Burying their heads in the ash

There was joyful news from His Majesty’s Revenue and Customs this week when it announced that the battle against illicit tobacco is being won. Its annual Tobacco Tax Gap report estimates the proportion of tobacco tax revenue — and therefore the proportion of tobacco sales — that is being lost to the black market. In its most recent report, HMRC declares that: “There has been a reduction in the tobacco duty gap estimate as a proportion of theoretical tobacco duty liabilities, from 21.7 per cent in 2005 to 2006 to 14.2 per cent in 2024 to 2025.” It reckons that the tobacco tax gap rose slightly between 2022/23 and 2024/25 — from 13 per cent to 14.2 per cent — but said that it remains lower than it was in 2019/20 when the figure was 15.4 per cent. Moreover, it claims that the tax gap for hand-rolling tobacco fell to an all-time low in 2024/25.

Great news! Except that it is obviously nonsense, isn’t it? As regular readers know, legal tobacco sales have been plummeting since 2021 and this can only be the result of the black market’s exponential growth. According to the Office for National Statistics (ONS) the number of smokers in the UK fell from 6.4 million to 5.3 million between 2002 and 2024. That is a drop of 17 per cent and should have been accompanied by tobacco sales falling by around the same amount. But according to HMRC’s own data, the sale of legal cigarettes fell by 34 per cent in the same period and the sale of legal hand-rolling tobacco fell by 40 per cent. Provisional data for 2025 shows that the collapse in the legal market has continued, with legal cigarette sales and legal hand-rolling tobacco sales falling by 40 per cent and 53 per cent respectively between 2022 and 2025.

When the quantity of tobacco sold legally is falling at more than twice the rate of the number of smokers, it doesn’t take Hercule Poirot to see that the black market is picking up the slack. The only alternative explanations are that people are buying vastly more tobacco legally in other countries, which seems most unlikely given that Brexit stopped large quantities being brought back from the EU, or that smokers are consuming fewer cigarettes per day, which they are not. A third possibility is that lots of nonsmokers are suddenly claiming to be smokers, but this is so implausible that it can rejected out of hand. If anything, social desirability bias encourages smokers to identify as nonsmokers in surveys. 

Simple maths shows that HMRC’s figures cannot possibly be accurate. Converting kilograms of rolling tobacco into sticks, the equivalent of 36.6 billion cigarettes were sold legally in the UK in 2022. If this declined at the same rate as smoking prevalence (-17 per cent), it would have been 30.4 billion by 2024. In fact, there were only 22.9 billion cigarettes sold legally in 2024, a shortfall of 7.5 billion.

If we imagine, for the sake of argument, that there was no illicit tobacco at all in 2022, this would mean that 25 per cent of the total market was illicit by 2024/25 (7.5 billion is 25 per cent of 30.4 billion). If you believe, as HMRC does, that 13 per cent of the market was illicit in 2022/23, it means that 33 per cent of the market was illicit in 2024/25. If HMRC underestimated the size of the black market in 2022/23, the real figure is higher still, but the absolute minimum it could be in a wildly optimistic and frankly impossible scenario is 25 per cent.

And yet HMRC’s tobacco tax gap estimate for 2024/25 is 14.2 per cent, only slightly higher than the figure of 13 per cent for 2022/23. It doesn’t stack up.

HMRC’s tobacco tax gap estimates have been fishy for a while. Last year, the Office for Statistics Regulation announced a review into the quality of its statistics and asked HMRC to “monitor whether its methods are optimally capturing tax gap and market size information”, but no effort seems to have been made to improve the quality of a dataset that HMRC itself rates as having “high uncertainty”. 

The theory behind HMRC’s methodology is simple: calculate how many cigarettes are smoked each year, subtract the cigarettes that are sold legally, and whatever you have left is the amount of tobacco that is sold illicitly. In practice, it is not so easy. The only piece of solid data is the legal sales figure. We have survey data for the number of smokers and the number of cigarettes they consume, but the ONS survey HMRC relies on had its status as an official accredited statistic withdrawn in 2024 due to “ongoing challenges with the response rates, levels, and weighting approach”. Moreover, smoking prevalence and cigarette consumption figures always need to be adjusted upwards to account for shy smokers and under-reporting. This requires a certain amount of guesswork. Estimates of how much duty-free tobacco is brought into the UK are also based on surveys and may be inaccurate. 

A further problem is that during the pandemic, the ONS stopped asking people how much they smoked. HMRC therefore “imputed” the figures for 2020/21, 2021/22 and 2022/23. The question was asked again in 2023/24 and so HMRC describes its estimate for that year as “actual”, but it has gone back to guessing for 2024/25. Blaming “modifications to question sequencing and funding limitations” it says that “certain consumption data for 2024 to 2025 are incomplete”. It has therefore “projected consumption data” for 2024/25 “based on established historical trends.” But what we are seeing today is not in line with historical trends. That is the whole point!

This is frankly pathetic. The simple fact is that HMRC’s illicit tobacco figures are worthless and serve only to mislead politicians and the public about the scale of the problem. Illicit tobacco has never been more visible in Britain, whether it’s empty packs of moody cigarettes on the pavement or high street shops selling illicit brands such as Manchester and Top Gun with impunity. Those empty packs could help solve the problem. The best way to gauge the size of the black market in tobacco is to gather a large and representative sample of disused tobacco packs and see whether they were sold legally. Tobacco companies have been doing this for years. KMPG, acting on behalf of Philip Morris International (PMI), produce an annual empty pack survey which recently found that 33 per cent of cigarette packs in the UK were contraband or counterfeit. Japan Tobacco International (JTI) use a slightly different methodology in which they interview smokers in their homes and offer to exchange their empty or current pack of cigarettes for a JTI brand. Using this system, they estimate that 33% of cigarettes and 50 per cent of hand-rolling tobacco were illicit in 2024/25 (their figures for 2025/26 suggest that this has risen to 42 per cent and 60 per cent respectively). 

Many people are wary of claims made by tobacco companies, but the Irish government has been using a close cousin of the JTI survey since 2009 for its official estimates. With a similarly high level of tobacco duty, the official Irish figures are similar to the industry’s figures for the UK. Ireland’s 2025 survey found that 28 per cent of cigarettes and 37 per cent of hand-rolling tobacco was illicit. 

Since the start of this decade, many countries have seen their illegal tobacco market blossom as a result of governments turning the screw too far on tobacco taxation. Australia is the most spectacular example of this, but the black market has rocketed in places like France, Ireland, the Netherlands, Canada and South Africa too. The United Kingdom is almost a member of this unfortunate club and yet the government, having been falsely reassured by risible estimates from HMRC, continues to bury its head in the sand.