Levy on tobacco industry could cost state millions

Chris Papadopoullos
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The deadline for submissions to the government’s consultation on a levy is tomorrow
A TAX on tobacco manufacturers’ profits could result in significant losses of income for the government, a consultancy has said.

“The implementation of a windfall tax is estimated to produce a net loss in tax receipts,” the analysis from Oxford Economics said yesterday.

If the tax is implemented at £100m, it is predicted it will lead to a loss in tax receipts of £128m, meaning a net loss of £28m. If the tax is levied at £1bn, this is estimated to lose the Treasury £1.167bn, meaning a net loss of £167m.

The firm assumes that any tax – which in their models are between £100m and £1bn – is passed on to consumers in the form of higher prices.

It then estimates that volumes of sales of duty-paid cigarettes and hold rolled tobacco would decline, leading to less revenue.

According to the research, HMRC’s Tobacco Bulletin shows £35.4bn duty paid cigarettes were manufactured or imported into the UK in 2013/14. If the windfall tax was implemented at £100m and £1bn, this equates to 0.2 and 2.4p per stick. This would increase the cost of a packet of 20 cigarettes (allowing for an increase in VAT at 20 per cent) by 6p (or 0.9 per cent) and 59 pence (or 8.4 per cent), respectively. Using estimates of how sensitive demand is to changes in price, Oxford Economics suggests sales volumes of UK duty paid cigarettes would decline by 1.1 per cent (or 0.4bn sticks) and 10 per cent (or 3.5bn sticks), respectively.

Both the Conservative and Labour parties have announced their intention to introduce a windfall tax or levy on tobacco companies, but neither have given specific details.

Oxford Economics research was commissioned by the Tobacco Manufacturers’ Association (TMA), Tomorrow is the deadline for submissions to the government’s consultation on a levy on tobacco manufacturers and importers.