£10,000	Y	Perm	£10,000	Y	Perm	£10,000	Y	Perm

Category A: less than 100 packets

Category B: 100 to 299 packets

Category C: 300 to 499 packets

Category D: 500 or more packets

3. Responses

Extending track and trace enforcement to Trading Standards

Question 1: should Trading Standards officers have the ability to issue compliance notices and the discretion to deactivate EOIDs?

1.1 All respondents supported the proposal of Trading Standards officers having the ability to issue TTS compliance notices and the discretion to deactivate EOIDs. Many noted the important role Trading Standards already play in tobacco control and their expertise in acting against those who sell illicit products.

1.2 Several respondents highlighted that unlike HMRC the local focus that Trading Standards officers could provide would assist in repeated enforcement which is crucial in suppressing the illicit trade in tobacco.

Knowing that local enforcement teams have the powers to deactivate EOIDs would be a greater deterrent, providing additional positive pressure on retailers to stay within the law.

1.3 A number of responses highlighted that Trading Standards officers are already well versed in the issuing of compliance notices and sanctions under a range of allocated powers. It was also noted that TTS sanctions would represent a technically complex set of regulations to enforce and so it was essential Trading Standards officers were provided with the correct equipment and given the appropriate training and support.

1.4 Several respondents commented that the proposal would only tackle non-compliance within the legitimate supply chain and not illicit sales made away from retail premises. It was noted that the operating procedures of both HMRC and Trading Standards would need to be aligned to ensure that the most appropriate sanctions are deployed.

Question 2: the Tobacco Products (Traceability and Security Features) Regulations 2019 lists the circumstances under which an EOID can be deactivated. Which, if any, of these circumstances would not be appropriate for Trading Standards to administer and why?

2.1 All respondents agreed that Trading Standards should have the power to deactivate EOIDs in all circumstances listed in the 2019 regulations, although 2 areas of concern were highlighted. Contraventions that occur above retail level, where issues are likely to be technically complex and cases where HMRC is conducting its own investigation in fraudulent activities.

To address these concerns respondents felt that a robust 2-way communication process was needed between HMRC and Trading Standards.

Question 3: are there any other considerations or safeguards relevant to the extension of TTS enforcement powers to Trading Standards?

3.1 Almost all respondents noted that the extension of HMRC’s TTS enforcement powers to Trading Standards would be technically complex, with numerous challenges to overcome including; whether any additional powers of entry or inspection would be needed; parity of treatment; interactions with existing Department of Health and Social Care legislation and a complex mix of devolved tobacco licensing powers.

In addition, robust intelligence and data sharing would be essential and must be supported by the appropriate information gateways. New operating processes would have to be agreed covering all likely compliance scenarios. Finally, access to equipment and IT systems would be needed.

3.2 HMRC’s internal discussions and those with external operational staff also highlighted the legal and operational complexities involved.

Government response

The government notes that all respondents support proposals to extend HMRC’s TTS enforcement powers to Trading Standards. However it is also alive to the operational concerns highlighted and the legal complexities involved.

The extension of HMRC powers would be a new approach and with that innovation come significant challenges. The government recognises that further detailed discussions are needed to overcome these challenges and ensure that any new powers given to Trading Standards are both usable and effective.

The government has therefore decided to adopt a two staged approach. To demonstrate its commitment to the proposals, legislation will be introduced in Finance Bill 2021/22, giving HMRC the ability to extend its TTS powers by way of a Statutory Instrument.

HMRC will continue to work at pace with Trading Standards, local authorities, OGDs and the Devolved Administrations to address the issues identified. With the aim of putting in place the necessary structures, processes and systems, in order that regulations extending the powers can be laid once Finance Bill 2021/22 has received royal assent.

The government recognises TTS sanctions relating to the deactivation of EOIDs can only be effective against illicit sales made at registered retail premises.

However, it remains confident that the package as a whole will provide tougher, more effective sanctions than those currently available to tackle small-scale offenders who operate outside of TTS. HMRC retains its other tobacco sanctions that can be used against those that deliberately evade duty, these include criminal prosecution.

A new track and trace-related penalty for holding non-compliant products

Question 4: excluding tobacco products brought into the UK by individuals as part of any travellers’ allowance, are there any circumstances where a business or private individual could legitimately hold non-compliant TTS products? What reasonable evidence could be provided to show this legitimate purpose?

4.1 Respondents agree that the circumstances where a business or individual could hold non-compliant TTS products in the UK would be limited.

4.2 Tobacco industry representatives highlighted some circumstances where their staff or service providers may hold non-compliant TTS products (including counterfeit) for testing, demonstration and training purposes.

Or where product is held in the UK but it is not intended for consumption here, either for the purpose of destruction or export. Where this was the case it would be likely that a ‘letter of authority’ or other standard business records would be able demonstrate a legitimate business reason.

4.3 The point was also made that some specialist tobacconists may hold stocks of rare or vintage cigars for many decades meaning it would pre-date the TTS packaging requirements.

Question 5: do you think the penalty model outlined in Table 1, with its initial fixed penalty amounts based on bands and previous compliance, would be a proportionate response?

5.1 All respondents supported the introduction of new penalties. Some respondents felt the proposed model could be an effective and proportionate response. However, the majority felt the suggested model was too lenient and that it allowed those who contravene the rules too many chances before they attract the maximum penalty. This could result in a disproportionate response compared to profits that could be made from illicit sales.

The current model is simply is not enough of a deterrent to combat the activity effectively.

5.2 A couple of respondents noted that penalties were only effective if they were paid. Increasing penalties was only likely to be an effective sanction against retailers who ‘dabble’ in illicit sales but it was unlikely to impact those who operate entirely outside the legitimate supply chain. It could therefore be seen as punitive on small retailers.

5.3 Some Trading Standards responses highlighted operational issues in determining who should be held liable to the penalty. Often within retail premises where illicit tobacco is sold, it can be difficult to establish who is responsible and so who is liable, the owner or sales assistant.

Question 6: How could the model in Table 1 be altered to be more effective in combatting illicit tobacco activities?

6.1 In line with the responses received to Question 5, a majority of respondents including; the tobacco manufacturers, public health groups and local authorities suggested amending the proposed model in favour of tougher penalties.

6.2 Public health groups recognised that the model was focussed solely on enforcement and that we should not lose sight that the first offence is a ‘teachable moment’ to provide education on the impact of illicit tobacco on the local community.

Government response

In response to the comments received to Question 5 the government notes the support for a fix penalty approach. However it takes onboard comments that penalty amounts should increase more quickly for those who reoffend.

In line with the two staged approach, legislation will be introduced in Finance Bill 2021/22 for a new TTS related penalty for holding or possessing non-compliant products. HMRC will continue to refine the penalty model to ensure a tougher yet proportionate approach. An updated model will be published for consultation, along with details of who shall be held liable, within the future draft regulations.

The government notes there are limited circumstances where a business or private individual could legitimately hold non-compliant TTS products. It will ensure suitable exemptions are drafted into the regulations. These exemptions will be subject to holders of such products being able to provide business records to demonstrate the exemption applies.

Other tobacco products are not currently captured by TTS requirements, although it is anticipated that they will be from 2024. The government notes the comments regarding the supply of vintage, aged or rare cigars and will consider how these requirements could be met in the future.

HMRC will explore how best to maximise the opportunity for education within the future operational guidance.

Seizure of TTS compliant products found alongside illicit product

Question 7: are there any circumstances where an economic operator or first retail outlet could legitimately hold non-TTS compliant product, alongside compliant product, at a TTS facility?

7.1 This question generated similar responses to those to question 4, with respondents foreseeing limited scenarios in which both compliant and non-compliant product could be legitimately held together at a facility covered by an EOID.

Where this could occur the consensus was that it should be the responsibility of the economic operator to ensure the proper segregation of products and that on request of an officer they should be able to provide evidence to support the legitimate purpose.

7.2 Respondents from the tobacco industry raised the point that since the retailer is not required to scan product onto their premises, they may be unaware of any traceability problems with legitimate stock.

Question 8: would the power to seize TTS compliant product, where found alongside noncompliant stock, be an effective deterrent to tobacco fraud? Please provide your reasoning.

8.1 Respondents were in favour of a new power to seize TTS compliant product where found alongside non-compliant stock. They agreed this action would disrupt the business’ daily activities and replacing the lost legitimate product could be materially more expensive than replacing illicit product or the associated financial penalties for dealing in illicit product. It was noted that this would not be effective against those that deal solely in illicit products.

Seizing TTS compliant stock where found alongside non-compliant stock would send a very strong message to retailers and be an effective deterrent to tobacco fraud.

8.2 Trading Standards and retail respondents highlighted potential operational challenges with the physical removal and storage of tobacco in larger quantity. Some tobacco manufacturers also highlighted potential ownership issues as some supply models mean that the stock held in shops could belong to the supplier until it is sold.

Government response

The government welcomes the broad support for this proposal and can see its benefits as an effective deterrent. It will introduce powers within Finance Bill 2021/22 to make TTS compliant stock liable to forfeiture in certain circumstances.

The government believes there is minimal scope for retailers to unwittingly be in possession of non-compliant stock, as any traceability issues would most likely have been identified further up the supply chain. However, safeguards will be built into operational procedures and guidance to ensure innocent parties can be dealt with under reasonable excuse provisions.

HMRC will continue its discussions with stakeholders to ensure process can account for the operational and ownership issues highlighted.

Withdrawing EOIDs on a temporary or permanent basis

Question 9: do you agree that where non-TTS compliant product is discovered at a facility covered by an EOID, on more than one occasion, then the corresponding EOID should be deactivated? Are there any circumstances where this may not be appropriate?

9.1 Respondents agreed there should be zero tolerance for repeated contraventions at retail level and that EOID’s should be deactivated.

Where non-TTS compliant product is discovered without legitimate business reasons, the EOID should be deactivated.

9.2 Tobacco manufacturers and retailer groups noted that operational guidance should ensure that all decisions take into account the circumstances highlighted in question 4.

9.3 Some local authorities felt this approach could be inconsistent with existing TTS legislation that allowed 3 regulatory breaches within 24 months before deactivation of an EOID. Additionally, they highlighted the need for future processes to include careful consideration of an individual’s motivation before taking action, including any potential links to poverty/financial insecurity.

Question 10: would you agree that a period of 6 months would be an appropriate length of temporary EOID deactivation? Are there any circumstances when withdrawal should be longer or even permanent? Please provide your reasoning.

10.1 Responses were mixed, although a majority felt that a 6-month deactivation period would be the appropriate response for a first contravention. There was strong support for making deactivation permanent where a second contravention took place after a temporary deactivation.

If after reinstatement of an EOID following a temporary deactivation further instances of non-compliance are uncovered then the subsequent withdrawal should be permanent.

Question 11: what appeals processes do you think are necessary before an EOID can be deactivated? Do you think a warning notice should be required in all cases?

11.1 The consultation sought views about how these sanctions could work in practice. The following highlights some of the comments received.

11.2 Trading Standards and public health groups suggested that the appeals process needs to be simple and rapid in order to minimise the amount of time that the business can remain trading.

“The appeals process needs to be as simple as possible, and rapid, as otherwise the business would, it is assumed be able to continue to legally purchase tobacco for sale.”

11.3 Opinions on whether a warning notice should be required were split. Those in favour suggest it would be good practice to issue compliance notices as it would help create a compliance history and may be helpful for later actions.

In was noted that similar practices were already applied by Trading Standards in their enforcement of other delegated powers. Respondents who thought a warning notice should not be required said that it would introduce an additional step which would soften the effectiveness of the sanction.

Government response

The government considers that six months would be the most appropriate length of time for the temporary removal of an EOID. The government will continue to consider if there are circumstances where it would be proportionate to seek a longer period of removal, with the necessary appeals processes in place. It is the government’s intention for these sanctions to align with other sanctions in HMRC and to reflect a proportionate approach. Work is ongoing in this area.

The government notes that there is a difference between economic operators failing to satisfy the regulatory requirements of TTS and those who knowingly source illicit products for the purpose of retail. There are also limited hardship considerations that can be given to cases that involve excise fraud.

The government agrees that a warning letter should be issued with the first contravention which details the escalation of the sanctions, including the possible de-activation of their EOID.

Question 12: do you think the sanctions model in Table 2 could be effective in combatting illicit tobacco activities? Can you suggest how this model could be altered to make the sanctions more effective?

12.1 Responses were similar to those received for question 5, respondents supported the introduction of the new sanctions model but a significant number felt it was too lenient and allowed too many chances before additional sanctions were applied.

12.2 Comments were made about the need for an effective communications strategy to ensure that people understand their obligations.

The sanctions will only act as a true deterrent if they are known about through [an] effective communications strategy and this would lessen the likelihood of a suspected offender claiming lack of knowledge of the new enforcement tool and sanctions.

Government response

The government notes the support of the proposed model but takes on board comments that the sanctions should increase more quickly for those who reoffend. As with the penalty proposals, HMRC will continue to refine the proposed model to ensure a tough yet proportionate approach. A revised table of additional sanctions will be published for consultation with the future draft regulations.

The government acknowledges that sanctions are designed to change behaviours. We will explore how best to maximise the opportunity for education within the future operational guidance.

Deactivation of EOIDs for failure to comply with health regulations

Question 13: where a retailer is in receipt of a banning order preventing tobacco sales or has been excluded from a national tobacco licencing scheme for persistent non-compliance, do you think Trading Standards should have the ability to deactivate the retailer’s EOID for the period that they are excluded from making tobacco sales?

13.1 Respondents unanimously agree with this.

We really welcome the element of the consultation document which recognises the importance of tobacco legislation in protecting health as well as reducing duty evasion.

13.2 Some Trading Standards and local authority responses highlighted technical complexities, with challenges to overcome including the interaction with existing powers such as banning orders and devolved licensing powers.

Question 14: how would deactivation of a retailer’s EOID in these circumstances help tackle tobacco duty fraud?

14.1 Respondents generally thought that linking offences would send a strong message that non-compliance of any form would not be tolerated and these actions would directly impact tobacco duty evasion.

[Deactivation of an EOID] would provide a further deterrent to illicit tobacco sellers.

Deactivation of a retailer’s EOID in these circumstances will help tackle tobacco duty fraud as it clearly indicates how serious a crime it is.

14.2 A number of respondents support the idea of linking the EOID to both a retail premises and an individual, so retailers who have the EOID removed cannot simply ask another person to apply on their behalf and continue to trade from the same location.

Government response

The government notes that all respondents support the proposals. However, it is also aware of the legal complexities involved and that further detailed discussions are needed to overcome these challenges and ensure that any new powers are both usable and effective.

As part of the two staged approach, HMRC will continue to work at pace with Trading Standards, local authorities, OGDs and the Devolved Administrations to clarify the issues identified.

4. Next steps

Alongside this summary of responses, we have published our draft primary legislation.

HMRC will continue to work at pace with Trading Standards, local authorities, OGDs and the Devolved Administrations to address the issues identified. With the aim of putting in place the necessary structures, processes and systems, in order that regulations extending the powers can be laid once Finance Bill 2021/22 has received royal assent.

We welcome comments on our draft legislation.  

Annex A: List of stakeholders consulted

HMRC is grateful to the following who provided written response to the consultation.

1. ASH Wales

2. AITS’s ( Association of Independent Tobacco Specialists )

3. ASH (Action on Smoking & Health)

4. Association of Convenience Stores Limited (ACS)

5. British American Tobacco UK Limited

6. Chartered Trading Standards Institute

7. Director of Public Health

8. Durham County Council

9. Federation of Wholesale Distributors (FWD)

10. Fresh and Balance

11. Gawith Hoggarth & co

12. Hunters & Frankau Limited

13. Imperial Tobacco Ltd

14. ITPAC

15. JTI UK

16. Kirklees Public Health

17. Leeds Public Health

18. National Business Crime Centre

19. National Federation of Retail Newsagents

20. NE Lincs Wellbeing Service

21. Petrol Retailers Association

22. Philip Morris Limited

23. Public Health Doncaster

24. Public Health England & Trading Standards NE & Yorkshire Region

25. SCOTSS National Coordinator (Society of Chief Officers of Trading Standards)

26. Smoke Free Newcastle

27. Southampton City Council Trading Standards

28. Staffordshire Trading Standards

29. Suffolk Trading Standards

30. TMA (Tobacco manufacturers Association)

31. Trading Standards East Midlands

32. Trading Standards North East England

33. Trading Standards North West

34. Trading Standards Wales

35. University of Bath Tobacco Control Research

HMRC also received 2 responses from private individuals.