Analysis: the impact of the alcohol duty freeze on the drinks industry

MPs cheered when Chancellor Philip Hammond announced in his Budget speech that duties on wines, beers and spirits would be frozen for the next financial year beginning in April.

But what he didn’t tell them was that the cost of alcohol to the consumer will rise nevertheless and that his tax take from it will increase.

Since June 2016 when Britain voted to leave the European Union, the value of sterling has fallen by 14% against the euro and by more than 10% against the dollar. Many importers, especially of wines, have absorbed some of the extra costs involved in paying suppliers and have been protected by annual contracts agreeing exchange rates.

That ability is exhausted and inevitably prices are rising on the shelves and will do so more markedly after the peak Christmas and New Year sales season.

Add to that exchange rate pressure the depleted 2017 harvests in much of Europe, notably France, Spain and Italy, leading to the lowest global wine production in 56 years and it is inevitable that prices to the consumer must rise.

In addition, even UK-based producers, notably the whisky industry, is facing rising costs for items such as packaging, energy and transport, so their output costs are under pressure. So the consumer is not exempted from rising shelf prices on British products.

Producers both at home and overseas have warned that the present price regimes are unsustainable.

And because VAT is levied on the wholesale price paid by importers and retailers, the Chancellor’s tax take will rise, especially on high value wines from France. And that is without the extra potential costs of Brexit in meeting additional customs regulations and paperwork.

Chancellor:…duties on other ciders, wines, spirits and on beer will be frozen #Budget2017 pic.twitter.com/PipijhlhwD

— HM Treasury (@hmtreasury) November 22, 2017

Hammond partly recognises this. Buried in the Budget background papers was a promise to help importers from the EU protect at least part of their cash flow.

It says: “Businesses currently benefit from postponed accounting for VAT when importing goods from the EU. The government recognises the importance of such arrangements to business due to the cash flow advantage they provide. The government will take this into account when considering potential changes following EU exit and will look at options to mitigate any cash flow impacts.”

And to a certain extent he has tried to reduce the impact of his headline measure to increase the tax on white ciders.

The background papers say: “Following the consultation launched at Spring Budget 2017, the government will introduce a new duty band for still cider and perry from 6.9% to 7.5% alcohol by volume to target white ciders. Legislation will be brought forward in Finance Bill 2018-19, for implementation in 2019, to allow producers time to reformulate and lower their abv.”

But the message to the cider industry is clear: adjust your product range or Hammond will hit you hard in 18 months’ time.

It is a similar picture for the owners of small pubs. The sop of a £1,000 relief on their rateable value is being extended for a further year to March 2019. But to a business on the brink it is small beer.