Taxes on Alcohol and Tobacco in UK

The duties on Alcohol and Tobacco are very unpopular, but have the virtue that consumer are really aware only of how much they are going up and not how much has cumulatively been levied in the past. 20% VAT Taxes are paid on Alcohol and Tobacco related products in UK. Different rates of Tobacco duties are paid on cigarettes, cigars and other tobacco products. Cider duty is paid on cider and perry.

Each increase therefore causes great aggravation at the time, but very rapidly gets forgotten as consumers get used to the new levels of prices, which are anyways constantly adjusted for other reasons. Furthermore, as they are levied in incremental amounts expressed in pence, their incidence is very erratic.

VAT receipts automatically rise in money returns when product prices rise, but excise duties do not and therefore can and often, fail to keep pace with inflation. Surprisingly, some products, such as whiskey, are currently very cheap by historical standards once inflation is taken into account, partly as a result of a move to uniform taxation of alcohol content.

Taxes Applicable

Alcohol and tobacco products bear VAT on the total cost after levying excise duties, which means the tax is taxed. In the case of cigarettes Excise Duty (EC) harmonised proposals results in a specific tax of 3.2p per cigarette and a special ad valoram tax of 21 percent of the retail price. As a result, roughly 75 percent of the retail price of a packet of cigarettes consists of tax of one kind or another whereas it is only one-third for a pint of beer.

In recent years increasing attention has been given to the wider social costs associated with the misuse of alcohol. Tobacco and vehicles by individuals, but there has been no clear attempt to force a reduction in the consumption via the price mechanism. This may partly reflect the desire to maintain revenue, since sharp increases in prices may, at least temporarily, cause demand (and hence revenue) to fall disproportionately. Perhaps more importantly, excise duties feed straight through to rate of inflation, control of which is the primary macroeconomic objective.

Alcohol Duty

Today, the tax on alcohol is at an all-time high. But a bottle of budget whiskey, gin or vodka and you are paying about four-fifths of the purchase price directly to the government. Because excise duty is determined by the amount of pure alcohol in the bottle, the tax on a premium whiskey is the same as on a cheaper brand of the same strength. However, you have to pay 20% VAT on top of the excise duty. That means the duty is treated as value added to the product for VAT purposes. Effectively, you pay tax on tax.

Example:

The Spirit Duty you pay on a 1 litre bottle of 40% ABV vodka is 40% of £28.74, or £11.50.

Tax on Beer and Wine

There is far more tax per unit of alcohol on whiskey and other spirits than there is on beer or wine. The Scotch Whiskey Association thinks that this is terribly unfair. But there is logic to taxing spirits more heavily. The theory is to equalise the price of a unit of alcohol in its various forms. At the supermarket, a typical bottle of wine costs about £5 for 10 unit of alcohol; a bottle of blended whiskey is £14 for 28 units and a large can of beer is £1 for two units. That means, allowing for the cost of the drink and the tax, a unit of alcohol costs about 50p in whichever form you consume it.

The reason Scotch is taxed so highly is that, without the duty, it would be unhealthily cheap. It’s a good thing when our decisions are not distorted by tax effects and, when deciding how to get plasters, excise duty means that the price of different drinks works out as much the same. Incidentally, this is why a minimum price of alcohol, as suggested by some health activists and politicians, is a red herring. Excise duty has almost the same effect on its own.

Tax on Beer

Taxes on beer depend on the strength or Alcohol by Volume (ABV) content

Tax on Cider

Taxes on Cider depend on the strength or Alcohol by Volume (ABV) content and whether it’s still or sparkling.

Tax on Wine

Taxes on Wine depend on the strength or Alcohol by Volume (ABV) content and whether it’s still or sparkling.

Avoiding Tax on Alcohol

Avoiding tax on alcoholic beverages is very simple. Just don’t drink. Travellers also get to avoid duty by buying duty free or bringing your own. This is much less popular than it used to be, which is a shame as brewing is not difficult and the results can be very drinkable. If you make your own beer, or a fruit wine such as elderflower or blackberry, it has to be for private consumption only. You shouldn’t sell it or even give it away. However, there are special tax breaks for mall producers of beer and cider. Cider is usually taxed at the same rate as beer, subject to some wrinkles. But you can make up to 7,000 litres a year, and sell it, without paying a penny of duty.

Taxes on Tobacco

Like the duty on alcohol, the tax on tobacco is also very high, at about £7 on a pack of 20 cigarettes. The excise duty on cigarettes is set at a prohibitive rate to encourage smokers to quit the habit (unlike on alcohol, which, as we saw, is intended to make our tipple of choice the same price per unit of alcohol and maximise revenue). Together with information, campaigns and the ban on smoking indoors, this seems to be working. Smokers are not under a fifth of the adult of the population, down from half 40 years ago.

If you are one of the people who find it very hard to give up, the current situation is not pleasant. You either have to pay a fortune to feed your habit, or you could get your fix from the black market. If you are staying honest (and keeping your local cigarette retailer in business), the rest of us are grateful. The tax on tobacco raises £10 billion a year, considerably more than smokers cost the NHS. Which means, that if everyone stops smoking, the government will have to find another £10 billion to replace the revenue from cigarettes. No prizes for guessing who will have to pay that. Yes, it will be us.

Final Thoughts

At the time of writing this article, about 12 million adults in the UK smoke cigarettes. More than 80 percent of smokers take up the habit as teenagers, and smoking rates are highest among young adults. The overall decline in smoking prevalence has now been evident among adolescents, and higher rates of cigarette smoking have become particularly marker among girls.

The higher taxes on cigarettes (UK has the highest tax rate in the EU) reduce adult cigarette consumption and smoking uptake among young people. A 10 percent increase in cigarette price on average reduces demand in adults by 4 percent and has an even greater impact on young peoples’ consumption. There is also evidence that in high-income countries like UK, tobacco tax increase reduce consumption disproportionately among low socioeconomic groups. Therefore, regular above inflation increase in tobacco tax, should impact more on smoking among disadvantaged groups.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.