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Budget was no let-off for the drinks industry

George Osborne said that none of his “Emergency Budget” measures would be hidden in the small print. It was a promise he only partially kept.

The euphoria at his announcement that there would be no new taxes on alcohol and that the 10% extra duty on cider would be abandoned soon gave way to a more cautious reaction.  

The rise in the rate of VAT to 20% in the new year will add between 6p and 10p to a pint in a pub, depending on your source of information. That will do little to further stem the rate of pub closures. Nor will it help the off-trade at a time when the “average family” (whatever that may be) is about to lose £400 a year from discretionary spending.

January and February are dog days for the trade; it looks like takings will be meagre indeed in the first couple of months of 2011. There could, however, be a pre-increase consumer mini boom in the run up to Christmas.

Indeed, importers and producers face further Christmas headaches related to the VAT increase. First, supermarkets and multiple retailers who in the past have forced the supplier to bear the cost of any duty increase or face delisting will seek to protect their price points by demanding similar handling of the VAT rise. How much further can supplier margins be squeezed?

There will also be a rush of orders in December for delivery in the New Year. Why? Because VAT is chargeable at the rate applying on the date of the invoice, not the date of delivery, so order in 2010 at 17.5% rather than in 2011 at 20%. Delivery can come later and payment much later.  

What Osborne has given the drinks sector is a further period of uncertainty and trade distortion when what everyone needs is a firm base from which to negotiate the next few years of austerity.

For instance, he has promised to review the duty of “cheap strong cider”, which can only mean an increase, so the producers have only been given a stay of execution. But on a wider basis, the government has undertaken to review the taxation of all alcohol and publish a report in the autumn.

The increasing clamour for minimum unit pricing and/or the banning of below cost promotions must be dealt with finally in that review.

Finance on Friday has previously highlighted the administrative and legislative difficulties entailed with introducing these strategies, which are based on the fallacy that curing binge drinking can be achieved through taxation on the innocent majority rather than addressing the underlying problems that create binge drinkers.  

Now is the time to present clear, factual evidence to the Treasury. At the end of the review, the industry needs to know with finality that the new regime of alcohol taxation will remain in place for at least the lifetime of this parliament. That will allow producers, importers and retailers to assess how best to plan their businesses for a four-year period.

For instance, will the “inflation plus 2%” escalator be continued and what measure of inflation will be used? Osborne is rebasing benefits on the Consumer Prices Index, which excludes housing cost and thus gives a lower figure than the Retail Prices Index on which the escalator has been based so far. Will he retain that measure and thus get “inflation plus 2% plus a bit extra”?

Osborne has set out a five-year plan for his own “business”, that of government. He must at least allow the drinks sector to do the same by the end of this year.

Finance on Friday, 25.06.2010

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