Tobacco companies face paying fines of millions of pounds unless they act to curb the illegal smuggling of cigarettes being sold in Britain on the black market.
The Treasury is worried that criminal gangs are costing taxpayers £2bn a year in lost revenue. Part of the problem is counterfeit imports from the Far East, but a trend has emerged in which UK-made cigarettes and tobacco are exported to the EU and then sent back to Britain illegally.
As no duty is paid on exports to EU countries, the tobacco can be sold at half its usual price in pubs, clubs and street markets, if they are smuggled back.
A Government source said: "We are dealing with criminal gangs ... There have been seizures of 100,000 cigarettes and 50 to 60kg of tobacco."
Tobacco companies do not make extra profits out of the illegal trade but the Treasury says they have an obligation to do more to protect taxpayers' interests.
The Government is to include a clause in the Finance Bill, which implements the measures in the Budget, to allow HM Revenue & Customs to impose fines of several million pounds, based on profits of the illegal trade. The aim is to persuade tobacco companies to mark products so they can be "tracked and traced".
The Treasury claims previous crackdowns have reduced losses from £2.7bn in 2000-01 (21 per cent of tobacco revenues) to £2bn in 2003-04 (16 per cent).
The Tobacco Manufacturers Association says most cigarettes and virtually all hand-rolling tobacco on which duty is not paid is bought in other EU member states because the UK rates of tobacco duty are higher than in other countries.
It also claims that Revenue & Customs is unable to stem the flood of such tobacco due to the rules of the single market and possibly a lack of resources.Reuse content