UK consultation on taxation of heated tobacco products ends soon

The UK Government’s public consultation on the tax treatment of heated tobacco products will wind up shortly on June 12. HM Treasury initiated this open dialogue on March 20 in order to address the potential need to introduce a new category for heated tobacco products in the Tobacco Products Duty Act 1979.

Heated tobacco products (also known as “heat not burn”) comprise an innovative product category which heat tobacco to generate a vapor without combustion. Although these products contain tobacco they have only been on the market for a relatively short time and are not listed among the products liable to pay duty detailed in the Tobacco Products (Descriptions of Products) Order 2003.

As there are currently few heated tobacco products available in the UK market, Her Majesty’s Revenue & Customs (“HMRC”) tends to review these on an individual basis in order to determine the appropriate tax treatment. HM Treasury, however, recognizes that this case-by-case approach is neither sustainable nor efficient in the long run and believes that introducing a new category would provide consumers and producers greater certainty about the duty for which heated tobacco products would be liable.

To address how best to tax heated tobacco products HM Treasury has undertaken to seek input from interested stakeholders and the public at large through this open consultation. The process starts by asking if introducing a new category in the Tobacco Products Duty Act 1979 is the best way to capture heated tobacco products for duty purposes. Alternatively, a broader “smokeless tobacco” category might be well suited to accommodate future product developments but would not capture heated tobacco products specifically.

Key to the process of creating the appropriate tax category for heated tobacco products is an adequate definition that captures the full range of available products as well as those which may be developed in the future. HM Treasury offers key criteria for defining heated tobacco products such as inclusion of tobacco and generation of vapor. The consultation seeks a defining characteristic that will separate these products from hand rolling tobacco (“HRT”).

Another facet of the consultation is the calculation of the duty and identifying the taxable base. The government indicates a bias towards taxing the weight of the tobacco and understands that this is a flexible approach given that heated tobacco products may come in various formats such as sticks and capsules. However, on this issue, as with other questions, the government seeks feedback from stakeholders and solicits different opinions and alternative approaches.

In order to minimize the administrative burden of collecting a new excise tax on heated tobacco products and maintain the efficiency of the current tax system the government proposes to adopt the same procedures used to collect the existing tobacco excise duty. Stakeholders are invited to assess the inclusion of heated tobacco products in the current regime and to identify any additional administrative issues that the government should consider.

Finally, HM Treasury indicates that this consultation will not address the rate of excise duty to be applied to a new category of heated tobacco products. In the event that a new category is created following this consultation process, a rate of tax will be set on the same basis as the duty currently applied to heated tobacco products already in the market. The government recognizes that many knowledgeable sources believe that insofar as heated tobacco products are smokeless and may carry a lower health risk to consumers than conventional tobacco products the reduced risk should be reflected in the duty rate.

However, HM Treasury affirms that this consultation is purely about the tax treatment of heated tobacco products. Issues relating to health impacts are deferred to the Department of Health. It seems regrettable that this otherwise comprehensive public consultation chooses to ignore this critical question. Excise duties are often justified on the grounds that they compel the consumer to offset or “internalize” the “negative externalities” caused by consumption of certain products such as alcohol and tobacco. If heated tobacco products are indeed less harmful than traditional products which burn tobacco it seems negligent to omit their lower risk profile from the determination of the rate of excise duty.