Alcohol taxation: government policy up to 2020

What does this paper cover?

This paper covers the recent policy history of alcohol taxation up to 2020. The Library briefing on the new alcohol duty system covers developments from 2020 in more detail.

How are alcoholic drinks taxed, and how much money do these taxes raise?

For the purposes of taxation, alcoholic drinks are classed in four categories: beer; cider and perry; wine and made-wine; and spirits. ‘Made-wine’ is any alcoholic drink made by fermentation that is not beer, cider, perry, spirits or wine – mead, for example.

Excise duty is charged on each of these categories at a fixed rate – a number of pence per litre.

In the case of beer and spirits, the rate of duty is set in relation to alcoholic strength. Strength is measured as alcohol by volume (ABV) – the percentage of an alcohol product’s volume comprised of pure alcohol. An additional duty is charged on ‘high strength’ beers, those over 7.5% abv, while a reduced rate applies to ‘low strength beers’, those under 1.2% abv. Wine, made-wine, cider and perry are subject to specific (ie, by volume) duties, though duty rates are banded by reference to alcoholic strength.

The rate of excise duty charged on alcoholic drinks is not affected by the way in which they are sold (that is, whether they are purchased at a pub or at a supermarket). Alcohol duties are paid by the producers or importers of the products. In a review of alcohol taxation published in 2010 the Government noted that changes in the levels of duty are often passed through to wholesalers; retailers and ultimately consumers. Where the tax burden falls can depend upon the market power of the different agents in the market.

VAT is applied after alcohol duty, so, for example, the price of a one litre bottle of spirits (with a strength of 40 per cent) currently reflects the pre-tax price plus £11.50 of duty plus 20 per cent VAT on both the pre-tax price and the duty.

The Office for Budget Responsibility (OBR) forecast that alcohol duties will raise £12.7 billion in 2022/23. This represents 1.3 per cent of all tax receipts and is equivalent to around £450 per household and 0.6 per cent of national income.

How have excise duties on alcohol been set in recent years?

As flat-rate duties are expressed in cash terms, they must be revalorised (ie, increased in line with inflation) each year in order to maintain their real value. Prior to 2010 the Labour Government applied a ‘duty escalator’ – a commitment to increase duty rates each year in real terms. The Coalition Government reversed this approach, removing the duty escalator in 2013, and in subsequent years duty rates have either been cut or frozen.

The OBR has summarised these duty rate changes:

• Beer duty – at Budget 2013, 2014 and 2015, the beer duty rate was cut (by 1 penny per pint). At Budget 2016, Autumn Budget 2017, Budget 2018, Budget 2020, Spring Budget 2021 and Autumn Budget 2021 the beer duty rate was frozen;
• Spirits duty – at Budget 2014, Budget 2016, Autumn Budget 2017, Budget 2018, Budget 2020, Spring Budget 2021 and Autumn Budget 2021 spirits duty was frozen. At Budget 2015, spirits duty was cut by 2 per cent;
• Cider duty – at Budget 2015, cider duty was cut by 2 per cent. Cider duty was frozen at Budget 2014, Budget 2016, Autumn Budget 2017, Budget 2018, Budget 2020, Spring Budget 2021 and Autumn Budget 2021; and
• Wine duty was frozen at Budget 2015, Autumn Budget 2017, Budget 2020, Spring Budget 2021 and Autumn Budget 2021.

What proposals have the Government made to reform alcohol taxation?

In October 2020 the Government launched a call for evidence seeking views on how the UK alcohol duty system could be reformed, in the light of the fact that the UK would be leaving the EU, and would not have to comply with EU legislation harmonising excise duties across Member States. As set out at this time, the Government’s aim is to introduce reforms to make the current duty regime “simpler, more economically rational and less administratively burdensome on businesses and HMRC.”

In the Autumn 2021 Budget the Chancellor announced plans to amend the alcohol taxation regime from February 2023, so that all beverages would be taxed in direct proportion to their alcohol content. The Government set out its proposals in a consultation paper published alongside the Budget. The deadline for responses was the end of January 2022 and no further details have been published to date.

The Government’s paper stated that subject to the outcome of the consultation, it planned to legislate for the changes to the rates structure through the 2022/23 Finance Bill, with the new rates structure to take effect from 1 February 2023. Prior to this, the associated primary legislation would be published in draft in Summer 2022 for technical consultation. However, on 20 July the Financial Secretary to the Treasury Lucy Frazer announced that the Government were continuing to consider the feedback to the consultation and would respond in the autumn.

Further reading

Two other issues are often discussed in relation to the alcohol taxation and the pub trade: minimum pricing, and the regulation of pub companies.

First, in March 2012 the Coalition Government had announced proposals to discourage the sale of cheap alcohol by setting a minimum unit price – rather than, as initially planned, banning its sale if priced below the rate of excise duty and VAT. Following a consultation exercise, in July 2013 the Government announced that it would revert to initial plans, and in May 2014 legislation came into force to ban sales if priced this low. Commons Library briefing CBP5021, Alcohol – minimum pricing discusses this issue.

Second, many have argued that another factor that has encouraged the decline in the number of pubs in recent years is the behaviour of pub companies – pubcos – to their tenants. Following several attempts to improve pubco-tenant relations through voluntary arrangements, in 2014 the Coalition Government introduced legislation to establish a code of practice to be enforced by an independent Adjudicator, and the Pubs Code was launched in July 2016. Commons Library briefing CDP2018-19, Application of the Pubs Code 2016 discusses this issue.

Further to this, Commons Library briefing CBP8591, Pub statistics, provides national and regional figures for the number of public houses and bars in the UK, as well as employment data.