UK Government supports risk-based taxation for heated tobacco

A Command Paper (the “Paper”) issued by the Secretary of State for Health and Social Care in December 2018 lays out the UK Government’s response to the House of Commons Science and Technology Committee’s Seventh Report of the Session 2017 -19 on E-Cigarettes. The Paper expresses the Government’s firm belief in proportionate regulation of e-cigarettes based on the reduced risk profile of these devices. It extends this harm reduction approach to the tax treatment of heated tobacco products consistent with the Committee’s recommendation.

Assessment of relative risks

The Government accepts the Committee’s recommendation to help fill remaining gaps in the evidence on the relative risks of e-cigarettes and heat-not-burn products. It charges Public Health England with maintaining its annual ‘evidence review’ on e-cigarettes and directs PHE to examine evidence on heated tobacco products as new evidence emerges.

In regard to heated tobacco products and understanding their role in harm reduction, the Government has previously asked the Committee on Toxicity of Chemicals in Food, Consumer Products and the Environment to provide it with an independent assessment to research the toxicological risks of heat not burn products and compare these to those attributed to conventional cigarettes. Among the positions published by COT on 12 December 2017 was the finding that consumers who use heated tobacco products are exposed to between 50 and 90 percent less of the ‘harmful and potentially harmful’ compounds compared with conventional cigarettes. COT was unable to conclude anything concerning the risks of heat not burn products compared to e-cigarettes. PHE reached similar conclusions following its latest evidence review.

The Government expressed its commitment to make available to the public the outputs of research on the risks of e-cigarettes and novel tobacco products.

Risk based taxation

Having accepted the reduced risk profile of e-cigarettes and heated tobacco products the Government fully embraces Recommendation 6 of the Committee’s report which proposes that “the level of taxation on smoking-related products should directly correspond to the health risks they present, to encourage less harmful consumption.”

Transposing this recommendation into policy implies that “e-cigarettes should remain the least taxed and conventional cigarettes the most, with heat-not-burn products falling between the two.”

In actual fact, Recommendation 6 reflects current practice in the United Kingdom. E-cigarettes are considered consumer products and are therefore subject only to the 20% Value Added Tax. Cigarettes and other tobacco products are taxed at considerably higher rates of excise. Heat not burn products are regulated under the Tobacco and Related Products Regulation (TRPR) as novel tobacco products. For purposes of taxation they are classified, on an interim basis, as other smoking tobacco products which attract the lowest rate of excise duty available for tobacco.

Since 29 October 2018 the applicable rate of excise for other smoking tobacco and chewing tobacco is £125.20 per kilogram. The Government notes that the Committee on Toxicity concluded that heated tobacco products are less harmful than cigarettes but more harmful than e-cigarettes and expects the taxation system to reflect this. Further, the Government notes that “where tobacco is taxed on a weight basis heat-not-burn products generally have an advantage as they contain comparatively less tobacco.”

Budget 2018

The findings expressed in the Report are consistent with announcements made previously by the UK Treasury. The government first signaled its intention to legislate a new duty category for heated tobacco products when it released the results of its public consultation on the tax treatment of these novel tobacco products in March 2018. The announcement reflected the majority of responses to the consultation conducted earlier in the year which indicated that “a new category is the best way to capture heated tobacco products for duty purposes.”

The proposed addition of a new excise duty category to the TPDA was announced by HM Revenue & Customs on 6 July 2018.

Later, at Budget 2018, HM Treasury announced that a new duty category ‘Tobacco for Heating’ would be introduced in Finance Bill 2018-19. The duty rate for ‘Tobacco for Heating’ will be set at the same level as hand rolling tobacco, which is currently £234.65 per kilogram. The changes will become effective on 1 July 2019.

European Commission Review

A report from the European Commission with a review of the Tobacco Excise Directive (Council Directive 2011/64/EU) that could propose inclusion of heated tobacco in the Directive is expected in 2019. Independently of a mandate from the Commission, nearly half the EU Member States have already amended their respective excise legislation so as to include a new discrete duty category for heated tobacco with tax rates well below those applied to conventional cigarettes.

While the UK is not the only country in Europe to create a new excise duty category for heat-not-burn products, it does, perhaps, provide the best and most clear example of a fiscal policy based on the available scientific evidence that applies risk-based taxation to novel products seen as offering a reduced risk profile.

The Commission would be well served by taking note of this risk-based approach to taxation which has the potential to offer a significant contribution to overall harm reduction among users of tobacco products.

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