Bulletin Board - Case for Taxation Reform


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	ALCOHOL DRINKS TAXATION: THE CASE FOR REFORM

Introduction

This Government is committed to fair, transparent and effective taxation for the UK. The Scotch Whisky industry seeks the same for alcoholic drinks.

By freezing the duty on spirits in the 1998 Budget, which had the effect of narrowing tax discrimination in relation to wine and beer, the Government took a modest step toward meeting those taxation objectives in the context of alcoholic drinks.

But there remains a long distance to travel if severe discrimination against spirits in the UK is to be eliminated.

Drinks tax discrimination benefits neither the consumer, the Government nor UK plc. Revenue receipts from spirits are falling. The UK drinks market is changing rapidly. The current tax structure, whose shape was formed 80 years ago, does not reflect this.

The 1998 spirits rate standstill provides an opportunity for reform: make this the first step in a process of reform of drinks taxation to create a fair, appropriate and equitable system for the new century.

Why is reform necessary?

The current system is not fair.

At the moment, two thirds of the price of a typical bottle of Scotch Whisky is swallowed up by excise duty and VAT. On a bottle of wine, the comparable figure is nearer one third.

This differential has nothing to do with differences in alcohol content. Regular pub measures of different drinks - all of which contain comparable amounts of alcohol - are taxed at different rates. Scotch Whisky is the highest.

The current system is not effective

All the evidence is that the Treasury can no longer rely on raising additional revenues from alcoholic drinks. Total excise duty receipts from all alcoholic drinks, measured in real terms, have fallen by 13.5% in the last decade. Spirits revenue alone has declined by 32%.

In 1992, a 24 pence tax hike was followed by a loss of revenue receipts of Ł80 million. Standstills in 1993 and 1994 allowed the market to stabilise and the revenues started to recover.

But a further 22 pence tax hike at the end of 1994 was followed by a fall of Ł120 million in revenue receipts, from which the Treasury has still to recover.

The current system has hit the point of diminishing returns

Recent UK studies, including one by the influential Institute for Fiscal Studies, show that the Government has “run out of road” as far as raising more revenue from spirits is concerned. This alone furnishes the logic for reform: review of the tax structure for alcoholic drinks will provide the steer for reform.

The current system is not transparent

Current tax structures are a muddle. They involve different and highly confusing categorisations.

There are different rates of duty — and the basis for their calculation varies widely — for each of the principal categories: spirits, beer, cider, wine and sherry. Wine is further sub-divided, with different rates of duty for light, medium, heavy and sparkling.

There are different rates for intermediate drinks and, yet again, for mixed drinks.

Why not a simpler, transparent and more straightforward system - easy for the consumer to understand, uncomplicated to administer: a single rate of tax, levied according to alcohol content?

The current system is inequitable

There is a generally accepted taxation principle that the tax burden should be lighter on those goods and services which are more important to those on lower incomes, and heavier on those predominantly purchased by higher income groups.

The Treasury does not hit this target with its current system. Wine, beer, and spirits are consumed across income groups. Income surveys show that there is no argument on equity grounds for taxing spirits more heavily than the other categories.

The current system hits employment

Scotch Whisky companies offer crucial employment. Scotch Whisky distilling operations are to be found mainly in remote rural areas in Scotland. They provide vital rural jobs, and are frequently the mainstay of fragile local economies.

The distillery lies at the heart of the community: if it goes, then the community surrounding it is under threat - the village shop, the postman, the school teacher, the district nurse, the local garage, the farmers, even the pub.

Bottling and distribution centres are mainly in Scotland’s central belt, which has seen the loss of many of its traditional old-established heavy industries, and which as a result enjoys EU financial support aimed at alleviating unemployment problems.

There are currently around 12,400 people employed in the industry. The prestigious Fraser of Allander Institute has calculated that one job in Scotch Whisky supports four others outside the industry. Thus, the number of individual men and women who depend for their jobs upon a viable Scotch Whisky industry is around 62,000.

The current system encourages cross border shopping

Current drinks tax structures encourage both legal and illegal cross-border trade. The industry is working with government to help stamp out illegal smuggling, but an enormous perfectly legal trade is inspired by current tax structures.

Tax differences between Britain and her continental neighbours are considerable: a bottle of Scotch costing Ł10 - Ł11 in Dover can be Ł7 in Calais. Who can blame consumers for buying in low tax France rather than over-taxed Britain . . . and who wins? Neither UK retailers nor the UK Treasury, that’s for sure.

Instead, we are exporting sales, jobs and revenue receipts to France. Only radical reform and amendment of the structure and levels of UK taxation will remedy this unedifying situation.

The current system stands in the way of European tax equalisation

Completion in 1993 of the Single European Market should have led to genuine tax harmonisation. Five years on, Commissioner Monti is still struggling to come up with a fair system which could be implemented across Europe.

The UK Government can help by pressing for equal tax treatment for spirits and other alcoholic drinks. No other country will fight for this.

The UK has the most at stake. 50% of the intra-European trade in spirits is generated from the UK, mostly by Scotch Whisky. Europe’s numerous wine producing member states remain a powerful counter- force.

Unless the UK demonstrates its commitment to equal tax treatment by establishing this in the domestic system, it will be increasingly hard to fight for it with credibility in Europe. The current EU minimum rates structure is discriminatory. Spirits must bear a far higher minimum rate than beer. Wine - at zero - is not required to bear any tax.

Worse: every member state applies higher actual rates of duty to spirits than either to wine or beer. Wine pays no tax in seven out of the 15 member states.

	Austria	Belgium	Denmark	Finland	France
Wine	nil	426	856	2,162	30
Beer	347	425	780	2,888	257
Spirits	723	1,651	3,674	5,097	1,440

	Germany	Greece	Ireland	Italy	Lux
Wine	nil	nil	2,559	nil	nil
Beer	196	309	2,049	351	197
Spirits	1,297	999	2,847	648	1,035

	NL	Portugal	Spain	Sweden	UK
Wine	441	nil	nil	2,937	1,911
Beer	424	275	168	1,746	1,619
Spirits	1,497	814	686	5,955	2,843

(ECU per hectolitre of pure alcohol)

The current system specifically hits UK plc

The interests of Scotch Whisky and those of UK plc are directly linked.

By discriminating against spirits at home, the government sends unmistakable signals to governments abroad - particularly to the other member states of the European Union - that it is OK to discriminate against spirits.

In Europe, which accounts for 40% of Scotch exports, this makes little sense.

Why does all this matter?

Scotch Whisky makes a huge impact on the UK’s trade balance.

Scotch is sold in more than 200 markets around the world. It is one of the UK’s top five manufactured exports, generating export earnings per employee at twice the level of the second best performer, electronics, and some seven times the average for manufacturing.

In their submission to the WTO, the Japanese, in defence of their infamous discriminatory tax on Scotch Whisky, specifically mentioned tax discrimination both by the UK and the European Union against their own domestic products.

Industry leaders get the same message on trade missions to other countries. The Chilean Ambassador in London recently rebuffed SWA criticisms of his country’s tax regime by suggesting the industry’s leaders should examine their own Government’s habits.

The current system does not match the Government’s own tax principles

The Government, in its 1997 Red Book on the principles of current taxation policy, clearly states:

“How and what is taxed sends clear signals about the economic activities which governments believe should be encouraged and discouraged, and the values they wish to entrench in society . . . A tax system should be well designed, to meet the objectives of the government of the day, without generating considerable side effects; it must keep taxpayers’ compliance costs to a minimum; it should avoid the less well off bearing an unfair burden; and attention must be paid to any implications for the United Kingdom’s international competitiveness”

Quite.

Conclusion

The Scotch Whisky industry wholeheartedly endorses the principles set out above, and acknowledges the Government’s commitment to tax reform.

We believe that there is an overwhelming case for this approach to be applied to alcoholic drinks taxation.

Early review of the current system would both provide the basis for modernisation of the structure, and would be consistent with the interests of the industry, the consumer, the Government and UK plc.

Edinburgh, 1998


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