Brown's cigarette tax delay costs pounds 300m

A decision by Gordon Brown to defer a hike in cigarette duty by five months to 1 December has cost the Treasury pounds 300m in lost tax and handed manufacturers a likely profits bonanza.

Since the Chancellor made his announcement in his first budget last July to delay the imposition of extra duty by five months, the major producers have all been laying on extra shifts to make as many cigarettes as possible ahead of the deadline.

Their bonded warehouses are full to bursting with cigarettes, which, provided they are taken out of bond by the first of next month, can be sold by retailers without the duty increase. So many cigarettes have been made, and demand from retailers to beat the deadline has been so great, that cigarettes at "pre-budget prices" will be sold well into next year, even as late as summer.

Any hope by Mr Brown to use t`e extra duty to reduce demand has backfired, adding to Labour's embarrassment over its generosity to the industry in allowing tobacco advertising in Formula One motor racing. David Swann of the Tobacco Manufacturers Association estimated the lengthy deferral had cost the Treasury around pounds 300m in lost duty.

One manufacturer said it had added two shifts a day and had been working flat out to meet demand from supermarket chains and other retailers anxious to be able to offer cheap cigarettes. It had managed to make the equivalent of 18 months'-worth of cigarettes in just five months. And Imperial Tobacco confirmed: "We have been working extended overtime for several months and have still been unable to fully meet our orders."

In his Budget, Mr Brown announced a rise in excise duty equivalent to 19p on a packet of 20 cigarettes. ,Industry disappointment gave way to disbelief and delight when it became apparent the new tariff would not be introduced for five months.

Industry insiders said they were at a loss to explain the Government's thinking. It was possible the Chancellor had decided to target the practice of "forestalling", whereby retailers stockpile cigarettes ahead of a budget in anticipation of a duty increase. But this speculatory stockpiling normally takes place over one month, not five, and because the industry knows the exact size of the rise, they have been able to deliberately add extra shifts in the knowledge they will safely beat the deadline.