The dog end of the duty free for all: The economy is paying a hefty price as shoppers stock up on cheap cigarettes and alcohol across the Channel

CIGARETTE papers and matches are among shopkeeper Paul Mason's best-selling lines. But that is a tiny glow of comfort against the massed ranks of unsold cigarette packets on his shelves.

For the past 15 years, Mr Mason and his wife, Judith, have run their Mason News convenience store in the village of Swanmore near Southampton. But the bottom has dropped out of their business this year, since the Government relaxed duty-free allowances to meet the provisions of the European Union's single market.

Although they sell everything from newspapers to pints of milk, about a fifth of the shop's turnover was in tobacco. They would normally have been building up to the busiest time of the year this weekend. But instead they are facing a cheerless Christmas.

'It's getting worse and worse,' Mr Mason complained. 'A number of customers have told me they have been across the Channel and bought enough cigarettes to last them until the New Year.'

His is a common plight in the South-east of England, where a hop across the Channel and back is an easy option. The habit is catching.

New figures suggest that the British exchequer may be losing up to four times more duty than Kenneth Clarke has been led to believe from January's relaxation of duty-free allowances.

His Budget judgement will have been reached with advice from Customs and Excise, which is sticking to its original forecast that it would lose pounds 250m a year as a result of British people crossing the Channel to stock up on drinks and tobacco.

That would be a tolerable 2.25 per cent leakage from the regular annual duty collection of pounds 11bn on those items.

But last week Michael Jackaman, the chairman of the Allied-Lyons drinks group, made nonsense of that calculation by reporting that the duty loss on beer alone is running at a rate of pounds 340m a year.

Mr Jackaman's figure was borne out by Bernard Windsor, chairman of the Wine and Spirit Association, who claimed that surveys by his organisation indicate a duty loss of pounds 264m this year in the sector.

The Tobacco Advisory Council estimates that revenue losses on cross-border shopping for handrolling tobacco and cigarettes will only be pounds 100m this year. But that excludes the effects of smuggling.

However, the council predicts a 5 per cent drop in consumption beyond the long-term trend, implying a duty shortfall of nearly pounds 400m and pointing to large-scale illicit imports.

This was confirmed by a Customs and Excise spokesman, who said that handrolling tobacco, or HRT, had been a major problem for a long time. It has a high value in relation to its weight, and costs five times more in this country than on the Continent. A 50g pack sells for pounds 6.80, compared with Fr15 ( pounds 1.70) in Calais.

Alcohol's bulk makes it difficult to sell in commercial quantities away from licensed outlets.

Meanwhile, cigarettes hold limited attractions to law- breakers because, like HRT, a pack of 20 sells for Fr15 across the Channel but retails at only pounds 2.40 in the UK. That makes it hard to sell illicitly for much over pounds 2.

In the first five months of this year, there were 442 prosecutions involving pounds 580,000 of smuggled drink and tobacco. HRT accounted for a surprising pounds 377,000 of that figure, against only pounds 98,000 for beer.

Customs and Excise finds it difficult to estimate how much smuggling it is failing to catch - which may account for the discrepancy between its pounds 250m estimate of lost duty and the pounds 1bn suggested by the trade.

To that loss must be added lower tax revenue from VAT, reduced business profits and increased benefit payments to people in Britain who lose their jobs.

The most frequently quoted figure for loss of business across the drinks and tobacco industries is 10 per cent nationwide. That proportion is also consistent with the experience of Denmark, Germany and Italy, all of which have tried unsuccessfully to impose higher duty rates than applied in adjoining territories.

The UK anomaly will persist until EU duty rates are harmonised in 1998. But the member states face an awesome challenge to complete the task by then.

The governments of high-tax countries such as Britain do not want to give up an easy source of revenue, while their counterparts in low-tax areas such as France recoil from the unpopularity they would incur with local producers and consumers. It is not impossible that Mr Clarke will undergo a Pauline conversion when he presents his Budget on Tuesday - but the omens do not seem promising.

Unwins, Britain's largest independent wine merchant with 285 branches and four wholesale depots, wrote to the Tory MP Timothy Renton recently to highlight 'the disproportionate and discriminatory tax burden'.

Mr Renton replied last week: 'There is an urgent need to raise more public finance, particularly because of the pressures on the social security budget and thanks to the increasing number of people over the age of 70 and 80 in our country, whose demands on the National Health Service are particularly frequent and urgent.'

Michael Wetz, joint managing director and a descendant of Unwins' founder, has had the galling experience of seeing Mammouth, the French supermarket chain, advertising its attractions on Meridian, the South of England ITV company. The Unwins' wholesale depots in Brighton and Folkestone have suffered 20 per cent turnover cuts.

A recent survey by the stockbrokers Barclays de Zoete Wedd found that the 78 per cent of cross-Channel passengers intending to buy alcohol had travelled an average of 163 miles to reach Dover. That takes in places as far away as Banbury in Oxfordshire and Norwich in Norfolk.

More than a fifth of those questioned were buying duty- free drink on behalf of other people, and a similar proportion admitted that their carrying capacity played a part in limiting the quantities they were buying.

But only 22.5 per cent said they would refuse to buy cheap imports on the grounds that they were illegal.

A Customs and Excise spokesman insisted: 'Everybody is still in the dark. It will not be clear how far revenue has been affected until the full figures for the 1993-94 tax year are available next October.'

(Photographs omitted)