The sale of cannabidiol aka CBD oil, one of the non-hallucinogenic parts of the cannabis plant, is a growing industry. Relatively weak CBD products are sold in high-street stores such as Superdrug and Boots as a health supplement for those suffering anxiety or stress, which neatly brings me to the curious case of The CBD Flower Shop Ltd.
A stronger version of the cannabis plant, is specially grown in Italy, processed in Switzerland and imported into the UK by The CBD Flower Shop Ltd. They then retail this niche product, usually in the form of tea, but only containing the legally allowed amount of CBD oil.
Is Marijuana food?: HMRC enter the scenario
HMRC clearly weren’t happy and assessed the taxpayer for £430,000 of VAT on the basis that the CBD teas were a standard-rated product that were not eligible for zero rating as the products did not come under their definition of food. Not unsurprisingly, the taxpayer’s view was that CBD was listed in the EU Novel Food catalogue and, as such, could be regarded as a food for zero-rating purposes.
HMRC’s own Public Notice on the subject (PN: 701/14 Food) notes that dietary supplements, medicines and food additives are not usually zero rated; however, the same notice states that teas, including herbal teas and similar preparations, are zero rated.
In this case, CBD Flower Shop Ltd was assessed on the tea leaves and not the CBD oil, which they strongly disagreed with and decided to have their day in court!
Is Marijuana food?: And so, to court – opening statements
The general process for a tax tribunal is that both sides draft their Statement of Case (SoC), which sets out the core arguments at issue. HMRC filed their SoC on 5 May 2022 and the taxpayer filed on 27 May 2022, together with their list of documents and witness statements. Having had sight of the taxpayer’s case and evidence, HMRC then applied to the tribunal on 18 August 2022, asking to amend its statement of case.
HMRC’s amended statement, which it now sought to rely on in the tribunal, contained an additional section titled “illegality”. HMRC had, in effect, changed their argument to ‘CBD oil products’ are illegal and zero rating cannot be applied to an illegal product.
They further argued that as the original legislation for zero rating was for clearly defined social reasons and that would not extend to giving a tax benefit to illegal acts. This new argument looked to not even consider the merits of zero rating of foods and instead jumped straight to the conclusion that as the products are illegal then they must therefore be standard rated.
Is Marijuana food?: And so, to court – the nitty-gritty
That HMRC tried to argue the goods were illegal and therefore not eligible for zero rating does highlight the oddity that something illegal could still be subject to VAT. HMRC then rather arrogantly told the tribunal, that its amended statement was in its opinion ‘bulletproof’ and therefore should be successful. Not unsurprisingly, the taxpayer disagreed, arguing that the amended statement was filed late and prejudicial.
The tribunal considered the arguments and came to the conclusion that HMRC’s new arguments did indeed have some merit. However, they also commented that these new arguments were presented over three months after the original statements of case had been presented.
HMRC claimed that it lacked expertise in the law relating to drugs and required advice from the Home Office, who had not been very quick in responding. The chair of the tribunal dismissed this argument, pointing out that HMRC had had plenty of time to get specialised expert advice prior to submitting their original statement on 5 May 2022.
Is Marijuana food?: The court’s decision
HMRC’s attempt to amend its statement of the case at the last minute, thereby changing its entire argument for rejecting zero rating, was if nothing else, very unsporting. Whether or not the CBD Flower Shop had the requisite licences, or indeed even needed a licence, will no longer be an argument HMRC can advance, the zero rating now resting on the original statement of case and whether the products are a food or a tea-based drink.
Accordingly, the tribunal dismissed HMRC’s late application and found for the defendant.
Tax Accountant’s view
This was a clear case of ‘you can’t have your (space) cake and eat it’. HMRC, having read the taxpayer’s SoC, then realised that their case was weak and tried to come up with another, more compelling argument. They might possibly have won if they had not taken such a lazy and sloppy approach to preparing their case, but now we’ll never know!