Cheaper Champagne, pricier Pinot Grigio and maybe a battle with the EU as UK revolutionises its wine tax regime

For the first time in 140 years, the British government is changing the way it taxes alcohol. This could have an impact beyond the shores of the United Kingdom. Robert Joseph reports.

Winners and losers in the new UK excise duty regime
Winners and losers in the new UK excise duty regime

Regular observers of the UK wine scene – a group that should include anyone involved in selling in that market – will be used to the period of nail-biting anxiety prior to the annual budget. Will the Chancellor of the Exchequer – Britain’s Minister of Finance – significantly increase duty rates? Or will he (it is always a man, for some reason) simply allow the tax to rise in line with inflation? Or – fingers firmly crossed – will last year’s tax be left unchanged. The watchers are also aware that whatever the figure, it will always be subject to 20% VAT sales tax. 

Before the 2021 budget announced by Chancellor Rishi Sunak on October 27th, still wine, irrespective of its ex-cellar price, was subject to excise duty of £2.23 ($3.06) per 75cl bottle, while the figure for sparkling wine was £2.86 ($3.93). With the addition of the VAT, this rose to £2.68 ($3.68) and £3.43 ($4.71) respectively.

The welcome news this year was that Sunak did indeed leave these figures untouched. Much more significantly, however, he announced plans to reform all excise duty rates from February 2023. From that date, sparkling wine will be taxed at the same level as still wine. While this will clearly benefit Prosecco and Champagne, Britain’s favourite fizz, it will also help the sparkling wines produced by the UK’s growing wine industry and promoted as ‘Brexit Juice’ by various UK politicians who believe it has high export potential.

More dramatically, under the proposed new rules, taxes – for wine and other beverages - will also reflect alcohol levels. The stronger the drink, the more duty will be levied. So, a red, white or pink still wine weighing in at a low strength of 11.5% will carry the same tax burden as it does today. Every additional half percent of alcohol would add a further £0.12 ($0.16) per bottle, including VAT. So, a 12.5% Pinot Grigio would be £0.24 ($0.32) more expensive; a 13.5% red would be £0.48 ($0.64) pricier and a fuller-bodied 14.5% effort would go up by £0.70p ($0.96). 
As an example, a bottle of 14% Campo Viejo Rioja currently on sale at Sainsbury, one of the UK’s biggest retailers for £7, would cost £7.59.

In other words, most red and white – and indeed dry pink – wine will go up in price. And as climate change – unmentioned in Sunak’s speech, despite being made a few days before the UK hosts the COP26 conference – continues to have its impact on grape ripeness, this process will only accelerate. (Port and Madeira, will also go up in price – by about a pound – which will dismay fans of these styles.)

Something to celebrate

Sparkling wine, whatever its strength - up to the unlikely figure of 15% - will, however, all be cheaper, with a 10.5% Sainsbury own label Prosecco dropping from £6 to £5. However, the excise duty component of a bottle of Champagne or English sparkling wine selling for over £20 will be less significant. For a £22 bottle of Ellercombe English fizz on sale in the same shop, for example, the saving will be just £0.76, or less than 4 percent of the total price. 

 

The new UK excise duties: data: Meininger's Wine Business International

 

Not so simple

The new tax model follows a long period of consultation within the UK trade and industry, and was partly justified by Sunak on the grounds of simplifying an overly complex system – reducing the number of tax bands from 15 to six. As the independent regional merchant, Hal Wilson of Cambridge Wine Merchants noted on Twitter, however, life for anyone involved in the UK wine trade will be anything but simpler.

“Our existing wine price bands (low alcohol, still, sparkling, and fortified) will in fact be replaced by 38 different rates of duty for each 0.5% between 3.5% and 22%.”

 

Led by the Scots

The search for new ways to tax alcohol in the UK dates back to University of Sheffield research commissioned by the devolved Scottish Government in 2009. At that time, the aim was to explore ways to reduce alcohol consumption in a region of the British Isles where its abuse was particularly problematic.

Minimum alcohol pricing was subsequently introduced in Scotland but not in the rest of the UK. But while regulations differ within countries, and excise duty regimes vary widely across Europe, until Britain left the EU at the beginning of 2021, the UK was subject to European Directives 92/84/ EEC and 92/83/ EEC which supposedly prevented it from linking duty to alcoholic strength.

Indeed, Sunak linked his freedom to launch his initiative directly to Brexit, despite Luxembourg having a similar VAT-based system within the EU.

However, the UK administration's newly-acquired ability to introduce new legislation of this kind does not extend to Northern Ireland which is covered by the Protocol agreed between Britain and the EU to preserve the province's rights under the 'Good Friday', Belfast Peace Agreement. The UK already wants to renegotiate the Protocol which it signed less than a year ago. Now it will be Brussels that will be ringing the alarm bells. One solution will be for Sunak to allow the Northern Irish to set their own rules in this sector. But will he do that?

While Sunak’s speech and its subsequent coverage in the UK media implied that the changes to the excise regime are certain to be introduced in 16 months, nothing has been cast in stone. It is still possible that the UK’s Wine & Spirit Trade Association might lobby for alternative options. There are already rumblings of discontent at the differences between the way the alcohol-linked taxes are to be imposed on different drinks.  For beer, the figure will be from £0.08-£ 0.19 ($0.11-$0.26) per unit, while sparkling cider will be subject to the same £0.26 ($0.36) level as wine, and spirits will be subject to the slightly higher rate of £0.29 ($0.40).

Another interesting question concerns the way in which the new system will be policed. European wines benefit from a 0.5% leeway, so an 11.9% French wine could be labelled as 11.5 and benefit from a lower tax rate. But ABVs on US wines are far more approximate. Will every vintage – or possibly shipment? - need to be tested when it hits UK shores? How and where will this be done and at what cost and to whom? Wilson, who points out that the UK currently has just six wine inspectors, wrily suggests that “a new circle of bureaucratic hell has been created of which Dante would be proud”.

There may be other implications. One rationale for the new system is the positive impact it will have on the nation’s health. Reducing the price of lower-strength wine such as a 10.5% rosé will, however, also be associated with boosting the sales of beverages with high levels of residual sugar. At present, popular off-dry wines fall below the 50g/litre threshold for the ‘sugar tax’ applied to soft drinks, but that figure could of course be reduced. What finance ministers give away, can also be clawed back.

 

Wine on tap

The decision to reduce the duty rate on draught beer – popular among pubs and their customers – also raises the possibility of wine producers requesting a similar dispensation.

Of course, given some of the other bureaucratic hurdles that have been erected between the EU and the UK by Brexit, many producers in traditional wine regions see the UK as less of a priority than in the past. Philip Cox of Cramele Recas in Romania, for example, was quoted in Meininger’s as saying that Britain had dropped from representing 75% of his exports to just 10%. Other companies, with red and white wines whose prices will be forced upwards by the new taxes, may similarly refocus their efforts on regions such as the US, Asia and America.

 

Impact elsewhere

However, the UK is a very sizeable market, and alcohol businesses globally will already be planning how to adapt to the new regime. 

Some will be looking at initiatives like Forrest Wines’ Doctor’s Sauvignon Blanc from New Zealand which, with an ABV of just 9.5% would have a considerable price advantage over 13.5% examples from neighbouring vineyards.

Another development I expect to see is the growth in the market for fruit-flavoured, wine-based drinks such as Accolade’s Echo Falls which can be tailored to hit specific alcoholic strengths and tax bands.

Will the UK move have an influence elsewhere? I’m not sure. Excise duty is not a major issue in many other countries and, in any case, there seems little likelihood of European, US or Australian or New Zealand wineries allowing the governments of their nations to follow this path. But South Africa, where the pandemic raised the issue of alcohol abuse, and led to clashes between government and the wine industry, might prove fertile ground for this kind of thinking. As might Russia, another market whose administration is not averse to introducing inconvenient legislation.

Robert Joseph
 

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