A smoking hot black market

Why doesn't the government want to know how big the illicit tobacco trade really is?

Legal tobacco sales halving in the space of four years should be a wake up call to the British government that the black market has exploded in size. Instead, MPs are breezily voting for the incremental prohibition of tobacco in the belief that, as Action on Smoking and Health (ASH) puts it:

HMRC data shows that illicit tobacco consumption is stable as of 2023/24 and has declined substantially over the long term, with illicit cigarette consumption falling by almost 90% since 2000.

ASH’s CEO Hazel Cheeseman has recently been on some sort of fact-finding trip to Brussels where she was given reassurances by her fellow ideologues. There is, apparently, nothing to see here.

The claim that “illicit tobacco represents a relatively small share of the market” rests on a flawed estimate from HMRC which even they admit has “high uncertainty”. The collapse in legal sales since 2021 is conclusive evidence that the illicit trade is much larger than they claim.

If HMRC were serious about getting the measure of the black market, it would conduct empty pack surveys. All that needs to be done is to collect random but representative samples from public and household bins and see how many cigarette packs and tobacco pouches originated in the UK.

The tobacco company PMI commissions KPMG to conduct empty pack surveys all over Europe. They found that 25.6% of manufactured cigarettes in the UK were contraband or counterfeit in 2024 - much higher than HMRC’s figure of 10.5% - but groups like ASH ignore this because the research is industry-funded.

I didn’t learn until last week that the Irish government commissions its own pack surveys. Conducted by Ipsos MRBI, they don’t involve going through recycling bins and the packs aren’t usually empty. Instead, a thousand smokers are interviewed for five minutes and are asked to bring their tobacco with them. Respondents are offered a scratchcard for participating and the response rate is “consistently high (over 80%)”.

The most recent (2024) survey found that 26% of cigarette packs in Ireland were illegal and a further 11% were legal but bought abroad via duty-free/EU. The number of illegal packs has doubled since 2019 when the figure was 13%.

For rolling tobacco, 36% of pouches were illegal and a further 13% were legal but bought abroad via duty-free/EU. The number of illegal pouches was three times higher than in 2019.

Ireland and the UK have similarly extortionate rates of tobacco duty. Are we really to believe that the UK has a much smaller black market? Are we to believe that the black market has doubled in size in Ireland in the last few years but not in the UK?

Interestingly, in Ireland only 2% of the packs were illicit whites (“cigarettes manufactured for the sole purpose of being smuggled into and sold illegally in another market”). From seeing empty packs on the pavement, my impression is that the figure is higher in the UK where brands such as Manchester and Top Gun have never been sold legally but are widely consumed.

ASH’s response to the collapse of the legal trade has been to claim that it is all due to people quitting smoking and that the recent decline is in line with the long term trend. They created the graph below as evidence for this.

They say that the pandemic “disrupted smoking behaviour” and that if you ignore that blip, legal sales have been falling steadily since 2015.

There are two problems with this. Firstly, the pandemic didn’t disrupt smoking behaviour; smoking rates continued to decline. What was disrupted was the ability of people to buy tobacco from abroad and on the black market. The increase in sales relative to the number of smokers in 2020 and 2021 was the result of lockdowns and travel bans forcing smokers to buy tobacco legally in British shops. It gave a hint of how big the non-duty paid market had always been.

Secondly, ASH ignore rolling tobacco in that graph. If you include cigarettes made from rolling tobacco, the graph looks very different. The increase in legal sales during the pandemic is more obvious and the subsequent decline is more dramatic. From 2023, the drop in legal sales has clearly been well below trend - and well below the decline in the number of smokers.

Incidentally, the reason ASH use the year 2000 as their baseline is because that was the year of the “booze cruise” when Britain’s drinkers and smokers took full effect of the EU’s Single Market. It led to over 10,000 cars being seized and a government crackdown on smuggling. During this mini-crisis, legal tobacco sales halved in a single year and by 2000/01, HMRC estimated that the tobacco tax gap was 25%. It is likely that the true figure is higher than that today. The claim that illicit sales have fallen by “almost 90%” since 2000 is based on absolute volumes and ignores the fact that there are far fewer smokers around today. It also ignores rolling tobacco. Using HMRC’s figures and including cigarettes made from rolling tobacco, there were 12.2 billion illicit cigarettes smoked in the UK in 2000/01. By 2023/24, this had fallen to 4.5 billion cigarettes. This is not a decline of “almost 90%”. It is a decline of 63%, mostly of which is due to the smoking rate more than halving since then.

Above all, the claim is based on HMRC estimates which are simply not credible. It is hard to say whether their estimates were better in 2000/01 but they are demonstrably wrong today.

It would be a relatively cheap and simple operation for the government to use empty pack surveys like KPMG’s or personal pack surveys like Ireland’s. Either system would produce a better estimate than HMRC is currently able to provide. It is hard to avoid the conclusion that the government refuses to use a better method because it would rather not know the truth.