Policy paper

Tobacco Duty on heated tobacco

Updated 1 November 2018

Who is likely to be affected

Manufacturers and importers of heated tobacco will be directly affected.

General description of the measure

The measure maintains the effectiveness of the tobacco regime, the government is introducing a new category of tobacco product called ‘heated tobacco’ in the Tobacco Products Duty Act (TPDA) 1979. The duty rate for heated tobacco will be set at Budget 2018.

Heated tobacco products (also known as ‘heat not burn’) are a recent development in the tobacco market. These products contain processed tobacco that is heated but not burned as it is in conventional tobacco products.

There are different ways that this can be achieved but they all use tobacco to produce or flavour vapour.

Under current rules there are 4 categories of tobacco product which attract different levels of tobacco duty:

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

While these classifications capture tobacco designed for smoking, apart from chewing tobacco which is clearly distinct, they do not specifically capture smokeless tobacco products.

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 liability to tobacco products duty. This is not efficient in the long term, particularly if the number of products on the market increases.

Policy objective

This measure will provide clarity and certainty, and ensure that heated tobacco is captured within the tobacco regime efficiently.

Having a clear definition that captures the full range of heated tobacco will also mean that there is less scope for manufacturers to attempt to reduce their duty liability by producing products which do not clearly fall within an existing category.

Background to the measure

At Budget 2016, the government announced a consultation on the tax treatment of heated tobacco. The focus of the consultation was a new duty category that could sufficiently differentiate heated tobacco from existing tobacco products.

The consultation set out the case for change, the current rules, and the rationale for potential changes to the tobacco duty regime in response to the development of heated tobacco. The consultation ran from 20 March 2017 to 12 June 2017.

On 13 March 2018, at Spring Statement, the government published a consultation response document which announced an intention to legislate for a new duty category in Finance Bill 2018-19.

Draft legislation was published for consultation on 6 July 2018.

Detailed proposal

Operative date

The new heated tobacco category will exist from the date of Royal Assent to Finance Bill 2018-19. The commencement date will be announced at Budget 2018.

Current law

The liability to tobacco products duty is determined in the UK by section 1 of the TPDA. The power to charge excise duty on tobacco products is contained in section 2 of the TPDA.

Tobacco products are further described by the Tobacco Products (Description of Products) Order 2003 (the Order).

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19 to amend sections 1(1) and 1(3) of and schedule 1 to the TPDA to include heated tobacco.

A power in the Finance Bill 2018-19 will also allow for the making of regulations to provide a description of heated tobacco within the Order.

The power will also allow for consequential amendments to relevant secondary legislation, including that which deals with the holding and movement of excise goods.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024

These figures are set out in Table 2.1 of Budget 2018 as part of the measure ‘Tobacco Duty: RPI plus 2ppt on all duties and additional 1ppt for hand rolling tobacco’ and have been certified by the Office for Budget Responsibility.

More details can be found in the policy costings document published alongside Budget 2018.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure has no impact on individuals as it only affects businesses.

There is no impact on family formation, stability or breakdown.

Equalities impacts

Due to differences in tobacco consumption, any changes to tobacco duties will have an equalities impact. Men are slightly more likely to smoke than women.

Impact on business including civil society organisations

This measure is expected to impact a small number of tobacco manufacturers who are large companies and SME tobacco importers.

These businesses will benefit from the measure as it aims to provide clarity and certainty on the future tax treatment of heated tobacco products. The administrative burden is expected to be negligible.

Businesses will incur one off costs, including familiarisation with the new rules. It is not expected that there will be any on-going costs.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be a negligible impact on staff resourcing for HMRC. There will be an initial cost estimated at £830,000 to amend HMRC’s IT systems and additional IT maintenance costs of approximately £38,000 over 5 years.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored and evaluated through communication with the taxpayer groups affected, revenue receipts and information collected by HMRC on the appropriate duty returns.

Further advice

If you have any questions about this change, please contact Excise: Enquiries on 0300 200 3700, email tobacco.policy@hmrc.gsi.gov.uk or write to HMRC at:

HM Revenue and Customs - CITEX Written Enquiry Team
Local Compliance S0000
Newcastle
NE98 1ZZ
United Kingdom