HMRC investigations into underpaid ‘sin taxes’ yield £1.6 billion

This publication was covered in City AM, Accountancy Age, economia, The Spirits Business and The Times on 21 March 2016.
  • 6% more than the £1.5 billion raised last year

According to our research, HMRC investigations into underpayments of ‘sin taxes’ on cigarettes, alcohol yielded £1.63 billion in extra tax this year, up 6% on the £1.54 billion raised the year before.*

HMRC is under pressure to maximise the tax take and cracking down on alcohol and cigarette smugglers avoiding excise duty is one of the most lucrative areas for HMRC investigations.

As cigarettes and alcohol have become increasingly highly taxed in the UK compared to other jurisdictions smuggling these products into the UK and avoiding UK duty has become ever more profitable. Tax on cigarettes makes up about 80% of the cost price.

Cigarette smuggling is a persistent problem in the UK. HMRC estimates that as many as 6 billion cigarettes consumed in 2014-15 were purchased on the black market and so no duty was levied on them. This is represents 14% of the total UK market for cigarettes.**

The incidence of smuggling is even greater with hand rolling tobacco – where HMRC estimates 4.5 million tonnes or 40% of the UK market is purchased illicitly.

Alcohol smuggling is also a significant issue for HMRC. In 2014-15 HMRC seized 5,281,646 litres of beer, 189,669 litres of spirits, and 1,489,538 litres of wine.†

Roy Maugham, tax partner says: “Duty on cigarettes and spirits is consistently increased well above inflation – but the production cost of the goods is low – this makes them a prime target for smuggling.”

“A significant number of taxpayers are disinclined to pay the full duty on alcohol and, particularly, cigarettes – which has created a thriving black market. It’s the inevitable result of heaping a heavy tax load onto any product.”

“HMRC has been attempting to tackle the problem for some time and not without successes, but smuggling is very difficult to eliminate altogether. At points HMRC’s efforts have gone too far – for example they have been criticised for seizing and destroying legal imports of alcohol and tobacco intended for personal consumption.”

“At a time when HMRC is under significant political pressure to maximise the tax take cracking down on those avoiding ‘sin taxes’ generates considerable additional revenue, and is broadly popular with the public.”

*Source: Data provided to UHY Hacker Young by HMRC
**Source: HMRC ‘Tobacco Gap’ report
†Source: HMRC: Tackling alcohol smuggling