Submissions

Tobacco Retailers’ Alliance (TRA) submission to the Treasury ahead of the Autumn Budget

22nd September 2017

The TRA represents and campaigns on behalf of small and independent retailers. Our members own a variety of small stores – convenience stores, small grocery stores, newsagents, etc. – that sell tobacco as well as other goods. The TRA members are legitimate retailers who sell tobacco in a legal and responsible way.
The organisation raises awareness of tobacco related issues and spreads awareness of the dangers of illicit products. We help drive up standards in the retail sector by providing our members with guidance on legal compliance in respect of the new and emerging tobacco legislation.

Tobacco remains an important part of small retailers’ businesses

Tobacco sales remain a vital part of small retailers’ business models and can often comprise over 30% of their revenues.
However there are further reasons which make tobacco products particularly vital to small retailers.
1. Tobacco products promote high footfall (over a quarter of all shop visits are to make a tobacco purchase) and have relatively stable and predictable demand. Tobacco purchasers also tend to buy additional products alongside their tobacco. This contributes greatly to retailers profits and provides a great deal of additional VAT revenue for the Treasury.
2. Tobacco products have a long shelf life relative to other products (such as milk and newspapers) which are typically sold at high volumes in small retailers. This means that there is relatively little stock risk associated with them.
Tobacco control lobbyists (who do not have to keep a business running) sometimes try to claim that tobacco ties up cash and is unnecessary for small retailers to sell, but these two factors completely discredit this idea. Ultimately, the importance of tobacco to small retailers is shown by the fact that thousands continue to sell it. Incidentally, this includes the only retailer in the country that the tobacco control lobby can persuade to say that tobacco isn’t an important part of his business.

The economic benefits delivered by the small retail sector

Small retailers who sell tobacco make very significant contributions to the UK economy. The latest Local Shop report from the Association of Convenience Stores shows that almost 50,000 convenience stores in the UK (excluding Northern Ireland) employed 370,000 people and had sales of £38 billion.
Additionally, small retailers invested over £850 million in improving their store to better serve their local community.
As explained above, tobacco sales are a vital part of retailer’s business models and tax rises that risk growing the illegal tobacco trade would damage the small retail sector and compromise then benefits it brings.

Tobacco retailers have been unfairly hit in the last year

The past year has seen draconian regulations imposed on tobacco retailers.
Tax has already been raised once in 2017 and doing so again would squeeze retailers and risk growing the illegal tobacco market. In 2016, 90% of shopkeepers said that the illegal tobacco trade is a threat to their business and the Government must avoid exacerbating this at all costs.

Minimum pack sizes (introduced fully in May 2017 a part of the EU’s Tobacco Products Directive (TPD)) have greatly reduced footfall for small retailers. Customers now have much larger supplies of tobacco and this has led to a large reduction in additional purchases. It has also increased the out of pocket cost of tobacco and this means that our customers are more likely to buy cheap illegal tobacco. Packs which were banned were bought by 71% of hand rolling tobacco and 24% of cigarette smokers and Oxford Economics has estimated it will cost retailers £1.5 billion in revenue and over 11,000 jobs. This is reflected in the Association of Convenience Stores’ alarming finding that the sector employed 20,000 fewer people this year than last.

Plain packaging of tobacco has made the counterfeiting of tobacco products much more easy and as a consequence it is much easier to make, smuggle in and sell illegal tobacco products. This will mean that smokers who want cheap tobacco can access it and will not come to legitimate, tax-paying, stores.
Even before the end of the sell through period for non-compliant products in May 2017, 60% of retailers in a TRA survey said that these changes were having a detrimental impact on their business. Yet only 32% of retailers surveyed by the TRA had engagement from Trading Standards to help them understand the regulatory changes. By contrast 91% had visits from the tobacco manufacturers to explain the changes.

Tobacco retailers have been unfairly hit over many years due to tax rises

Years of above inflation tax increases have massively increased the cost of legal, tax paid, tobacco products. This has raised the amount of tax paid on a pack of 20 cigarettes by around 65% since 2010. Unsurprisingly, 90% of shopkeepers say tobacco taxation is excessive and this is emphasised by the difference in price of tobacco in Europe and in the UK.

In some countries a pack of 20 cigarettes can be only a third of the price of the same pack in the UK. Raising taxes so many times and by so much has made it even more beneficial for price-conscious smokers to buy their tobacco from abroad and from illegal sellers who do not pay tobacco tax.

This means that there is a large tobacco tax gap and a large amount of revenue being lost by retailers. The tax gap in 2015-16 was £3 billion and the TRA estimates that this reduced revenue in small retailers by £1.8 billion, approximately £36,000 per shop and cost over 13,000 jobs. Worryingly, since the reintroduction of the tobacco duty escalator in 2010, the percentage of illegal and foreign cigarettes has grown.

High taxes also restrict small retailers’ ability to make profits on tobacco products. The margin made on the price of a pack of cigarettes when the cost of tax is excluded is very similar to that of many other products found in small retailers. However, the need to pay so much tax reduces this margin significantly.

E.g. if a 20% margin (40p) is made on the non-tax price (£1.98) of a value pack of 20 cigarettes (RRP £7.35) the margin made when you include the cost of tax (£5.37) falls 75% to just over 5%. As such, the high taxes on tobacco severely restrict the profit that could be made by small retailers. This will consequently damage employment prospects, investment and economic growth.

Other considerations
The TRA is also aware of other policies the Government is considering and offers the following comments.

1. The threat to introduce tobacco retailing licences would put a further expensive and bureaucratic regulatory hurdle in front of tobacco retailers and would likely increase the price of tobacco as the associated costs would have to be offset. Even more paperwork would distract retailers from the day to day business of running a shop and price increases would push smokers to buy illicit tobacco hurting retailers and tax revenues. Instead the TRA thinks the Government should consider the introduction of a minimal-burden registration scheme such as that in Scotland.

2. If Brexit meant that tariffs were imposed on tobacco then the price would rise. This would act like a tax increase and would encourage smokers to buy their tobacco from abroad and from illegal sources. This would hurt legitimate retailers and would cost the Government a lot of taxes that could have been used to pay for public services.
Reducing the amount of tobacco that individuals can bring into the country from the EU after Brexit would probably reduce the amount of tobacco smuggled into the UK. This would help legitimate retailers and would probably increase the amount of tobacco tax revenues collected, helping to fund important public services.

3. The Government consulted on a range of new sanctions in 2017 and the TRA generally supported the proposals it included and urges the Government to press ahead and implement these sanctions. However, the TRA also argued that the Government should go further in a number of areas, including providing additional funding to help the work of Trading Standards and a commitment to reinvest the proceeds of crime taken from offenders into the various enforcement agencies.


Conclusion

There is a lot of pressure on tobacco products from bad regulations and already very high taxes. Despite these, tobacco remains a vital part of small retailers businesses.
Raising tobacco taxes even further would be to risk the existence of 50,000 small businesses, the 370,000 jobs that they create and billions of tax revenue.

70% of shopkeepers think that the Government doesn’t care about their survival. It should try to win back their trust by reducing the regulatory burden (particularly regarding minimum pack sizes and plain packs) and not raising tobacco tax again and certainly not for the second time in 2017.