By Alan Powell, a member of the CIOT's Indirect Taxes Committee
After HM Customs and Excise's (HMCE) gentlemen’s agreement with the British wine industry in 1996 and some tumultuous events since, the curtain was quietly brought down earlier this month on the UK practice of dilution of wine or made-wine after the duty point (post duty point dilution – “PDPD”).
By resolution of the House, a new-section 55ZA is inserted into the Alcoholic Liquor Duties Act 1979 (ALDA). This section effectively prohibits PDPD by providing for penalty and forfeiture provisions to apply when water or any other substance is mixed with, or added to, wine or made-wine after the excise duty point, where the amount of excise duty payable would have been greater if the addition had taken place before the duty point. The change was introduced with effect from 1 April 2020.
This prohibition is nearly 20 years after HMCE legislated to prohibit the post duty point dilution of “plain” cider and 9 years after the then Chancellor announced in the Budget that duty avoidance (wine PDPD) would be stopped. Since 1996, made-wine PDPD had proliferated and many products were diluted across duty band to gain duty advantages, such as ready to drink products (RTDs). Such products have typically been diluted to 4% abv. Due to the differentials in duty across fermented products, the prohibition of PDPD means a made-wine at 4% abv is dutied at a much higher rate than beer and a massively higher rate than cider (although flavoured ciders are taxed as made-wines, so any PDPD of flavoured cider will be prohibited also and the rate much higher than for “plain cider”). Given that cider and wine/made-wine are taxed in bands, there is a perverse situation whereby higher strength products bear the same duty as lower-strength fermented products.
This brings into focus the lop-sided duty structure for various alcohol products in the UK, and in terms of each product, every industry has a dog in the fight. The government has announced a review of alcohol duties that was to begin with a call for evidence this summer. All it said was that it ‘recognises the complexity of the current duty system and will review potential reforms to be implemented after the transition period’– that is, from the 1 January 2020, when the UK is no longer bound by EU Directives on alcohol structures and rates.
In terms of the perversity of lower strength wine and made-wines and ciders bearing the same rate of duty as high-strength products and the trend for consumption of lower strength alcohol, it is worth thinking about “going back to future” – that is to the UK’s attempt in the Finance Act 1988 to legislate for much-reduced excise duty rates for all low-strength alcohol products between 1.2 – 5.5% abv in what were then termed “coolers”. The term “cooler” was used in the 1980s to refer to wine that was reduced by soft drinks and flavours that was “on trend” as they would now say. To encourage consumption of lower-alcohol drinks, UK health and taxation policy worked to legislate for much reduced duty rates for lower-strength beverages not only for wine coolers but all alcoholic drinks. The bands enjoying the lower rates were 1.2 – 2% abv, exceeding 2 – not exceeding 3%, exceeding 3% - not exceeding 4% and exceeding 4% not exceeding 5.5% abv.
I joined HMRC’s HQ alcohol policy unit at the exact same time the cooler bands were introduced; there was expectation of a big take-up. But there wasn’t. A few products were launched and crashed on the launch pad. However, by the law of unintended consequences, the innovation of alcoholic lemonade – Two Dogs and then Hooper’s Hooch, in the early 1990s as I recollect, took off as high-strength “alcopops” with the benefit of a very much lower duty rate than applied hitherto. As such products proliferated, they became to be made not as fermented products but with spirits (less expensive as a base ingredient and massively lower duty than the “full” spirits rate.)
Since these products tended to be at the higher end of the cooler bands and the intention of the reduced rates had failed, in 2002 the law was changed to eliminate the lower-strength cooler bands, to remove spirits from the cooler regime and (if I remember correctly) to align the remaining cooler bands with the rate for standard beer duty at 4 and 5.5%. The use of PDPD for RTDs made from made-wine (usually fortified then diluted after the duty point), undercut that move by HMCE and so it remained until this month.
Having reviewed all that, is it now time for re-think on taxation of lower-strength products? There is a more solid alcohol-free/lower alcohol drinks and health culture which was absent in 1988. It still makes sense that a wine or made-wine or cider at 2% abv should not attract the same tax as a product of 15% abv. So, too for all other alcohol products. With lessons learned from the unintended consequences of the last attempt at “cooler” bands, the case for reduced uniform rates for lower strength alcohol products is worth a pitch in the UK’s alcohol structures review (when it happens).
Guest blog by Alan Powell (of Alan Powell Associates), a member of the CIOT's Indirect Taxes Committee