Counterfeit alcohol costs UK £1.2bn a year

A study from the Institute of Economic Affairs (IEA) estimates that counterfeit alcohol is costing the Treasury £1.2 billion every year.

Counterfeit alcohol is costing the UK Treasury £1.2 billion every year

As the problem of counterfeit alcohol increases the report says that the UK is losing more money to “the cross-border movement of alcohol than any other EU state.”

The IEA also blamed high duties for the surge in fake alcohol, adding that factors which lead to an increase in counterfeiting include, “high taxes and social security payments, low tax morale, complex tax systems, low Gross Domestic Product, weak institutions and corruption.

“Evidence shows that the illicit alcohol market is also closely associated with high taxes, corruption and poverty. The affordability of alcohol appears to be the key determinant behind the supply and demand for smuggled and counterfeit alcohol.”

The problems associated with counterfeit alcohol were highlighted in the Czech Republic recently, when 20 people were killed and 36 hospitalised after drinking spirits laced with methanol. The deaths led to a ban on the sale of spirits over 20%.

The problem has spread through other Eastern European countries, and Paul Varga, chief executive of Brown-Forman, told the Financial Times that the fake alcohol market is growing globally.

He said: “A third of the world’s alcohol is estimated to come from what we call illicit production. It can be very dangerous to the point of being dangerous.”

The IEA said that one in 10 bottles or cans of beer sold in the UK have not had duty paid on them and that the sale of counterfeit spirits is rising. The IEA added: “HMRC seized almost 10 million litres of non-duty paid alcohol in 2010/11, a rise of 30% in two years.”

Michael Patten, Diageo’s global head of public affairs blames high taxes for the rise in counterfeiting. He told the Financial Times: “We tend to see an uptick in these illicit products when prices go up driven by tax. If alternatives are in place, people switch even though they are exposed to greater levels of risk.”

The IEA’s report agrees that higher prices and taxes do not necessarily mean people will drink less. The report said: “Demand for alcohol is relatively inelastic and drinkers have a series of options in front of them when real prices increase.

“They can do as the government hopes and drink less, but they can also do any of the following: (1) make savings elsewhere in the household budget, (2) switch from the on-trade to the off-trade, (3) downshift to cheaper drinks, (4) shop abroad, (5) brew or distil their own alcohol, (6) buy counterfeit or smuggled alcohol, and finally (7) buy surrogate alcohol (e.g. methanol, antifreeze, aftershave). The extent to which consumption patterns change depends on personal income and the price of drink.”

The report concludes that, “economic prosperity, moderate taxation and minimal corruption are essential for a country to minimise the size the alcohol black market.

“Without these preconditions, efforts to tackle the illicit alcohol supply through education, deterrence and enforcement are unlikely to succeed.”

Guala Closures are running a seminar at the Spirit Masters lunch on 20 November to talk about what more can be done to tackle the problem of counterfeiting. Places are free; to reserve a seat, please contact Marinel FitzSimons on +44 (0) 207 803 2437 or marinel@thedrinksbusiness.com.