Principle of taxing alcoholic drinks based on their alcohol content (ABV)
On August 1st, in just a couple of weeks’ time, the method by which the duty on alcohol is applied will drastically alter, with the changes resulting in the biggest reform of alcohol duties for nearly 150 years.
The UK government is introducing a new, simplified alcohol duty system founded on the principle of taxing alcoholic drinks based on their alcohol content (ABV), rather than the type of drink. HMRC, who administer alcohol duties, have said that the new rates will reduce the administrative burdens on businesses and support public health by increasing the tax on the most damaging high strength drinks.
Alcohol Duty Changes: How are drinks taxed at present?
Beer and spirits are taxed by alcohol by volume (ABV) and are categorised into several bands that increase duty rates according to alcoholic strength, whilst all the other types of alcohol, such as wine, are taxed based on the overall volume rather than percentage of that volume that is pure alcohol.
Simple you may think, well not really, as successive governments have created a system whereby products of the same alcoholic strength are often taxed at significantly different rates. Further complications arise at Budget time, when Chancellors for time immemorial, have tinkered with the rates with small rises, freezes and even occasional cuts, whatever they think suits the public mood, especially at election time!
To demonstrate how the current system works, here’s three examples:
Example 1: An off-licence sells a 1-litre bottle of vodka with a strength of 40% ABV, with the base price (pre-tax) £10. As Spirit duty is £28.74 per litre of pure alcohol, this results in £11.50 in duty and once you add VAT at 20% the final price to customer is £25.80 (£10 + £11.50 + £4.30).
Example 2: The same off-licence sells a 1-pint (568mml) bottle of lager with a strength of 5% ABV, with the base price being £2. As the duty for beers < 7.5% ABV is £0.94 per litre, the duty is £0.54 per pint, plus VAT at 20%, thus the final price is £3.05 (£2 + £0.54 + £0.51).
Example 3: This time a pint (568ml) bottle of low-alcohol lager with a strength of 3.4% ABV is sold, with the base price being £1. As the duty for beers < 3.5% ABV is £0.43 per pint, plus VAT at 20%, thus the final price is £1.72 (£1 + £0.43 + £0.29).
Alcohol Duty Changes: What do the new rates mean in practice?
To demonstrate how the new rates apply, here’s the same three examples but based on the higher rates:
Example 1: Looking at the same 1-litre bottle of vodka, it will be in the new flat rate category of £31.64 for any alcoholic product > 22% ABV per litre, resulting in a final price of: £27.20 (£10 + £12.66 + £4.54), amounting to a rise just over 5%.
Example 2: Whilst the same pint of 5% ABV lager has a new rate of duty, so will be in the > 3.4% to < 8.5% category at £21.01 per litre, thus the final price will be £3.12 (£2 + £0.60 + £0.52), amounting to a rise of just over 2%
Example 3: This time the pint bottle of lager with a strength of 3.4% ABV is sold, with the base price being £1. As the duty for beers < 3.5% ABV is £5.26 per pint x 3.4%, plus VAT at 20%, thus the final price is £1.41 (£1 + £0.18 + £0.23), amounting to a reduction of 18%.
Alcohol Duty Changes: Special reliefs
In addition, there are three special reliefs:
- The existing Small Producer Relief will now be extended from just small brewers to all producers of alcoholic products under 8.5% ABV. So, artisan gin or wine producers who meet the conditions for small producer relief can enjoy the same benefits as artisan brewers.
- Draught Relief will reduce the duty on draught products which are sold in bars and other public venues and will apply a reduced rate of duty on draught alcoholic products, again under 8.5% ABV.
- There is also a temporary, Transitional Arrangement for wine producers and importers to facilitate the transition to the new duty calculation methods, this temporary provision will exist for 18 months (from 1 August 2023 through to 1 February 2025).
For a complete breakdown, of both the new and old rates, plus the reliefs, can be found at:
https://www.gov.uk/government/publications/changes-to-alcohol-duty-rates/alcohol-duty-rate-changes
Alcohol Duty Changes: The overall effect on the public & public finances
The million-dollar question is whether producers and retailers will actually lower their prices in line with the lowering of the alcohol content. Based on the past history of the major players, a price drop is unlikely, in the same way a reduction of VAT or freeze in fuel duty does not automatically mean lower taxes are passed to the consumer.
HMRC’s own impact study concluded that for draught beers we shouldn’t see any increase in the price of a pulled pint and they predict a significant reduction in low alcohol beers (< 3.5% ABV). For bottled beers, there would be roughly a 5p increase per bottle. For cider a 2p increase if draught and 5p if bottled. Spirits may go up by 3p per tot and around 5p per glass increase for wine. They also forecast a modest drop in the total amount of duty collected
Accountant’s view
I consider these reforms to be long overdue, but as with any reform there are winners and losers, mainly losers if you drink at home and like to at least taste something akin to alcohol. For those who prefer a night out, as price rises seem to be coming along every few weeks, they probably won’t be noticed by the anyone enjoying a typical night out.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.