Tobacco duties are levied on purchases of cigarettes, hand-rolled tobacco, cigars and other forms of tobacco. In our latest forecast, we expect tobacco duties to raise £8.9 billion in 2017-18. That would represent 1.2 per cent of all receipts and is equivalent to 0.4 per cent of national income. Duty on cigarettes accounts for nearly 90 per cent of all tobacco duty receipts.

There are different rates for each type of product:

  • the rate on cigarettes is 16.5 per cent of the retail price plus £4.16 on a packet of 20;
  • the rate on cigars is £2.59 for a 10g cigar;
  • the rate on hand-rolling tobacco is £5.24 for a 25g packet; and
  • the rate on other smoking and chewing tobacco is £2.85 for a 25g packet.

VAT is applied after tobacco duty, so, for example, the price of a packet of 20 cigarettes currently reflects the pre-tax price plus 16.5 per cent ad valorem plus £4.16 of duty tax plus 20 per cent VAT on both the pre-tax price and the duty.

  • Recent trends

  • Latest forecast

    Our latest fiscal forecast was published in March 2017. Tobacco duty receipts are set to fall by 0.1 per cent of GDP by 2021-22. That is more than explained by the tax base, where tobacco consumption is assumed to continue its downward trend.

    Until 2020-21, the Government has stated that tobacco duties will be uprated each year in line with growth in the retail prices index (RPI) plus 2 per cent. The rise in the tax rate partly offsets the effect from subdued growth in the tax base.

    More detail on our latest forecast and how it was revised relative to our previous forecast in November was provided in paragraph 4.77 of our March 2017 EFO.

    Expand to read the extract from our March 2017 EFO

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  • Latest monthly data

    Tobacco duty receipts are spread unevenly over the year, largely reflecting changes in trader activity, particularly forestalling before duty rises ahead of each Budget and ahead of their own price rises. This means that year-on-year changes – particularly early in the fiscal year – need to be interpreted with caution.

    Over the first quarter of 2017-18, growth in tobacco duty is running well ahead of our full-year forecast (20.4 versus 2.6 per cent). This reflects strong growth in April receipts – it is too early to tell whether this trend will persist over the rest of the year.

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of tobacco duties from HM Revenue and Customs (HMRC) for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then uses a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    Tobacco duty receipts are estimated by multiplying taxable tobacco consumption – known as ‘tobacco clearances’ – by the corresponding duty rate.

    Our tobacco model is split into cigarette and non-cigarette clearances. For cigarettes, the model includes an underlying downward trend of 4 per cent a year, reflecting recent trends in consumption. The model includes a negative own-price elasticity for cigarettes, so above inflation rises in the duty rate reduce the volume of clearances. The sterling-euro exchange rate features in the model to reflect the impact of cross-border shopping – when sterling is strong, it is more attractive to buy cigarettes in Europe than in the UK and vice versa.

    Non-cigarette clearances are also projected to fall over the forecast period, although at a slower rate than cigarette clearances.

    The Government sets out policy assumptions for the uprating of tobacco duty each year. ‘Specific’ tobacco duty rates are set to rise in line with RPI inflation plus 2 per cent a year until 2020-21.

    Main forecast determinants

    The main determinants of our tobacco duty forecast are those related to the tax base and those that are used by the Government in setting the parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on tobacco duty receipts.

    1. Inflation (RPI)
    2. Sterling/Euro exchange rate

    Main forecast judgements

    The main forecast judgements in our tobacco duties forecasts include:

    • In-year estimate – Our estimate for tobacco duty receipts in the current year is determined by year-to-date performance of receipts and indications from HMRC’s internal receipts monitoring. The in-year estimate determines the base year from which we use our model to forecast receipts growth.
    • The underlying trend in tobacco consumption – The downward trend in tobacco consumption has picked up in recent years, partly reflecting changing attitudes, regulatory changes and the increasing popularity of e-cigarettes. The slope of this downward trend over the forecast is uncertain.
    • The effect of recent regulatory changes – These include the EU Tobacco Products Directive and standardised packaging regulations. The effect of these changes on tobacco consumption is highly uncertain. We use HMRC analysis to inform our judgement on the underlying consumption trend.

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  • Previous forecasts

    Contrary to our earlier forecasts, tobacco duty receipts have declined in cash terms since 2011-12, with forecast errors most pronounced from 2013-14 onwards. One reason for this has been lower-than-expected RPI inflation from 2014 onwards, affecting the duty rates. Tobacco consumption has also been weaker than we expected, which led us to assume a steeper underlying downward trend in clearances. Since November 2016, we have assumed a 4 per cent a year underlying fall.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 7 policy measures affecting our forecast for tobacco duties. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook. These policy costings include:

    • tobacco duty restructuring. At Budget 2011, the ad valorem rate was reduced from 24 per cent to 16.5 per cent, while the specific duty was increased by around 30 per cent to £154.96 per 1000 cigarettes. This raised the duty on cheaper cigarettes by a larger amount; and
    • duty escalators have been applied to cigarette duty in every year since 2010. Since 2013-14, specific tobacco duties have risen by RPI plus 2 per cent. This policy is in place until 2020-21.

    The effects of regulatory changes (such as the EU Tobacco Products Directive and plain packaging rules) are factored into our forecast via our assumption on the overall trend in tobacco consumption. These are informed by evidence from HMRC.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2017 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published alongside our 2017 Fiscal risks report.

    The table below shows that:

    • higher RPI inflation would increase tobacco duty receipts (in line with the default indexation policy set out by the Government, we assume that duty rates are indexed in line with RPI plus 2 per cent until 2020-21);
    • an appreciation of sterling against the euro would reduce UK duty-paid cigarette clearances, as it would make cross-border shopping more attractive.

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  • Other information

    Our tobacco clearances forecasts can be found in our EFO supplementary tables.

    Our 2017 Fiscal risks report explored the long-run pressure on revenues from the continued downward trend in tobacco consumption.

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