Escalator still rolling despite Budget pledge

Chancellor George Osborne delivered an unexpected fillip to the UK drinks industry in his Emergency Budget yesterday, but his announcement that there will be no new duties applied to alcohol this year does not necessarily mean the industry was let off completely.

Osborne’s decision, which was greeted with great relief by the trade, follows substantial increases in tax on alcohol in recent years. Since the start of 2008 tax on wine and spirits has increased by 26% and 22% respectively.

Likewise, the decision to reverse the 10% above-inflation duty increase on cider imposed by the previous Labour government provoked much chinking of glasses across the West Country. It was the first time the UK government has frozen excise duty since 2001.

However, read between the lines and it becomes evident that Alistair Darling’s much-maligned duty escalator, which sees alcohol duty rise at 2% above inflation year-on-year, will remain in place until 2015.  With inflation currently running at around 3%, that means we will witness a 5% increase this year alone.

Treasury documents affirmed: “The government confirms the across the board increase in cider duty rates of 10 per cent above inflation announced in the March Budget will be reversed from 30 June 2010. Secondary legislation will be introduced shortly to increase tax on cheap, strong ciders.

“The government will also review alcohol taxation and pricing and will report in the autumn. There will be no increases in the rate of duty on beer, wine or spirits at this Budget but the government will continue with the plans it inherited to increase the rates by 2% above inflation each year to 2014-15.”

The Chancellor also announced that VAT will rise from 17.5% to 20% in February 2011, hitting consumers in the pocket just as it will hit companies and retailers.

“With VAT now confirmed at 20% we could see consumer spend drop by billions,” said Richard Fleming, UK head of restructuring at KPMG, which handled the collapse of First Quench Retail last year. “Those retailers teetering on the edge may find the VAT rise pushes them over the edge. While we have seen a lull in insolvency numbers in recent months, we expect this trend to reverse, particularly in industries such as retail and leisure where improving consumer demand is vital.”

Likewise William Kirkness, a senior analyst at Royal Bank of Scotland, warned of difficult times ahead for retailers.

“I have to say I didn’t think fuel or alcohol would receive a bashing given the historical rises and the fact that it hits lower earners proportionately harder,” he said. “But it’s difficult to say if they won’t be hit next time round though.

“The VAT rise was a shocker, especially after FT peddled on the morning of the Budget that a rise was unlikely. If growth remains embryonic Jan 2011 could be a dire month for retailers.”

However, the mood of the drinks industry was, as a whole, very upbeat following fears that alcohol would be targeted again as a “soft touch” as the new coalition Conservative/Liberal Democrat government seeks to claw back the huge deficit left behind by the Labour administration. The move has also been viewed as an admission by the Treasury that duty increases on alcohol were not generating revenue.

However, while one would have expected the cider industry to be celebrating the news more than anyone – having seen the 10% above-inflation increase reversed – the reaction of Henry Chevallier, chair of the National Association of Cider Makers (NACM), was laced with a sobering warning.

“We offer a cautious welcome to this Budget if it signals the intention to introduce stability and sanity on duty rates,” said Chevallier. “After successive increases in duty this news offers some respite, but it only adds to the chaotic approach to duty if next time rates go up again.
 
“The cider industry has a very long investment cycle – perhaps 40 years. It means we need stability in order to plan and manage our businesses. For government, of whatever persuasion, to keep moving duty rates means very considerable disruption and a lack of certainty that undermines everything we do.
 
The NACM was also keen to stress the need for caution when the government conducts its autumn review on strong ciders and other drinks considered to be contributing to the problem drinking culture in Britain.

“This review creates an opportunity we must seize, but we must put the formulation of sensible policy ahead of a misguided notion that a minority of drinks create problems that affect everyone in our society,” said Chevallier.

The upshot of it all is that the industry is still facing a degree of uncertainty as we head towards the autumn reviews. Pricing and duties will once again be under the microscope and the softly-softly approach adopted by Osborne this time might just be a smokescreen ahead of further increases.

Click here to look back at our Budget day blog

Alan Lodge, 23.06.2010