Duty Freeze

T he drinks industry must be wondering what it has done to deserve such a sustained beating-up by government. First came a giant duty increase in March 2008. Alistair Darling then pushed through a surprise second increase in November, sticking the boot in by announcing a duty hike two percentage points above inflation every year for the next four years.

Now, the industry is also bracing itself for the reversion of VAT to 17.5% on 1 January next year - effectively imposing yet another tax increase.

Enough is enough. Successive Chancellors have got away with "sin taxes" and supermarkets have usually found ways of persuading suppliers to absorb them without pushing the price up for consumers.

Suppliers are simply not able to do that any more thanks to the pound's weakness against the dollar and euro, spiralling fixed costs and the impact of the recession.

That's why in the third week of The Grocer's Push Back the Tax campaign, we are calling for a duty freeze for 2010. Our message is simple: if the Chancellor was happy enough to put duty up when he announced a cut in VAT to 15%, then he should be prepared to freeze alcohol duty when VAT reverts and keep it at that level for the duration of 2010.

Freeze duty and the drinks industry has a real chance of weathering the recession. Fail to do so and there will be more pointless casualties. "At least 75,000" jobs are at stake, according to a joint submission signed by the five main trade organisations and handed to the Treasury in February, ahead of the Budget.

The Chancellor must stop treating the industry as a cash cow, they argue.

Darling's original 9% tax rise was initially interpreted by some as a means of tackling binge drinking and curbing deep discounting in supermarkets.

In reality it was nothing of the kind, and was never presented as such by the Treasury team. It was simply an attempt by the Chancellor to claw in an extra £635m a year to help plug a trade deficit measured by the Tories at £72bn.

In the Chancellor's pre-Budget report in November 2008, alcohol duty was hiked by a further 8% (4% for spirits), ostensibly to take up the slack created by the temporary cut in VAT from 17.5% to 15%. The sums didn't add up, though, according to Wine & Spirit Trade Association calculations, and wines priced under £5 actually attracted more duty.

Despite this, the Chancellor based his calculations this April on a nominal 0% inflation rate, and duly applied a 2% duty increase on alcohol. The 'duty escalator' had survived, despite huge industry opposition - including the unprecedented joint submission.

Yet the escalator is wrong in principle and based on flawed calculations. Not only does it damage profits and create redundancies in an industry already bruised by the recession, it fails to deliver the kind of tax revenues the government expected because sales fall.

There is evidence that sales are already doing just that. In the year to April 18, drinks volumes were down 4% across the on-and off-trade, while value slipped 1%, according to Nielsen.

The devastating impact on the on-trade has been well documented - 39 pubs are closing a week - but off-trade retailers and drinks suppliers have also been hit hard.

"There are people who are looking at fundamentally changing their business plans and in some cases asking whether there even is a business plan going forward," says WSTA chief executive Jeremy Beadles. "There are parts of the industry that are really suffering at the moment and that's going to be an ongoing issue. The industry needs help or you will see more businesses going under."

In the wine trade, the category that has spearheaded most of the drinks trade's growth over the past two decades, the effect of the duty hikes has been felt acutely. Jobs have quietly been shed across the industry over the past year, and more visibly at Constellation Europe and Gallo (see p46).

This cannot go on. In the past, the trade accepted inflation-matching increases were the best it could hope for. Now - unless Darling can be persuaded to abandon the escalator that commits him to raising duty by two percentage points above the RPI - all eyes are on inflation. If RPI recovers to, say, 1.5% in time for the autumn pre-Budget report, a 3.5% duty hike is on the cards.

But the Chancellor can choose to read inflation in any way he wants - or even ignore it altogether. It has been widely rumoured that, up until a week or so before settling on a 2% increase in duty, Darling was ready to go as high as 7%.

The industry was obviously relieved he didn't base his calculations on the 5% RPI figure recorded in the autumn. Now, however, the Chancellor needs to see reason and freeze duty.

The best case scenario is that he cuts duty at the end of the year to compensate for the rise in VAT and scraps the escalator for 2010. The worst case is that inflation climbs to the highs of last year and Darling keeps his promise to put duty up 2%.

The industry appreciates the government is under severe pressure to find new revenue streams - in June, the Organisation for Economic Co-operation and Development warned the Budget deficit would reach 14% of GDP in 2010, with output falling 4.3%, and Darling is predicting that the economy will shrink 3.5% this year. But the duty escalator is not the way to do it.

In fact, it could have the opposite effect.A study by Oxford Economics, funded by the industry, has calculated that a 2% increase in duty over the next two and a half years would yield a "nominal" increase in receipts. But when inflation is factored in, the forecast is for excise and VAT revenue to fall by £175m by 2010-11.

Such an outcome would be no anomaly. Increases in alcohol duty have consistently failed to provide the increases in revenues forecast by the Treasury, reveals the joint submission.

In 2005-06 and 2006-07 revenues were £165m and £118m respectively lower than the Treasury expected. In 2007-08, revenues were £179m higher than expected, but this was mainly for technical reasons - there were two Easters in 12 months and drinks retailers released a greater than normal quantity of alcohol in March 2008 in the period between the announcement of unexpectedly high duty increases and their application.

For much the same reason, revenues from April to November 2008 were higher than the same period in the previous year, but only by £113m. This compares with the Treasury's original full-year forecasts for the growth in revenue of £600m. Forecasts were subsequently revised in the pre-Budget report of November 2008.

"This consistent shortfall in receipts compared with revenue projections shows the Treasury cannot rely on anticipated excise duty receipts, and raises serious questions about the basis on which the Treasury made decisions in the 2008 Budget regarding the excise increase and the escalator," the industry said in its submission.

It also raises questions about the sense of a strategy that a) fails to boost the Treasury coffers and b) does untold harm to the drinks industry. Beadles describes duty as "the outside cost that hits the industry harder than anything else".

It betrays a complete lack of understanding by government of the slender margins businesses operate on, he says. "Even small increases can eat away and in some cases wipe out margins completely," he points out. "That isn't just about the industry: if the government wants a long-term income stream from alcohol duty it needs to think about a different approach. At this moment in time, all it is doing is creating a less reliable income stream."

Now is the time to press home the point to the Chancellor. If he sticks to his current plan, VAT will revert to 17.5% on the first day of 2010 and a duty hike will follow in the spring. This will ultimately mean a fall in excise and VAT revenue for the Treasury and crippling costs for the industry.

The solution? Freeze alcohol duty for 2010. Sign up now and lend your support to Push Back the Tax. n