3: Excise tax on Gin and Vodka

Background

The food and drink industry is the UK's largest manufacturer and the spirits sector is the only one where exports exceed imports. The alcohol drinks industry is important economically, strategically and socially. We are therefore concerned at the consequences of extra costs being imposed on our sector during the economic downturn. The GVA represents by far the largest sector in the UK spirits market.

Tax Escalator

The 2008 Budget introduced a Tax 'Escalator' which increased the Excise tax by 2% above the rate of inflation (RPI) for that year and the following four years. But this was before the recession started. The position forecast in that Budget has now changed and the escalator is an out of date tool.

Excise tax on Spirits has increased by 15.7% over the last two years as a result of the Tax Escalator introduced in the March 2008 Budget. This has reduced the volume of spirits cleared through HM Customs during that time period by 14%.

Tax Burden

The average tax per bottle pro rated to 1 litre for all spirits is increased correspondingly and is now up to 70% at 37.5% abv in the Off Trade. For the 'Cheapest in Display' products, tax can be over 85%. The average tax per bottle of spirits in the On-Trade is 26.0%.

Price sensitivity: Tax on spirits is close to or at the point of tax maximisation

London Economics have produced an update on Customs own 2003 report on Alcohol Taxation. This has shown that spirits are extremely price sensitive. Indeed, the current level of taxes on spirits is close to or at the optimal level (the tax maximising rate). This means that any further tax increase may lead to diminishing returns.

Impact on Revenue from Spirits

As a result, the revenue receipts from spirits for 2009 were down £49M on the previous year just when the Chancellor had hoped to increase his returns. Any further increase would put receipts severely at risk at a time of economic uncertainty.