Alcohol duties

This issue brief relates to a developing news event. For full details of the 2008 Budget visit our in-depth Budget section.

What are alcohol duties?

Most products containing alcohol are subject to a series of excise duties: either spirits duty, wine and made wine duty, beer duty or cider and perry duty. These duties are collected by HM Customs and Excise, and are levied on manufacturers and importers.

From March 2007, spirits and spirit-based ready-to-drink mixes (RTDs) and wine and made-wine of greater than 22 per cent alcohol by volume are liable for duties at a rate of £19.56 per litre of alcohol.

Beer is liable at a rate of £13.71 per hectolitre per cent of alcohol, while wine and made-wine and cider and perry are liable for a specific sum per hectolitre of product on a scale reflecting alcohol content by volume (abv).

Still cider and perry of between 1.2 and 7.5 per cent abv are liable for a rate of £26.48, or £39.73 for stronger drinks. Sparkling cider and perry of between 1.2 and 5.5 per cent abv are liable for £26.48, while the rate for stronger drinks is £172.33.

Wine and made-wine of 1.2 to 4 per cent abv are liable for a rate of £54.85; 4 to 5.4 per cent drinks for £75.42; 5 to 15 per cent drinks for £177.99; and 15 to 22 per cent drinks for £237.31. Strong sparkling wines are subject to separate rates: 5.5 to 8.5 per cent sparkling wines are liable for a rate of £172.33, while 8.5 to 15 per cent sparking wines are liable for £227.99.

A range of reliefs apply for alcohol-based products used for purposes other than drinking (eg as ingredients in other products, methylated spirits etc) and for small brewers.

All alcohols are also subject to Value-Added Tax at 17.5 per cent.

The rate of alcohol duties is adjusted annually by the Chancellor of the Exchequer as part of the Budget, with changes coming into force that day under the terms of the Provisional Collection of Taxes Act 1968.

The UK's alcohol duties are significantly higher than those that exist in most other European countries and much of the rest of the world. Since the removal of restrictions on alcohol importation from the EU as part of Single Market reforms, the collapse of the Soviet bloc and the opening up of trade with Eastern Europe and general greater global mobility, significant problems of widespread duty-evasion and large-scale organised smuggling have developed.

Background

Governments have taxed the consumption of alcohol for centuries, with different intentions at different times. Usually, governments were simply taking advantage of high demand to raise money from alcohol, and in the wake of high duties, smuggling has typically followed. In some parts of Britain, such as Cornwall, during the 18th and 19th centuries, smuggling of luxury goods (including drink) from Europe was more economically significant than the legitimate economy.

One of the best known and earliest attempts to use alcohol duties for social and health purposes, however, occurred in the early 18th centuries. At the end of the 17th century, cheap gin began to be consumed in large quantities in Britain, and laws introduced by William III actively encouraged distillation. With gin sometimes being distributed as part of workers' wages, consumption soon outstripped beer-drinking. Gin was taxed at 2d per gallon, while strong beer was taxed at 4 shillings 9d. The widespread consumption of gin was causing serious health and social problems, particularly in London (most famously depicted in Hogarth's "Gin Lane"). Research has suggested that gin-drinking was one of the main causes behind the death rate in the capital overtaking the birth rate in this period.

In 1729, gin sellers were required to be licenced (at a cost of £20) and the duty was raised to 2 shillings per gallon. In 1736, the Gin Act raised the cost of a licence to £50 and the duty to £1 - making gin prohibitively expensive. Rioting followed, and in the seven following years, only three licences were bought - yet gin, now frequently adulterated and harmful, continued to be consumed in huge quantities. The unenforceable Act was repealed in 1742 and the gin problem reached its peak during that decade, before a new system of regulation was introduced in 1751.

Today, the framework for alcohol duties is provided by the Alcoholic Liquor Duties Act 1979. The advent of the EU single market in 1992 was a critical turning point for alcohol duties: for the first time, most of the restrictions on people travelling to other European countries - where duties were usually far lower - were removed. This led on to large scale "bootlegging" (the bringing back of alcohol from the continent "for personal consumption" which was then resold without UK duty being paid). The Major government recognised this problem, and froze alcohol duties in its final years in an attempt to stem the tide of duty evasion, a policy continued by Labour.

In 2002, in response to the advent of spirit-based "alcopops", which many feared were being marketed primarily at children, subjected these products to spirit duty, causing an average price increase of 11p. At the same time, however, cider and perry duty was cut, primarily to support rural industry.

In 2003, in response to the extent of spirit smuggling, the Chancellor Gordon Brown announced plans to require bottles to display a stamp confirming that UK duty has been paid - in the face of industry opposition. Measures were included in the 2004 Finance Bill.

Controversies

Many drinkers resent the high and regularly rising prices that they have to pay for alcoholic beverages as a result of alcohol duties. Nonetheless, the principle of government taxing alcohol heavily as a source of revenue and to provide a price-based deterrent to drinking is widely accepted as legitimate.

However, a significant problem of smuggling has emerged in recent years. The causes of this phenomenon are disputed, but perhaps the most important is the desire of large sections of the public to pay less for alcohol and its willingness to evade paying duty to do so. For this reason (and on grounds of cost), the distilling industry warns that the stamp system will have little impact. In 2001-2002, Customs claimed that it had lost £600 million through alcohol duty evasion, compared to £450 million in 2000-2001.

Some critics of the UK's alcohol duties regime put the problem down to the differential rates in the UK and the rest of Europe. This has certainly generated the problem of the "white van man", who makes money by bootlegging drink. The drinks industry campaigns vigorously for UK duty levels to be lowered to those seen on the continent. The harmonisation of alcohol duties is also an objective of the European Commission.

The Government faces a dilemma with regard to alcohol duties. Increasing duties can be expected to stimulate duty evasion and revenue loss, while reducing them leave the Government open to accusations of social irresponsibility and reduces legitimate revenue.

2008 Budget update

In his first Budget as chancellor, Alistair Darling announced duties on alcohol would be increased by 4p per pint of beer, 14p per bottle of wine and 55p per bottle of spirits.

Statistics

• HM Revenue and Customs' receipts for spirits duties in 2006-2007 were £2.2 billion, and are projected to be £2.3 billion in 2007-2008 .
• Revenues for wine duties in 2006-2007 were £2.4 billion, and are projected to be £2.5 billion in 2007-2008.
• Revenues for beer and cider duties in 2006-2007 were £3.3 billion, and are projected to be £3.4 billion in 2007-2008.
• These figures should be taken in the context of a projected total of HMRC receipts of £453.4 billion for 2007-8.

Statistics: (Source: HM Treasury, "Budget 2007")


Quotes

"I announced in the Pre-Budget Report that - owing to continued high levels of spirits duty fraud - we would legislate to implement the Roques Report recommendation to stamp spirit bottles unless a workable alternative could be found. In making my decision that stamps are necessary to tackle fraud, I will help the trade financially with cash flow costs and defer payment for tax stamps and I will assist firms with capital investment. I have also decided - for the 7th budget in a row - to freeze spirits duty. And I will do so for the remainder of this Parliament - the longest freeze on duty in nearly half a century."

Gordon Brown MP, Chancellor of the Exchequer, Budget speech, March 2004

"Taxation of alcohol is an effective mechanism for reducing alcohol problems...The notion that heavy or dependent drinkers are immune to the influence of price is demonstrably incorrect. Put simply, but with entire scientific accuracy, alcohol taxation is a readily available instrument which can be applied to save lives and avert alcohol-related suffering.”

"Alcohol Policy and the Public Good", G Edwards et al, Oxford Medical Publications/WHO Europe, 1994