This is the first time HM Revenue & Customs (HMRC) has imposed a penalty on a firm for supplying to areas that are a "high risk" for smuggling.

Cigarettes are significantly cheaper in Belgium, compared with retail prices in the UK, because of lower taxes.

BAT said it was appealing against the "unjustified" fine.

It added: "We are a business not a law enforcement agency".

This is the first time a fine of this nature has been handed out by HMRC.

An eight-year-old amendment to the Tobacco Products Duties Act of 1979 entitles HMRC to impose a fine if a manufacturer is deemed to have failed in its duty not to facilitate smuggling.

The maximum penalty is £5m.

'Last resort'
HMRC said it could not name the company fined, owing to taxpayer confidentiality rules, but said it had "recently issued a penalty to one manufacturer and [we] are keeping all UK manufacturers under review".

"The supply-chain legislation enables HMRC to work with industry to restrict the volume of genuine products available to smugglers," a spokesman said.

"Sanctions are a last resort and only applied where there is evidence that a manufacturer is failing to comply with its legal obligations."

BAT said it was "providing a perfectly legal supply to a legitimate demand".

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