Calling Time on the Alcohol Duty Escalator Budget Submission 2014 The Scotch Whisky Association Executive Summary Scotch Whisky in the UK is under sustained pressure from annual above inflation excise duty increases, which are damaging a home market already in long-term decline. UK volumes of Scotch Whisky are 12% down since the escalator was introduced and 21% lower than a decade ago, a loss of 23. million 70cl bottles of whisky from the market between 2003 and 2012. Over that period, Scotch Whisky s share of the UK spirits market has fallen from 30% to 23%. No other consumer product faces such a punitive tax burden: Nearly 80% of an average priced bottle is accounted for by tax to the Exchequer. Excise duty on whisky has increased by 44% - or 2.42 a bottle - since the alcohol duty escalator was introduced. Whisky drinkers pay 48% more duty on the same amount of alcohol than beer drinkers. Scotch Whisky Association members believe strongly that enough is enough. The 2013 Budget was a significant blow to distillers. One category beer received favourable treatment. As a result, conditions became more difficult for those distillers that rely on a healthy UK market and need a firm base to deliver future export growth. Changing this policy and removing the escalator on spirits and wine would signal a fair and equitable approach to the drinks market, create 6,000 additional jobs, and deliver 230 million in extra revenue to the UK public finances in 2014. It would enable the Government to deliver on its commitment to support local pubs and communities, as well as an industry supply chain that supports 3,000 jobs in the UK. It would underpin investment and employment across many economically fragile rural and urban areas of Scotland. In short, it would be an outcome that would be good for consumers, government, and business. We urge the Government to implement reform this year. In Budget 2014, The Scotch Whisky Association is therefore calling for: immediate removal of the excise duty escalator on Scotch Whisky, and all alcohol duties to be frozen. 1
(1) Introduction It is useful to step back and reflect on first principles. In March 2011, the Treasury select committee published a report examining the principles of sound tax policy 1. The report concluded that fairness, supporting growth and competition, simplicity, and coherence are all amongst the principles that should be respected. The Chancellor was right to point out in Budget 2012 that such tests bear a close resemblance to the principles of good taxation set out by Adam Smith two centuries ago. The Scotch Whisky Association (SWA) recognises that in the real world, political needs, budgetary pressures, and the passage of time can mean that tax systems get out of step with this ideal. We understand that the Government needs to deal with the deficit and balance competing objectives. Nevertheless, it is striking just how distant the alcohol excise duty system has become from those basic principles. The duty escalator, whatever the reasons for its introduction during a time of economic crisis, is now imposing excessive taxation on a great Scottish and British industry. It reenforces historic distortions in the drinks market. It is a barrier to investment. The Scotch Whisky industry believes there is a compelling case to freeze alcohol duties and extend last year s partial removal of the duty escalator to other drinks categories. Such a move would be fair to consumers; support a major home-grown industry; make a positive contribution to the public finances; and support employment and growth. (2) Duty Burden There are no sectors where a nearly 80% average tax burden would normally be considered acceptable or sustainable. And yet this is the situation facing Scotch Whisky. Excise duty has risen by 44% - or 2.42 a bottle - since the escalator was introduced in 2008. With VAT, 79% of the price of an average priced 70cl bottle is tax. 4 in every spent by the Scotch Whisky consumer goes to the Treasury. Fig 1. % of average priced bottle accounted for by excise duty/vat (Nielsen). 1 Principles of Tax Policy, House of Commons Treasury select committee, Eighth report of session 2010-2012. 2
The escalator increases the tax burden by 2% above inflation every year. This is counterproductive, encouraging inflationary pressure at a time when ordinary British consumers face severe cost of living challenges. Alcoholic Drink 2007 2013 % Diff Beer 13.71 19.12 +39 Wine 1.89 23.81 +0 Scotch 19.6 28.22 +44 Fig 2. Changes to duty charged per cl of pure alcohol for beer, wine, and Scotch Whisky. Moreover, this tax burden is unfair to Scotch Whisky. A modern tax system should be equitable. There is no reason why a unit of alcohol served as Scotch Whisky should be taxed 48% higher than the same unit of alcohol served as beer. Alcohol is alcohol, in whatever form it is served. Last year s Budget re-enforced this distortion. Beer duty was cut by 2% and the escalator was removed from it. In contrast, spirit drinks faced another.3% rise, adding 47p to an average priced bottle. (3) Today s Market The UK remains the third largest Scotch Whisky market, representing 7% of global volumes. Around 80% of UK sales are outside Scotland. The UK market is, however, in decline and under considerable pressure. UK Consumption of Scotch Whisky Litres of Pure Alcohol (millions) 40 3 30 2 20 1 10 0 1993 1998 2003 2008 2012 Fig 3. HMRC/Scotch Whisky Industry Record 2013 (Sutherlands). Between the introduction of the escalator in 2008 and end-2012, there has been a 12% reduction in the UK market. That represents a volume loss of 6,00 bottles every day. The market is over 20% lower - or 23. million bottles - than it was 10 years ago. 3
This decline is continuing; at the end of October 2013, year-to-date Scotch Whisky clearances were down 4% compared to the same ten month period in 2012. Not surprisingly, Scotch Whisky s share of the UK spirits market has also decreased. It is now 23% compared to 30% a decade ago and 43% twenty years ago. Scotch Whisky as a % share of total UK spirits % Share 4 40 3 30 2 20 1 10 0 1993 1998 2003 2008 2012 Fig 4. HMRC/Scotch Whisky Industry Record 2013 (Sutherlands). A vibrant home market is vital. It remains important to many companies, but particularly small businesses and new entrants that depend on it. Even now, the UK market for Scotch Whisky is larger than exports to China and India combined. But it is declining and everything we know about economics suggests that the high tax burden is part of the reason why. It is interesting to contrast the situation in certain other markets where excise duty has been stable. Excise duty has been unchanged, for example, in the USA and Germany over the period of the UK escalator. Exports to these markets have grown by 6% and 36% in volume respectively. (4) Benefits of Reform Independent research by Ernst & Young suggests that removing the escalator on spirit drinks and wine would boost economic activity in those sectors 2. The spirits and wine sectors direct gross value added would increase from 11bn to 11.2bn. Employment within the industry is expected to increase by 6,000 jobs. And, because of the increased employment tax and corporation tax payments that those jobs generate, the industry s contribution to the public finances would actually increase by 230m in 2014, growing to 262m in 2018. Moreover, this larger industry could support supply chain investment more strongly. This supply chain includes cereal growers, glass manufacturers, packaging and labelling firms, plant and machinery providers, hauliers, and port facilities across the whole of the United Kingdom, as well as investment in some of the most remote rural areas and economically deprived urban communities in Scotland. 2 Alcohol Duty Escalator Economic Impact Assessment, Ernst & Young, October 2013. 4
() Local Communities Spirits and wine are as much at the heart of local pubs as beer. created for the on-trade comes from spirit drinks and wine sales. only did half the job. Over 40% of the value So last year s Budget Supporting the pub trade and local communities in a fair and equitable way means the government should extend the removal of the escalator from beer to other categories. (6) Supporting Scottish jobs & growth Any Chancellor must protect the revenue base. However, excise duty policy should be viewed holistically and look beyond excise revenue alone. Scotch Whisky is a product made in Scotland but which delivers for the UK as a whole. It is one of Scotland s and the UK s leading manufacturing and exporting industries. The sector supports over 3,000 jobs and is a home-grown industry rooted in our communities. The industry s gross value added to the UK exceeds 4bn every year, with Scotch representing nearly 2% of UK food and drink exports and consistently a top ten British manufactured export earner. (7) International Dimension Domestic tax policy could be used to support the Government s laudable goal of exportled growth. In the EU, only Finland, Ireland and Sweden tax spirits more heavily than the UK. The tax on Scotch in the UK is 2.6 times higher than the rate in Germany, 3.7 times higher than Spain, and 6 times higher than Bulgaria 3. The UK is a high-tax environment and this conditions other countries behaviour. 8,000 6,000 4,000 2,000 - Differences in EU Tax Rates Euro per hlpa Fig. Differences in excise duty rates (top four and bottom four EU Member States). The industry s experience is that overseas governments frequently use UK tax discrimination against Scotch Whisky as justification for discrimination abroad. In many markets, Scotch Whisky is discriminated against, either to protect domestic producers or for health or broader social reasons. What happens at home has an impact overseas. 3 spiritseurope summary of tax rates of alcoholic beverages in Europe, January 2014.
(8) Tackling Alcohol Fraud The SWA has welcomed and will participate in the new joint alcohol anti-fraud taskforce, launched in January 2014. The industry works closely with government to address alcohol fraud, which is estimated to cost the taxpayer in the region of 1bn a year. Illicit trade undermines legitimate businesses and deprives government of revenue. However, the persistence of alcohol fraud points to a more fundamental issue. Illegitimate activity will continue as long as there is an incentive to do so. The tax environment is part of the equation, with high excise taxes creating grey market demand and the financial returns that drive illegal operators. The benefits of lower fraud levels were not modelled in the Ernst & Young report mentioned above. Yet it is clear that a fairer rate would reduce the incentive to crossborder shop or avoid paying excise duty, with positive consequences for consumers and the public finances. (9) Revenue The OBR Autumn statement forecast projects that spirits duty receipts will increase by 31% by 2018/19, despite the expectation that the market as a whole will grow by 1% 4. This suggests that tax increases are now squeezing any growth out of the entire spirits sector. It is hard to see how the escalator policy is sustainable for Scotch Whisky given the long term fall in volumes. Extra revenues are coming at the cost of further decline in the whisky market. Higher taxation and lower demand will eventually lead to a loss of revenue. The last discussion with the industry on the Government s price elasticity of demand model dates back to 2010. The SWA would welcome the opportunity to participate in a review of the model to ensure that it adequately reflects a changing market and Scotch Whisky s position within it. In the longer term, reform of the excise duty regime to one that taxes alcohol broadly the same no matter how it is served would increase government revenues. Research by PwC and Optimal Economics presented to the 2010 HM Treasury review of alcohol pricing and taxation shows approximation of duty rates across all drinks would increase annual receipts to Government by 1bn. We recognise this is a long-term objective but Government policy should not deliberately take us further away from it every year. (10) Alcohol & Health Scotch Whisky companies support many initiatives that encourage responsible consumption of their brands. Companies are, for example, working with government and others on areas such as brand labelling and community projects through the Public Health Responsibility Deal and the Scottish Government Alcohol Industry Partnership. 4 Office of Budget Responsibility, Economic & Fiscal outlook (December 2013). The direct impact of alcohol duty equalisation on tax receipts, PwC (August 2010) and Equalisation of taxat ion of alcoholic drinks, Optimal Economics Ltd (August 2010). 6
SWA members must abide by a strict responsible marketing code of practice. In December 2013, the SWA also launched a new 00,000, five year Action Fund designed to support projects aimed at reducing alcohol-related harm in Scotland. Tax policy is sending out a confused message. The UK Government s sensible drinking guidelines do not differentiate between different alcoholic drinks. It is the amount consumed and patterns of drinking that are the most important influences on consumption, not the type of drink chosen. Selecting particular drinks for special tax treatment sends a message that some drinks are more harmful than others. (11) Conclusion The Scotch Whisky industry is calling for fairness in this year s Budget. We seek a fair balance in alcohol taxation that delivers on the basic tenets of an efficient, modern tax system. Such a system is a long way from what we have now. However, the Government can make a positive start this year by freezing all alcohol duties. This would support growth, help tackle the high cost of living, and boost a key Scottish and British manufacturing sector at home and abroad. Removal of the duty escalator would signal a fair and equitable approach to the drinks market, create 6,000 additional jobs, and deliver 230m in extra revenue to the UK public finances in 2014. With tax now representing nearly 80% of an average priced bottle, SWA members believe strongly that enough is enough. In Budget 2014, The Scotch Whisky Association urges the Chancellor to show support for a flagship Scottish and British industry by: removing immediately the excise duty escalator on Scotch Whisky, and freezing excise duty on all alcoholic beverages. 7