Policy paper

Stubbing out the problem: A new strategy to tackle illicit tobacco

Updated 1 March 2024

Ministerial foreword

Smoking is a leading cause of preventable death and illness in the UK. This government is united in our action to address the harms of tobacco and make smoking obsolete. In 2019 we pledged to make England ‘smokefree’ by 2030 – achieved when adult smoking prevalence falls to 5% or less.

In October 2023 we went even further with Stopping the start: our new plan to create a smokefree generation, announcing a range of measures to tackle the harms of smoking. This includes our intention to introduce legislation which means anyone born on or after 1 January 2009 will never be legally sold tobacco products.

With every step we take towards a smokefree generation we must continue our efforts to tackle the criminals seeking to undermine our progress. HMRC estimates that the illicit market in tobacco duty and related VAT was £2.8 billion in 2021 to 2022. The proceeds of this crime fund the smuggling of weapons, drugs, and even human beings across the globe. We must tackle the cancer of organised criminal groups as unwaveringly as we tackle the harms of smoking itself.

HMRC launched its first strategy to tackle illicit tobacco in 2000. This, and consequent strategies with Border Force, have reduced the estimated duty gap for cigarettes by a third (from 16.9% in 2005 to 11% in 2021 to 2022) and for hand-rolling tobacco by a half (from 65.2% to 33.5% over the same period). Our last strategy published in 2015 drove forward bold new legislation, sanctions, controls and operations to tackle the illicit trade.

Today we go even further. Our new strategy will target loopholes at all stages of the supply chain, keeping us several steps ahead of the criminals.

The strategy:

• sets out our new root and branch approach - which targets the demand for illicit trade (the consumers that criminals seek to exploit) as well as the supply (the criminals themselves)
• is supported by over £100 million new funding over the next 5 years to boost HMRC and Border Force enforcement capability
• establishes a new, cross-government Illicit Tobacco Taskforce – combining the operational, investigative and intelligence expertise of various agencies, and enhancing our ability to disrupt organised crime

Tackling illicit tobacco requires united action across all parts of government. This strategy strengthens the already effective collaboration between HMRC, Border Force and the Department of Health and Social Care, to drive enforcement in all areas and stub out the problem of illicit tobacco.

Gareth Davies MP, Exchequer Secretary to the Treasury

Introduction

“Illicit tobacco preys on the most disadvantaged in our community, stealing health and hope” – Javed Khan, Independent Review into Making Smoking Obsolete, June 2022

Tobacco harms our health, our productivity, and our economy. Its harms are well-documented and widespread. In 2019 the government committed to making England smokefree by 2030 – achieved when adult smoking prevalence falls to 5% or less. To support this ambition, in October 2023 the government set out its intention to create a ‘smokefree generation’. This means anyone born on or after 1 January 2009 will never be legally sold tobacco products.

To deter people from smoking, we have also developed one of the highest tobacco taxation regimes in the world. These high duty rates, making tobacco less affordable, have helped reduce smoking prevalence in the UK from 26% in 2000 to 12.9% in 2022.

Illicit tobacco, however, undermines these efforts. The illicit trade involves a range of tobacco products that are sold illegally, often to underaged users, without paying taxes (VAT and excise duty). It provides a cheap and unregulated supply of tobacco to those who might otherwise be deterred by cost.

Illicit tobacco trade undercuts law-abiding businesses. It funds other organised crime with its proceeds and increases the burden on honest taxpayers. HMRC estimated the illicit market in tobacco duty and related VAT at £2.8 billion in 2021 to 2022. Its impacts are disproportionately felt by the most disadvantaged in our communities, with over half of all smokers of illicit tobacco coming from the most deprived socioeconomic groups.

Tobacco fraud exists throughout the world and the UK market represents a small fraction of the global demand for illicit product. The wide range of suppliers and organised crime groups (OCGs) operating across borders make it hard to limit the flow of goods into the UK; there is a virtually limitless illicit supply available worldwide and the profit margins attract large numbers of criminals. We know this and respond accordingly, working in partnership across government to stop production at source, seize illicit product at our borders and in our shops, and punish the criminals involved in the illicit tobacco trade.

Progress update

The government has pledged to take action on the sale of illicit tobacco in successive strategies dating back to 2000. HMRC and Border Force’s last strategy, ‘Tackling illicit tobacco: From leaf to light’ (‘Leaf to Light’) launched in 2015, set out the following aims for targeting, catching, and punishing those involved in the illicit tobacco market:

1. create a hostile global environment for tobacco fraud through intelligence sharing and policy change
2. tackle the fraud at all points in the supply chain, from illicit production to retail
3. raise public awareness of the links between illicit tobacco and organised criminality to reduce tolerance of the fraud in the UK
4. optimise the use of the sanctions we have and, where we need to, develop tougher ones

As well as improving the way we operate, we have also continued to use the full range of sanctions available to tackle fraud throughout the supply chain. From April 2015 to March 2023, this has resulted in:

• £10 billion: tobacco duty receipts in 2022 to 2023
• 10.6 billion: non UK-duty paid cigarettes seized by HMRC and Border Force
• 1,600 tonnes: non UK-duty paid hand-rolling tobacco seized by HMRC and Border Force
• 1,571: people convicted of tobacco crime offences
• 8,000: assessments to recover unpaid excise duty
• 9,304: excise wrongdoing penalties issued for tobacco offences
• £298 million: value of penalties and assessments raised

Through ‘Leaf to Light’ we have:

• ratified the World Health Organization’s (WHO) Protocol to Eliminate Illicit Trade in Tobacco Products (The Protocol). The Protocol provides for a series of measures aimed at reducing illicit tobacco trade, including the launch of a global tracking and tracing system
• strengthened our network of Fiscal Crime Liaison Officers, with 45 officers based in 38 countries, with a global reach via regional working. These officers work closely with overseas authorities to clamp down on the illicit tobacco trade
• taken the lead as one of the earliest global adopters of a Track and Trace system for tobacco products
• strengthened our regulation to target new risks and gaps in our controls, introducing the Raw Tobacco Approval Scheme in 2017, and the Tobacco Products Manufacturing Licensing Scheme in 2018
• launched the Tobacco Operational Intelligence Co-ordination Centre (TOICC), a multi-disciplinary and multi-agency team with members from HMRC Risk and Intelligence teams, Fraud Investigation Service teams, and Border Force. TOICC’s main aim is to identify tactical opportunities to counter OCG activities
• launched Operation CeCe, an initiative which focuses its efforts on disrupting illegal tobacco trade at a local retail level. Bringing together local authorities, law enforcement, and National Trading Standards, Operation CeCe has enabled the seizure of illegal tobacco from retail and residential premises across England, Wales and Scotland, disrupting the market and preventing fraud
• led a review of all available sanctions, and introduced new, stronger sanctions and powers to Trading Standards in 2023 for street level distribution of illicit tobacco

Case studies

We introduced new controls to help us tackle fraud

Track and Trace systems track tobacco products from manufacture to retail. The UK system introduced in 2021 requires each packet of cigarettes and hand-rolling tobacco destined for the UK market to be marked with a unique identifier code (UID) and specific packaging and security marking requirements. The product is then tracked at every point in the supply chain via a scan of the UID, from manufacture to import to distribution and sale. Using the security label and UID, officials are able to quickly identify whether a particular packet of cigarettes is genuine. As well as increasing efficiency for on-the-ground checks, the system also enables us to track wider trends in tobacco smuggling and tobacco distribution.

We work internationally to target organised crime groups that manufacture and supply illicit tobacco for the UK market

An illustrated example: via our Fiscal Crime Liaison Network, HMRC collaborated with Polish law enforcement bodies to take down an international crime group that were involved in a range of crimes including large scale smuggling of cigarettes to the UK. HMRC supported the Polish investigation by providing intelligence and evidence of the group’s activities in the UK as well as specific seizures.

In February 2023, Polish authorities launched coordinated raids across Poland, arresting 25 suspects, searching 47 premises and seizing cigarette machinery, cigarettes, firearms, ammunition, drugs and cash. This case demonstrates the level of criminality involved in illicit tobacco, but also the success that our international collaboration brings.

We target prolific smugglers at the border and within the UK

In June 2022, Border Force seized over 99 million illicit cigarettes at the Port of Hull. This was the largest ever single seizure of cigarettes at a UK port. Criminals had packed 8 containers full of illicit cigarettes and shipped them to the UK through the United Arab Emirates. HMRC has made several arrests in relation to this seizure.

This is just one example of our work at the border, where Border Force and HMRC combine to share intelligence, conduct profiling to identify illicit tobacco products and prosecute those responsible. This work led to over one billion cigarettes being seized at the border alone in 2021 to 2022.

We target the retailers that facilitate the fraud

HMRC works closely with Trading Standards to disrupt the illicit tobacco trade at retail level – known as Operation CeCe. This work began in January 2021 and has already led to the seizure of over 28 million illicit cigarettes and nearly 8 tonnes of illicit hand-rolling tobacco in the first 2 years.

New sanctions to tackle illicit tobacco duty evasion

Stronger powers to combat illicit tobacco were introduced in July 2023, including penalties of up to £10,000 for any businesses and individuals who are caught selling illicit tobacco products.

This builds on the existing successful collaboration between HMRC and Trading Standards. Under these stronger powers Trading Standards are able to make referrals to HMRC where they find evidence that a contravention of the Tobacco Track and Trace system has occurred.

HMRC manages the administration and issuing of the relevant sanctions under the new powers.

Recent trends

The wider backdrop of HMRC’s work to tackle illicit tobacco has evolved since the publication of ‘Leaf to Light’:

• smoking prevalence in the UK has reduced significantly from 17.2% in 2015 to 12.9% in 2022 (around 6.4 million people). Government action has been an important driver of this decline and will soon go further. In October 2023, the Department of Health and Social Care published its command paper, Stopping the start: our new plan to create a smokefree generation. This will make it an offence for anyone born on or after 1 January 2009 to be sold tobacco products. History shows that when we have introduced targeted measures, whether through tighter legal controls or stronger enforcement, they have had a positive impact on tackling the problems of illicit tobacco. This strategy, and the increased investment in enforcement agencies of over £100 million over 5 years, will further boost agencies such as local trading standards, HMRC and Border Force to stamp out opportunities for criminals
• despite tighter controls and successes since ‘Leaf to Light’, HMRC’s tax gap estimates and wider intelligence suggests the tobacco duty gap has broadly stagnated since 2015 (15.6% in 2015 to 2016 to 17.7% in 2021 to 2022). This stagnation suggests that no matter how much we strengthen our current strategy, supply will always find a way to enter the market where a demand for it exists. The profit margins available in the global illicit tobacco trade mean OCGs will go to great lengths to maintain supply, are willing to constantly adapt to tight controls, and are able to quickly recover from setbacks
• far-reaching developments such as the UK’s exit from the EU, the COVID-19 pandemic, and the cost-of-living pressures do not seem to have impacted the overall risk posed by illicit tobacco. The demand in illicit tobacco appears to have remained consistent in spite of these political and global events
• there have been some changes to the type of product that make up the illicit market:
  • the illicit market for cigarettes is currently dominated by counterfeit and cheap white cigarettes, which are virtually all manufactured outside the UK and smuggled in as finished product. Smuggled genuine cigarettes make up a smaller part of the market
  • the illicit market for hand-rolling tobacco is largely composed of both counterfeit product that is illegally produced within the UK, and genuine product smuggled in from those European countries with lower duty rates. The increase in UK illicit production is largely down to the low levels of expertise and equipment required to make hand-rolling tobacco combined with the greater profits that can be made by producing the product close to the intended market
  • the consumption of shisha tobacco continues to grow within the UK. Although the tax at risk is currently much lower than for cigarettes and hand-rolling tobacco, there is an illicit market consisting of smuggled shisha from overseas as well as illicit manufacture of shisha within the UK

Despite our successes in tackling illicit tobacco since ‘Leaf to Light’, these developments and trends suggest some changes are needed to our approach to tackle the challenges:

• a stagnation rather than decline in illicit sales over the past few years suggests we may have reached a stubborn core of illicit tobacco consumption. While this demand continues, OCGs will continue to go to great lengths to maintain supply. In these circumstances the most effective tactic to tackling illicit trade is likely to be through demand reduction
• in terms of supply, while further controls and initiatives will have further impact against OCGs, an increase in enforcement capacity and capability is required to make a significant reduction in the illicit market as a whole

A new approach

Our new strategy is based on delivering 2 high level, strategic aims.

Aim 1: Reduce demand for illicit tobacco

To reduce the size of the illicit market, we have to reduce demand for illicit products. Supply side measures alone are not enough to make further progress in the fight against illicit tobacco. Reducing demand will reduce the opportunities for OCGs and the wider harm they cause, reduce tax losses and support the government’s new plan to create a ‘smokefree generation’.

Aim 2: Tackle organised crime to reduce community harm 

The illicit tobacco market is dominated by organised crime, that brings pain and suffering to the UK and our local communities. We will not allow these OCGs to operate freely. We will bring them to justice and protect society from the harms they cause. Significant new investment of over £100 million across the next 5 years has been allocated to proactively tackle the persistent challenge of the tax gap plateau and effectively address the emerging risks hindering the realisation of a smokefree generation.

These 2 overarching aims are strongly interlinked. Our efforts to reduce demand through supply side intervention will involve tackling and punishing the criminals involved in tobacco smuggling. Tackling those criminals will in turn drive up the price of illicit tobacco and have a knock-on impact on quantity demanded.

Substantial new funding of over £100 million throughout the next 5 years has been allocated to support the delivery of the first smokefree generation, demonstrating our commitment to combatting tobacco fraud and ensuring a smokefree generation for our society. This new money will be used to support the full range of activity across HMRC, Border Force and Trading Standards as set out in this strategy.

We have worked to incorporate recommendations on illicit tobacco from The Khan review 2022: Making Smoking Obsolete into this strategy where relevant. Specific actions on shisha and tougher sanctions for illicit tobacco are set out in detail below. Several of these recommendations, such as the introduction of a tobacco licensing scheme, are broadly covered by existing or upcoming schemes, such as Tobacco Track and Trace requirements and accompanying sanctions.

The government has set out proposed actions to protect future generations from the harms of smoking by creating the first smokefree generation. HMRC and Border Force will work to support wider government ambition around reducing demand for tobacco more generally. Our particular role will be to reduce demand for illicit tobacco.

We will work to reduce demand directly by tackling public attitudes towards illicit tobacco consumption as well as by reducing the ease of access to illicit products. 

Our ambition is to drive down demand for illicit tobacco by making it more expensive to buy and harder to source. 

Aim 1: Reduce demand for illicit tobacco

1A: Reduce the ease of purchasing illicit tobacco by increasing our impact on retailers that sell illicit products and working with honest law abiding retailers

We want to prevent illicit tobacco from being a convenient and readily available option. We will work to disrupt the ease of access in order to achieve a knock-on impact on demand.

We will:

• build on the success of Operation CeCe by increasing the level of funding and committing to our relationship with Trading Standards for the long term, to enable greater impact
• improve intelligence sharing across HMRC and Trading Standards, ensuring the long-term success of Operation CeCe
• tackle online sales of illicit tobacco on social media platforms, gathering intelligence on social media sales, and working with social media platforms to ensure we are effective in limiting criminal groups’ ability to sell illicit tobacco through these channels
• review our current sanctions to ensure we are able to work with landlords to close down any outlets that sell illicit tobacco on their premises and encourage them to terminate leases early where this is the case. This will support the enforcement of our new tougher tobacco sanctions

1B: Focusing our law enforcement activity on increasing the price at which organised crime groups are able to sell illicit tobacco products, which will in turn reduce demand for them

While limiting supply of illicit products is extremely difficult due to their availability around the world and the willingness of OCGs to smuggle them, our actions change the way the OCGs operate, increasing their costs and raising the eventual street price of the tobacco products. Economic analysis shows that raising the price of illicit tobacco products has a material impact on the demand for those products.

We will:

• increase the risk to those criminals involved in the supply of illicit tobacco, forcing OCGs to go to greater, more expensive lengths, to smuggle products
• disrupt smuggling routes and methods, making OCGs adapt to more expensive routes and methods to maintain supply
• dismantle the most prolific OCGs in order to eliminate the economies of scale they are able to achieve
• continue to dismantle illicit tobacco factories in the UK, disrupting attempts by OCGs to establish UK production as a means to eliminate logistical costs

1C: Support the wider government campaign for a ‘smokefree generation’ strategy with communication activity to help tackle the trade and consumption of illicit tobacco and raise awareness of links to organised crime.

Whilst we have publicised our prosecutions and seizures and fed into wider governmental campaigns to tackle illicit tobacco, we can go further to raise awareness of illicit tobacco and the impact it has on local communities, using communication levers to help drive down demand for illicit product.

We will:

• deliver proactive communications activity to support the drive to reduce demand and comfort levels for users of illicit tobacco
• publish communications targeted at businesses – including retail outlets – to reinforce the risk and highlight the impact of new sanctions
• issue wider communications, which will highlight the wider community harm, risks to children and links to other types of organised crime where appropriate. The impact of the illicit trade is often the greatest in the most deprived areas of the country. Focusing communications to areas where illicit tobacco is most prevalent will help support a smokefree generation and reduce health disparities
• work with other government departments, including the Department of Health and Social Care, to support communication campaigns and other initiatives designed to reduce demand for tobacco products more generally – highlighting the financial impact to the economy as a whole and to local communities
• ensure we are joined up on our messaging with other government departments, public bodies, and organisations including the Illicit Tobacco Partnership
• continue to proactively publicise our seizures, arrests, and success stories

Aim 2: Tackling organised crime

The illicit tobacco market is dominated by OCGs that operate internationally and involve themselves in a number of other crimes. The harm caused by these groups is far wider than just those linked to smoking. For example:

• human trafficking victims are often used in the production of illicit tobacco products, working in inhumane conditions against their will.
• tobacco OCGs often also smuggle and supply other criminal commodities including drugs
• they are often violent criminals that use weapons in our communities
• the proceeds of tobacco fraud are laundered, funding other crime as well as further tobacco fraud
• they sell tobacco products to children who would otherwise be unable to legally purchase tobacco products and become smokers

HMRC has responsibility as an enforcement agency to bring perpetrators of tax fraud to justice. We are committed to protecting society from harm and tackling those who set out to cheat the tax system.

We will work to tackle organised crime within the UK, at the border, and overseas, using effective intelligence sharing and levying harsh penalties on those who break the law. To achieve this, we will:

2A: Establish a multi-agency illicit tobacco taskforce to co-ordinate enforcement activity

• we will establish a multi-agency illicit tobacco taskforce, bringing together colleagues from HMRC, Border Force, and Trading Standards into a single team that collaborates closely with other law enforcement and intelligence partners
• the taskforce will combine all intelligence and information available, building an overview of the illicit market and the criminals involved, enabling a coordinated and comprehensive response to be taken
• the taskforce will direct operational activity, utilising the capabilities and powers of all partners to maximise our impact on the most harmful OCGs
• working together, we will identify new and emerging threats and develop plans to tackle them

2B: Target the most harmful organised crime groups within the UK relentlessly until they are no longer able to function

We will:

• use all available resources and sanctions to tackle the most harmful UK-based OCGs, including prosecution
• prioritise targeting these groups over the long-term, investing significant resource into disrupting their operations
• target the illicit finances of these OCGs, working with law enforcement partners and using HMRC’s extensive asset recovery powers to recover cash and assets

2C: Target organised crime at the border

Most illicit tobacco is smuggled into the UK as finished, packaged product. Even though illicit hand-rolling tobacco is now often manufactured in the UK, OCGs still rely on raw materials that are smuggled in. The proceeds of tobacco fraud are also often smuggled out of the UK in cash form. 

• HMRC and Border Force will continue to work together, sharing intelligence to identify and seize tobacco products, production materials/equipment and cash at the border, and to prosecute, penalise and fine those responsible for smuggling attempts
• in line with wider governmental ambition set out in the Border 2025 strategy, we will look to improve how we operate at the border by optimising our checks, streamlining border processes and exploring how new and emerging technologies can support our work at the border
• we will explore new sanctions to apply at the border alongside the use of immigration powers to refuse and remove passengers who smuggle tobacco products. These sanctions would provide an effective additional tool to deter and punish smugglers of illicit product

2D: Strengthen international collaboration to tackle organised crime

Illicit tobacco is a global problem. The illicit cigarettes we find in the UK are largely manufactured abroad, often crossing multiple borders before reaching our shores. Since leaving the EU, the UK has continued to play a leading role in championing international agreements and forging closer working partnerships overseas to create a hostile global environment for the illicit tobacco trade. We will continue to collaborate with international partners to make it difficult for UK-based OCGs to obtain illicit tobacco.

We will:

• work via our network of Fiscal Crime Liaison Officers in key multilateral and bilateral partnerships to disrupt the most harmful OCGs and disrupt the flow of illicit tobacco before it reaches the UK
• work with partner countries through the World Health Organization’s (WHO) Global Sharing Platform for Tobacco Track and Trace, which launched in September 2023. This platform enables the UK to obtain and to share tracking data with over 65 other countries signed up to the platform. This data will build our intelligence on the global supply chains for genuine products and support us to target our efforts on tackling illicit products accordingly

2E: Use policy and legislation to reduce opportunities for OCGs

• we are extending access to Tobacco Track and Trace across HMRC and to Trading Standards
• in 2024, HMRC will extend the Track and Trace system to include all tobacco products such as cigars, cigarillos, and shisha
• we will continue to utilise existing legislation to ensure that OCGs are unable to obtain large volumes of genuine UK marketed tobacco products
• we will continue to work with key partners, particularly the Department of Health and Social Care, on the best implementation of the Tobacco Track and Trace System, including investigating opportunities which would allow anyone to check whether a business is correctly registered to sell tobacco products
• we know that whilst shisha makes up a small proportion of the overall illicit tobacco market, a significant amount of the shisha consumed in the UK is illicit. We will work in partnership with key organisations to crack down on illicit shisha in the UK, gathering intelligence on the supply chain in this space and exploring policy options to reduce the size of the illicit shisha market
• we will review and strengthen our reporting mechanisms for illicit tobacco so that those who identify illicit tobacco can easily alert the appropriate authorities
• we will work across government to ensure we are joined up in our work to tackle organised crime and to highlight the links between illicit tobacco and other organised criminality

Evaluating the strategy

We will develop a strong evidence base underpinning this strategy, so that we can accurately measure the effectiveness of our work and adapt our response accordingly.

We will work to refine the methodology we use to calculate a wide range of tools that allow us to measure the impact of our work, ensuring we have a robust assessment of the size of the illicit market. This includes:

• developing a range of near real time indicators of the overall scale of the illicit market
• maximising our use of Track and Trace data
• quickly identifying variations in behaviour