The Treasury is losing billions of pounds in tax revenue and contributing to a growing black market economy due to its tax handling of tobacco, figures suggest.
New analysis from KPMG and IPSOS sounding the alarm over the illegal tobacco market, which the Labour Government’s Tobacco and Vapes Bill seeks to tackle.
Ministers have claimed the Bill aims to establish a generation free from smoking by prohibiting anyone born on or after January 1, 2009 from purchasing cigarettes.
The legislation also provides ministers with authority to outlaw flavoured vaping products, designate smoke-free public spaces, and ban vaping in cars carrying children.
The Treasury is understood to be losing billions pounds a year due to a growing illegal black market
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A report from KPMG cited that a flourishing illicit tobacco trade is already draining billions from public coffers, while a regulatory gap permits the sale of high-capacity vaping devices capable of delivering thousands of puffs.
Furthermore, IPSOS data from 2025 reveals that 46 per cent of cigarettes consumed are now non-duty paid, either purchased illegally or brought in from overseas, depriving the Treasury of an estimated £7billion annually.
HM Revenue and Customs (HMRC) receipts for the period from April 2025 to February 2026 fell £500million short of the previous year, a six per cent decline.
Critics have also warned that the entire framework faces a fundamental legal obstacle in Northern Ireland, where the Windsor Framework renders the generational ban unenforceable.
The number of Britons smoking appears to have fallen
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GETTYRachel Reeves delivered the Budget in the Commons last year | PA
Yet smoking rates dropped by only four per cent during the same timeframe, suggesting a £167million gap attributable to consumers switching to illicit sources.
The price differential makes the black market attractive: legitimate cigarettes cost £16.60 per pack on average, while illicit alternatives sell for roughly £5.
Dr Christopher Snowdon, the head of Lifestyle Economics at the Institute of Economic Affairs, said: “The explosion of black market tobacco in recent years will not come as news to smokers, nor to anyone who pays attention to cigarette packs on the pavement and in beer garden.
“But, the dramatic decline in legal sales at a time when the number of smokers has been falling more modestly, is conclusive proof that we have a serious problem.”
The Government has introduced legislation to regulate the vape market
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PAThose prohibited from buying tobacco will remain free to purchase so-called “monster vape” kits capable of producing up to 100,000 puffs, the equivalent of approximately 8,000 cigarettes.
John Larkin KC, formerly Attorney General of Northern Ireland, has concluded that Section 7A of the European Union (Withdrawal) Act 2018 means EU law takes precedence over domestic legislation, including the Tobacco and Vapes Bill.
Sir Robert Buckland KC, the former Lord Chancellor, has publicly described the Bill as “legally indefensible” in its application to Northern Ireland.
Despite these criticisms of the legislation, Health and Social Care Secretary Wes Streeting said: “Prevention is better than cure – this reform will save lives, ease pressure on the NHS, and build a healthier Britain.”