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TPD18050 | National Advice Service Enquiries - Calculating the recommended retail selling price

From HM Revenue & Customs · Tobacco Products Duty

You may be asked by potential importers of cigarettes how to calculate a recommended retail price (RRP) for the purposes of establishing the amount of ad valorem duty which would be payable.

Where there is no existing RRP (i.e. the brand is not currently sold within the UK meaning that the manufacturer or other importers will never have previously set an RRP) the first importer of the brand may set one for duty purposes. Whilst cigarettes may be retailed for less than this price, they should not be sold for more than the RRP because the ad valorem duty element is calculated on the RRP.

In the above circumstances, it is up to the importer to establish what the RRP should be, however the following is intended to give some guidance on how to calculate the proportion that tax may contribute to this price and an example to help.

  • The importer will need to calculate an RRP for the purposes of establishing the amount of ad valorem duty payable using the below formula or use the Minimum Excise Tax (MET)*, whichever is highest.

  • To find the specific duty of a packet of 20 cigarettes: take the price per 1000 cigarettes and divide by 50. You can get the most recent specific duty rate here.

For example: 244.78 (specific duty rate per 1000 cigarettes) / 50 = 4.8956 (specific duty payable on a packet of 20 cigarettes).

  • Find the Factor cost per 20 cigarettes. The factor cost will include all charges, expenses (other than the excise duty and VAT) and profit margins for all in the supply-chain including the importer, any wholesalers and retailer. In other words, the factor cost represents all components that build up the retail price of the cigarettes other than excise duty and VAT. Assuming the factor cost per 20 cigarettes is £2(only an example), add this to the specific duty per 20 cigarettes.

For example: £2 (factor cost per 20 cigarettes) + 4.90 (specific duty per 20 cigarettes) = 6.90.

  • Use the following formula to obtain RRP. For the purpose of this example we consider VAT of 20% and ad valorem of 16.5%, which are the rates at April 2021. You will find VAT rates here and ad valorem rates here

RRP =

Factor cost + specific duty divided by 1 - VAT fraction - Adval fraction =

6.90 divided by 1 - 0.1667 - 0.165 =

£10.32

To fully understand the above formula, we can look into the process in reverse order. Consider the RRP of 10.32

This amount contains a VAT element of 16.67%. This represents the percentage of VAT as part of the gross retail price. It is the VAT fraction (20% is 20/120 of the gross retail price) which when expressed as a percentage is 16.67%. This means that the amount of VAT within a price of 10.32 is 1.72. So, the price without VAT is 8.60. This is 0.8333 proportion of RRP (8.60/10.32 or 1-0.1667).

Now take away the ad valorem fraction. 0.8333-0.165 = 0.6683.

In theory, you multiply 0.6683 by the RRP to obtain factor cost plus specific duty. Hence, conversely in order to find RRP you divide factor cost + specific by 0.6683.

In summary, given these tax rates the sum of all the other components of price will make up 0.6683 of the retail price. Therefore, it is possible to calculate an RRP inclusive of excise duty and VAT if you know all other components of the price.

*Note: An exception is if the factor cost of any cigarettes is low enough to result in a price that means total duty payable is below the MET. In such cases the MET should be applied and the proportion of tax within gross price will be greater than that explained in the formula which means it cannot be used. Find the most recent MET duty rate here.