It gets reported that ‘vaping’ has helped some three million smokers quit or reduce their smoking habits. Recent government research suggests it has saved the NHS billions of pounds.
For some time it had been thought that e-cigarettes meet the definition as a smoking cessation product for the purpose of the reduced rating of VAT.
But as VAT is never simple and the legislation (Group 11, Schedule 7A, VATA 1994) simply allows for reduced rating on the supply of ‘pharmaceutical products designed to help people to stop smoking tobacco’, we decided to look into this in some more detail.
From discussions with HM Revenue and Customs after liaising with other advisers who had received conflicting advice, HMRC offered the following as a response;
“Thank you for your enquiry of 12 January 2016, regarding the VAT liability of e-cigarettes and e-liquids.
I initially refer you to subsection 3.4 of VAT Notice 701/57, Health professionals and pharmaceutical products, which states the following,
Smoking cessation products prescribed and dispensed in accordance with the provisions of paragraph 3.2 are zero-rated. The reduced rate applies to all other supplies of pharmaceutical smoking cessation products, including supplies made over the internet. This includes all non-prescribed sales of patches, gums, inhalators and other pharmaceutical products held out for sale for the primary purpose of helping people to quit smoking.
However, for the purposes of VAT, e-cigarettes and e-liquids are subject to the standard rate (20%) of VAT.”
As ever, it would have been helpful if HM Revenue and Customs had responded with a clear definition of the difference between a pharmaceutical product and an e-cigarette where both are sold in the same environment and both are held out for sale with the primary purpose of helping people to stop smoking.
It has now been reported that large retailers are now putting in VAT error claims to HMRC to repay 15% of the VAT accounted for on the sale of vaping products on the basis that vaping products meet the definition of pharmaceutical products designed to help people to stop smoking tobacco. Consideration should therefore be given to putting in protective claims, should any potential case taken to a Tribunal be heard which could take a while to resolve.
It is predicted that HM Revenue and Customs will reject these initial error claims and a test case will go to Tribunal. Much like the Rank case… this is likely to be a long process and could take years for a final decision to be given after all sides have considered the full appeals procedures. And of course unjust enrichment must be considered.
For further advice, please contact FCTCVAT@francisclark.co.uk or speak to a member of the team on 01803 320100.