HMRC Suffers Setback in VAT on Cannabinoid Products Test Case

21/02/2023


The fairness of litigation depends on all sides promptly laying their cards on the table so that no one is taken by surprise. A tribunal made that point in a case concerning the burning issue of whether the welter of cannabinoid (CBD) products now legally available to consumers should be categorised as ‘food’ and zero-rated for VAT purposes.

A retailer sought zero-rated status in respect of its CBD products on the basis that they are food. HM Revenue and Customs (HMRC), however, took the view that the products are subject to standard, 20 per cent VAT and raised assessments in respect of the retailer’s past sales in excess of £430,000.

After witness evidence had been exchanged and directions given for a hearing of the matter before the First-tier Tribunal (FTT), HMRC applied to amend its previously stated case. It asserted for the first time that it was for the retailer to show that it was licensed to sell CBD products or that a medical exemption applied to them.

HMRC argued that, in the absence of such a licence or exemption, dealing in such products is illegal, regardless of whether they contain tetrahydrocannabinol, the psychoactive element in cannabis. Under the Misuse of Drugs Act 1971, all parts of a cannabis plant, save for its seeds, mature stalks and fibres derived from those stalks, are treated as a controlled drug.

In resisting the application, the retailer argued that it had been ambushed by HMRC putting forward an entirely new illegality argument at a late stage in the proceedings. Ruling on the matter, the FTT noted that the application had clearly been made late. The delay arose from HMRC’s failure to obtain specialist advice on the issue sooner than it did. Given the prejudice that the retailer would otherwise suffer, the balance came down in favour of rejecting the application.


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