Tax treatment of heated tobacco products

Question 1

1. Introduction

Accepted Answer

Budget 2016 announced that the government would consult on the tax treatment of heated tobacco products. This is a new type of tobacco product and does not include e-cigarettes. E-cigarettes do not contain tobacco and are therefore not liable for tobacco duty.

This consultation sets out the case for changes to the tobacco duty regime in response to the development of heated tobacco products. Chapter 2 lays out the current rules and the rationale for potential changes. Chapter 3 seeks views on the technical details of how changes could be made and how these fit in with the future evolution of the heated tobacco product category. A summary of the consultation questions is provided in chapter 4 and chapter 5 sets out the consultation process.

The consultation will run for a period of 12 weeks closing at 11:45pm on 12 June. The government will announce its next steps once the consultation has closed and all responses have been received and considered. Please send responses to the consultation questions to heatedtobacco@hmtreasury.gsi.gov.uk.

Question 2

2. Background

Accepted Answer

2.1 What are heated tobacco products?

Heated tobacco (also known as heat-not-burn) products are a recent innovation in the tobacco market. In these products processed tobacco is heated, but not burned as it is in conventional tobacco products. There are a number of different ways that this can be achieved, however, all products use tobacco to either produce or flavour vapour. Unlike e-cigarettes, heated tobacco products do contain tobacco. E-cigarettes are not in the scope of this consultation.

2.2 Current Rules

The rules for calculating the amount of excise duty due on tobacco products are laid out in the Tobacco Products Duty Act 1979. Definitions of the products liable to pay duty are detailed in the Tobacco Products (Descriptions of Products) Order 2003. Under current rules, there are five classifications of products which attract different levels of tobacco duty:

cigarettes
cigars
hand-rolling tobacco (HRT)
other smoking tobacco
chewing tobacco

While these classifications capture tobacco designed for smoking, they do not specifically capture smokeless products (apart from chewing tobacco). At present, there are only a very small number of heated tobacco products on the market and HMRC assess these on a case-by-case basis to determine the appropriate liability to tobacco products duty.

2.3 Why do these rules need to change?

Assessing products on a case-by-case basis will not be efficient in the long term, particularly if the number of products on the market increases. Introducing a new category would give certainty to consumers and producers about the duty heated tobacco products are liable for, reduce complexity in the duty system and ensure that products are captured efficiently. Having a clear definition that captures the full range of heated tobacco products will also mean that there is less incentive for manufacturers to attempt to reduce their duty liability by producing products which do not clearly fall within an existing category.

Question 3

3. Potential changes

Accepted Answer

3.1 Introducing a new category

Heated tobacco products contain tobacco and, therefore, fall within the tobacco duty regime. In order to maintain the efficiency and effectiveness of the regime, the government is minded to introduce a new category for heated tobacco products in the Tobacco Products Duty Act 1979. The new category would be designed to specifically capture heated tobacco products, giving certainty to manufacturers and consumers about their duty treatment going forward.

Question 1: Is introducing a new category in the Tobacco Products Duty Act 1979 the best way to capture heated tobacco products for duty purposes? If not, how should heated tobacco products be captured?

3.2 Definition

For this new category to be effective and sustainable, it will need to capture the full range of heated tobacco products, including products not yet on the market. At present, the government is aware of three broad types of heated tobacco products:

processed tobacco heated directly to produce vapour
processed tobacco designed to be heated in a vaporiser
devices that produce vapour from non-tobacco sources, where the vapour is then passed over processed tobacco in order to flavour the vapour

Question 2: Are you aware of any current, or planned, heated tobacco products which would not fit into these categories?

Based on these product types, the government is minded that a definition of heated tobacco for duty purposes should be based around the following criteria:

is not cigarettes, cigars, hand-rolling tobacco, or chewing tobacco
consists of or includes tobacco
has been prepared to produce or flavour vapour
has not been prepared for use in a water pipe

Question 3: Do these criteria accurately define and capture both current and planned heated tobacco products? Are there any criteria which should not be included in a definition?

Question 4: Are there any products other than heated tobacco products that could be captured by this definition?

The definition will also need to include a characteristic that differentiates heated tobacco from HRT, in case the tobacco would otherwise meet the HRT definition. Current products do not seem to have objective criteria through which heated tobacco could be differentiated. Therefore, the government is minded to include criteria based on the fact that the heated tobacco is encased, for example in a capsule. A maximum size for capsules could then be set to ensure that it captured products specifically designed for use in heated tobacco devices.

Question 5: What would be an appropriate maximum size for a heated tobacco capsule? Would it be appropriate for the maximum size to be based on the weight of the tobacco?

Question 6: Alternatively, are there any objective, technical or scientific criteria that differentiate heated tobacco from conventional tobacco for smoking?

Question 7: Are there any other criteria that the government should consider including in the definition?

In order to fully consider the effectiveness of a new category for heated tobacco, the government is also interested in stakeholder views on the future development and evolution of this segment of the tobacco market. As well as the products already available in the UK, a number of other, differently designed heated tobacco products are on sale in other countries. For a new category to be effective and efficient, it will also need to capture any future products.

Question 8: Are there any consumer or product-based incentives for manufacturers to develop products outside of these categories?

An alternative way to capture heated tobacco products would be to introduce a ‘smokeless tobacco’ category. This could be potentially be more broadly defined. This could make sense in the context of future product evolution, but does not capture heated tobacco products specifically.

Question 9: Would a smokeless tobacco category be a better way to capture heated tobacco products? If so, how should smokeless be defined?

Question 10: Are there any wider implications of introducing a smokeless tobacco category which the government should consider, for instance on other types of tobacco?

This definition of heated tobacco products is designed to capture only the tobacco containing element and not the electronic device used to heat it. For example, it would capture tobacco designed for use in a vaporiser, rather than the vaporiser itself. This is consistent with the fact that pipe tobacco is liable for tobacco products duty, but that smoking pipes are not. However, depending on the evolution of heated tobacco products, it is possible that this delineation between the device and the tobacco component may not always be appropriate.

Question 11: Do you agree that a heated tobacco duty category should only capture the tobacco capsule used in devices, rather than devices themselves?

3.3 Calculation of Duty

The specific component of tobacco products duty is currently calculated in one of two ways. For cigarettes, specific duty is calculated on a per stick basis. For all other tobacco products, specific duty is calculated based on weight.

The government is minded that heated tobacco duty should be calculated based on weight. As there are a number of different types of heated tobacco products, calculating duty by weight is more flexible as it does not necessitate a one-size fits all approach for very different products. Calculating the duty based on weight also means that the duty could be directly based on the amount of tobacco contained in the product.

Question 12: Do you agree that weight is the best way to calculate the duty on heated tobacco?

The government would also welcome stakeholder views on how the weight of a heated tobacco product should be defined. Duty could either be calculated based on:

the weight of the whole product
the weight of the tobacco contained in the product

Using the weight of the entire product is the most straightforward. However, using the weight of the tobacco only would mean that the duty was directly linked to the amount of tobacco being consumed. This would avoid charging the same amount of duty on products which are the same weight when finished, but which include differing quantities of tobacco.

Question 13: If the duty on heated tobacco is levied based on weight, how should the duty be calculated; the weight of the total capsule, the weight of the capsule contents, or the weight of the tobacco?

Question 14: Are there any other factors that the government should consider in deciding the regime for calculating the duty on heated tobacco products?

3.4 Administration

Introducing a new category to the tobacco products duty regime will impose a small burden on tobacco manufacturers and importers. As well as those producing or importing heated tobacco products being liable for a new type of tobacco products duty, there will also be a small administrative burden due to the introduction of a new regime. To maintain efficiency in the tax system, the government is minded that the new category should be collected through the same form as the existing tobacco duty return.

Question 15: Would there be any difficulties administering the regime in this way?

Question 16: Are there any other administrative issues which the government should consider?

3.5 Duty Rate

This consultation is not seeking views on what the duty rate for a new heated tobacco category should be. If, following this consultation, a new category is introduced, then the duty rate will be announced in due course. The duty rate for heated tobacco products will be set on the same basis as other tobacco products. The government will consider the fact that there are heated tobacco products already on the market – which are paying duty under the current rules – in making a decision on the duty rate.

As it is the combustion of tobacco which produces the vast majority of toxins and harmful chemicals in cigarettes, some have suggested that heated tobacco products may carry a lower health risk to consumers than conventional tobacco products. Some argue that, if they are reduced risk, then this should be reflected in the duty rate. However, this consultation is purely about the tax treatment. Any information relating to health impacts will be shared with the Department of Health.

Question 17: Are there any other factors which the government should consider when setting the duty rate?

3.6 Future Evolution

As heated tobacco is an emerging category very little is known about how consumers will respond to these products. In order to fully analyse the impacts of introducing a new regime for these products the government would welcome information from stakeholders on consumer behaviour and the heated tobacco market generally.

Question 18: Thinking about the UK in particular, what is the current size of the market for heated tobacco products (in terms of units sold and amount of tobacco per unit)? How do you expect this will develop over time?

Question 19: For products not currently on sale in the UK, do you have any data on sales or market shares for international sales? How has this changed over time, and how do you expect it to change in the future?

Question 20: Do you have any information on the users of heated tobacco products, particularly compared to conventional tobacco users?

Question 4

4. Summary of consultation questions

Accepted Answer