Duty changes: ‘the full cost will be met by wine drinkers’

In this exclusive comment piece from the chief executive of the Wine and Spirit Trade Association (WSTA), Miles Beale offers his views on the first month since the historic alcohol duty reform came into force.

As we come to the end of the first month of the Government’s new excise duty regime, are there any immediate conclusions to be drawn on the impact of 20% plus increase to most wine duties?  In short, it’s too early to tell.

Unlike some markets such as fuel, where the impact of an increases in oil price is almost instantly passed on to consumers, the wine retail landscape is more complex.

At the time of writing, some retailers and wholesalers have chosen not to pass on the duty increases immediately, some have, while others may be selling duty-paid stock (pre 1 August) to exhaustion before re-pricing.  What is clear, however, is that it is unsustainable for businesses to absorb the largest increase in wine duties for almost 50 years for any significant period of time.  It is inevitable that the full cost of the new duty system (an increase it duty for most wines of at least 44p a bottle plus VAT – yes you read that right the Government taxes a tax) will, ultimately, have to be met by wine drinkers.

Leaving aside other inflationary pressures on the supply chain such as glass PRN prices, we estimate the new duty regime once the costs are fully passed on to the consumer will cost UK wine drinkers upwards of £500 million a year in extra duty and VAT.  That’s quite a windfall for the Treasury if the price increases don’t affect consumer demand.

But that is a big ‘if’ and one Treasury has not historically fully factored into its forecasting.  We have long argued that Treasury modelling fails to fully take into account the effects of price changes on demand: wine – the drink industry’s largest generator of Exchequer revenue – is more elastic, i.e. demand is more sensitive to price changes, than the Treasury had traditionally factored into its forecasts.

This year, for the first time I can recall, hidden in the documents accompanying the Budget, the Government acknowledges that the biggest uncertainty surrounding the future forecast of duty receipts is the ‘behavioural response’ – consumer demand in other words.

So, while it is certainly too early to tell what the impact of the new duty system has had it is incumbent on the sector to report what is happening on the ground.  Over the coming months the WSTA will be working with its members to assess the impact of the duty increases on sales and will feed the outcome of that analysis to Government. As Government itself says: “Tax doesn’t have to be taxing”.

The revised duty regime need not be a done deal – at least not yet.

Related news:

What you need to know about the alcohol duty reform.

Alcohol duty hike will exacerbate ‘inflationary misery’, WSTA say.