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This report explores the case for reforming alcohol duty in the United Kingdom, and the principles which should underpin a new, improved alcohol duty regime. This includes consideration of alcohol duty reforms that could be implemented following Brexit.
The report notes a number of key issues with the current alcohol duty regime:
- Significant disparities in duty charged for same strength products. While a relatively weak 6% ABV bottle of wine faces duty of 50 pence per unit of alcohol, as of the time of writing a 6% ABV cider faces duty of just 7 pence per unit of alcohol.
- Mixed incentives to produce weaker strength products. While beer duty increases or holds steady, on a per-unit of alcohol basis, with the strength of the product, this is not true for cider or wine. For these products, incentives to reduce product strength are limited.
- An inconsistent approach to taxation. While beer and spirits duty are taxed according to pure alcohol content, wine and cider duty are taxed according to the volume of the final product. This is a reflection of EU regulatory requirements, which require wine and cider to be taxed in this way. Brexit could open up possibilities to rationalise alcohol taxation in the UK.
- Lack of consideration for the alcohol tax system as a whole. Alcohol duty has become highly politicised and often driven by spurious arguments, rather than what evidence suggests would be most optimal – whether that be in terms of raising revenue, supporting jobs or improving public health outcomes.
- Arguments often used to justify duty freezes and favourable treatment for certain beverages are deeply flawed. For example, jobs-based arguments used to justify cider and spirits duty freezes ignore the fact that cider accounts for a very small number of jobs in the economy, and the fact that about 90% of whisky is exported from the UK – meaning duty changes and domestic consumption patterns have little bearing on jobs. Jobs-based arguments also ignore work lost through excessive alcohol consumption. Analysis by Public Health England found that, in 2015, there were 167,000 working years of life lost due to alcohol consumption – 16% of all working years lost in that year.
Arguments used to call for a more favourable tax treatment for spirits tend to focus on the need to support the Scotch whisky industry, yet UK-produced whisky accounts for just 17% of spirits consumed in the UK. Whisky’s dominance in the political discourse around spirits, with its evocation of images of charming rural distilleries, thus seems highly misguided. Vodka is in fact the most widely consumed spirit in the UK, accounting for about 30% of total consumption.
Arguments related to the regressive nature of excise duties are also flawed. Firstly, alcohol taxation does not appear to be particularly regressive, given relatively high rates of non-drinking among lower income households. Secondly, regressivity alone is not a strong argument against alcohol duty. Inequalities in the economy are better addressed through broader tax and welfare policy, rather than through alcohol duty which should largely be concerned with addressing the health and social harms caused by alcohol consumption.
The report notes the substantial health and social problems in the UK that are caused by excessive alcohol consumption:
- Studies suggest that the total costs of alcohol to UK society could stand at between 1.3% and 2.5% of GDP. This includes higher healthcare, policing and social care costs, as well as costs associated with lost productivity and lower employment.
- While in the 1960s the UK had a much lower rate of liver disease and cirrhosis deaths than other European countries such as France, Spain and Italy – the UK now has a higher rate of deaths than these countries.
- Alcohol-related deaths are more common in the most deprived areas of the United Kingdom. Alcohol-specific death rates among men in the most deprived quintile of the population are 4.3 times higher than for men in the least deprived quintile. For women, age-standardised death rates are 3.4 times higher.
The report notes that, while the evidence around the health impacts of mild-to-moderate drinking is mixed, the adverse impacts of heavy drinking on individual health and society are indisputable. Hazardous and harmful drinkers account for a staggering 78% of alcohol consumed in England. This is despite the fact that these heavier drinkers account for just a quarter (25%) of the total population.
There is also growing evidence suggesting that even moderate rates of alcohol consumption are associated with higher risks of cancer.
We argue that alcohol duty should be reformed to focus taxation where health and other harms are greatest. This will ensure that lower risk drinkers are not overly penalised for their consumption of alcohol. It also increases the chance of duty reform reducing alcohol consumption among heavier drinkers, or at least ensuring that such drinkers are paying for the costs associated with their consumption.
Analysis presented in this report provides insights into the types of drinker, and types of alcohol product, most associated with heavy drinking:
- Heavy drinkers are more likely to consume higher strength products such as spirits and high strength beers and ciders.
- Heavy drinkers are also more likely to consume alcohol in the off-trade (that is, drinking “at home” or “on the street”, rather than in a pub, bar or restaurant).
- Heavy drinkers are more likely to consume cheaper alcoholic beverages.
To better focus alcohol taxation on where health and other social harms are greatest, this report sets out five recommendations for a revised alcohol duty system:
- Introducing a duty strength escalator, to focus alcohol duty on the higher strength products disproportionately consumed by heavy drinkers, and create stronger incentives to produce lower strength products. There is at least tentative evidence that alcohol producers respond to duty changes, by reformulating products. Carlsberg reduced the strength of its low strength lager, Skol, from 3% to 2.8% ABV, in response to the introduction of a new lower-rate duty band for low strength beers. AB InBev has also reduced the strength of more mainstream brands of beer – including Stella Artois, Budweiser and Becks – as a means of reducing costs associated with alcohol duty.
- Levelling the playing field across same-strength products. Products of the same strength should face the same rate of duty and duty should be a function of the pure alcohol content of drinks, rather than the volume of the final product. This would help simplify the alcohol duty system.
- Allowing pubs to claim back a proportion of alcohol duty through a new “Pub Relief”. This would focus alcohol duty on the off-trade, which is particularly reliant on sales to hazardous and harmful drinkers. Conceivably, this could work in a similar way to Alcoholic Ingredients Relief, which already exists. With Alcohol Ingredients Relief, businesses can claim relief on alcohol excise duty when they use alcohol as an ingredient in drinks less than 1.2% ABV, chocolates, vinegar and other foods for human consumption (below a certain alcohol content).
- Explicitly linking alcohol duty to the social costs of alcohol, rather than treating it as a cash cow. At the very least, alcohol duty should cover the health, crime and welfare costs to government and wider society (the “externalities” associated with alcohol consumption). Paternalistic arguments, which consider the ability of individuals to make “bad” and regrettable lifestyle choices (such as those that undermine their job prospects), could justify a higher tax take. Alcohol duty should not be treated as a cash cow for government. The UK public finances are already overly reliant on niche taxes, rather than broad taxes such as income tax and VAT. Reliance on niche taxes makes the public finances inherently more volatile and at risk from factors such as changing consumer preferences. Linking alcohol duty to social harms, rather than as a general tool for revenue raising, could help to improve dialogue between drinks manufacturers, government and health experts.
- Regularising the uprating of alcohol duty, with inflation or earnings uprating being the “norm”. This would help depoliticise the setting of alcohol duty. While we believe inflation or earnings should be the “status quo” form of uprating duty, this should be complemented with review periods, held perhaps on a five or 10 yearly basis. The purpose of the review period would be to explore the latest evidence base on alcohol-related costs to society, and ensure that alcohol duty tax take is broadly in line with these costs – as we proposed in Recommendation 4 above. This review should be informed by expert insights from government, the healthcare sector, academics, charities and industry, taking into account the latest evidence and structural trends. As we discussed in this report, some of the evidence base, for example on the health impacts of mild-to-moderate drinking, remain debatable; conceivably estimates of the social cost of alcohol could change significantly as our knowledge-base improves. The review period would provide further incentives for drinks manufacturers to reduce alcohol-related harms – for example by withdrawing “worst offender” products from the market (such as high strength, low quality, low cost drinks) and advertising the risks of excessive consumption of alcoholic products. Manufacturers would be incentivised to do this in order to reduce structural duty increases following the review period.
Some of the recommendations we outline above can only be realised in the event of European-wide regulatory reform, or the UK pursuing a different approach to regulation following Brexit. As discussed earlier, European directives bind the UK to taxing wine and cider according to the volume rather than the alcohol content of the final product. In addition to the possibility that the UK remains in the EU, or returns to the EU following departure, the UK might still be bound by EU regulations following a permanent Brexit. This might be a requirement for a successful trade deal with the EU following Brexit, for example.
Even if European regulations constrain the possibility for duty reform, there is still scope to have a more optimal regime than we have at present – one that better focuses taxation where harms are being most generated. This includes:
- Regular uprating and evidence-based duty reviews.
- Introducing more duty bands for cider (as Ireland has done) to better incentivise the production of lower strength products.
- Bringing beer, cider, spirits and wine duty more closely into line in the sub-8.5% ABV category, for similar strength products.
- Introducing a new duty band for beer, between 2.8% and 3.9% ABV. It was brought up in our discussions with industry that there is likely to be a broader market for beverages in this kind of strength category, as opposed to the sub 2.8% ABV category which is relatively niche. However, the current duty system does not incentivise production of such beverages. Alternatively, there may be a case for increasing the upper limit of the “< 2.8%” beer duty band, to cover low strength beers which are more likely to gain mainstream demand.
- Narrowing the main duty band for wine. In the UK the main duty rate for still wine runs from 5.5% ABV to 15% ABV. EU law requires that there has to be a single band for wine between 8.5% and 15% ABV. As the UK’s main still wine and made-wine band is currently 5.5% to 15% ABV, it would be possible to split the main still wine and made-wine band into two, and introduce stronger incentives via duty to produce low strength wines between 5.5% ABV and 8.5% ABV.
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