News

Taxing times

02 April 2008 By db staff writer

d=”standfirst”>The recent Budget rocked the drinks trade, writes Ron Emler, with even higher than expected taxes on beer, wine and spirits. A predicted weakening of the pound against the dollar provides a glimmer of hope for the industry

Alistair Darling claimed his first Budget had “stability” as its cornerstone. As far as the drinks industry is concerned, nothing could be further from reality. Not only did Darling impose swingeing tax increases on alcohol, he also worded his statement in such a way as to obscure the true extent of his impositions.
He said duty rates “will increase by 6% above the rate of inflation. Beer will rise by 4p a pint, cider by 3p a litre, wine by 14p a bottle and spirits by 55p a bottle”. The monetary values grabbed the headlines (as Darling intended) and the 6% figure was reported erroneously. In the case of still wine, the duty increase is Â£1.47 a case, plus VAT (the tax on a tax), so Darling is grabbing more than 10% extra per bottle.
He admitted that he had raised duties to pay for extra winter fuel payments for the elderly and to help families. There was no mention of countering binge drinking or pandering to the health lobby. This was an old-fashioned tax grab for political expediency. He had to give something away and the public finances are in such a parlous state that extra “sin” taxes were too tempting a target to ignore, especially as the Treasury trumpeted that the price of a bottle of wine in supermarkets had actually fallen by about 40p in the past 10 years. Treasury insiders now admit that they did not realise that suppliers, not retailers, had absorbed most of the excise duty increases in the intervening period, ignoring the substantial cost savings the industry has made.
Worse, Darling announced that excise duties would rise by two percentage points above the rate of inflation each year until 2013.Â He has conceded that inflation will be above the Bank of England’s 2% target, so next year’s duty increases will probably be about an extra 6%. The Scotch Whisky Association estimates that duty alone on a standard bottle could be about Â£7.25 by 2013 and there are alarmist predictions of the Â£6 pint to accompany the London Olympics in 2012.
The drinks industry had expected modest increases but nothing on Darling’s scale. The Wine and Spirit Trade Association pointed out that Britain now imposes the highest taxes on wine of any EU country, while the British Beer and Pub Association said: “The millions of people who enjoy beer have just been hit by a Â£50.5 million a month tax on their family budgets”.
For a decade, Gordon Brown had eschewed imposing extra duties on Scotch whisky but Darling’s extra 55p a bottle (59p including VAT) was condemned by the Scotch Whisky Association, which was “astonished” by the rise at a time when the industry is investing more than Â£400m to meet demand. Chief among its objections is that a major British exporter could face extra difficulties when pressing for lower tariff barriers abroad simply because the UK government had set a bad example. The Treasury cut little ice with its argument that 90% of the industry’s production is exported and that therefore the increased duties would have little impact. On the contrary, producers felt aggrieved that the “inflation-plus” duty escalator will further entrench what they see as disproportionately heavy taxes on spirits compared with other forms of alcohol.
The Institute of Fiscal Studies calculates that the higher duties will raise an extra Â£400m for the government this year and Â£1 billion a year by 2013-14, but it warned that higher spirits duties were likely to increase illicit trading and booze cruising. The Treasury itself calculates that alcohol revenue “leakage” was Â£400m in 2005/06.
The brewing sector also pointed out that commodity price rises, notably for barley and hops, will push beer prices up by a further 7% this year, while the 20% increase in petrol prices in the past 12 months was adding to distribution cost pressures. On average, 27 pubs a month are closing and the owners of small free houses, the most vulnerable pub sector, will also be hit by the 80% escalation in capital gains tax when they attempt to
sell up.
Darling’s calculations were based on a relatively benign economic outlook, something that alarmed most commentators at a time when the economy is slowing, house prices are falling, unemployment is rising and personal debt is at record levels, leaving consumers in poor
shape to stand up to what looks like a rapidly approaching
global recession.
Already there is a marked downturn in consumer sentiment. A recent survey for The Times showed that more than a third of the adult population were cutting back their expenditure due to
fears about job security and the state of the economy. More than 50% said they were planning to eat out less this year. Conversely, that might boost off licence and supermarket sales.
There were, however, two glimmers of hope springing from Darling’s widely condemned Budget. The first is that sterling will weaken against the dollar. For instance, Capital Economics,
the independent forecasting consultancy, predicts that the pound could fall to about $1.75 by the end of this year. That would boost returns for big exporters such as Diageo, the largest producer of Scotch, which derives about a third of its net sales from the US. On the other hand, exporters will come under more pressure from Europe if, as Capital Economics predicts, sterling falls further against the euro to about e1.25 by early next year. That will squeeze importers, agents and retailers harder as continental producers seek to maintain their own returns as sterling weakens.
The second is that the big retailers will be forced to recognise that it will be impossible for their suppliers to absorb the extra 14p duty on a Â£3.99 bottle of wine;
the price point will have to be breached. Some importers hope that allowing the retail price to rise to, say, Â£4.49, with the chancellor taking the blame, will give producers slightly healthier margins and leave them scope
to fund selected lower priced promotions at strategic times of
the year.

Insider opinion:
Jeremy Beadles, chief executive, Wine and Spirit Trade Association (WSTA)
“British consumers will now pay more tax on wine than anyone else in the European Union. It is bizarre at a time when the economy is slowing, prices are rising and many families are feeling the pinch that the government should choose to add to their burden by making the simple pleasure of a glass of wine or spirits considerably more expensive.”

Rob Hayward, chief executive, British Beer & Pub Association (BBPA)
“Every single day, the treasury is losing over Â£1 million in beer taxes and four pubs are closing. People are now drinking 1m fewer pints a day compared with last year. That trend will continue. It’s a decision doomed to failure – bad for taxpayers, beer, pubs and bad for the Treasury as well.”

Stephen Robertson, director general, British Retail Consortium (BRC)
“We are not convinced that raising the price of alcohol through taxation is the correct solution. The problem with taxation on alcohol is that it’s a blunt instrument that raises the price to millions of consumers who drink responsibly.”

Gavin Hewitt, chief executive, Scotch Whisky Association (SWA)
“A tax rise is a blow to international competitiveness when the industry has been investing significantly to meet growing global demand for Scotch whisky. It sets a damaging precedent that export markets may follow.”