E-cigarettes and VAT | PKF Francis Clark
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E-cigarettes – Are they smoking cessation products for VAT purposes?

I recently read that ‘vaping’ has helped three million smokers quit or reduce smoking, and according to government research, it has saved the NHS billions of pounds.

Back in 2016, I received a query from a UK retailer asking me to confirm that e-cigarettes met the definition as a smoking cessation product for the purpose of the reduced rating of VAT. Initially, my response was “of course they are.”

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’, I looked into this further.

I contacted HM Revenue and Customs after learning other advisers had conflicting advice and was 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.”

Not very helpful!

It would have been great if HM Revenue and Customs 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.

I learned more recently that big retailers are now putting in VAT error claims requesting that HM Revenue and Customs repay 15% of 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. Other suppliers should also be considering putting in protective claims.

I predict that HM Revenue and Customs will reject error claims and a test case will go to Tribunal. Much like the Rank case… this will be a long drawn out process and it could take years for a final decision. And of course unjust enrichment must be considered.

For further advice, please contact me, [email protected] or 01392 667000.

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