Select Committee on Scottish Affairs First Report


4. Excise duties

44. Probably the issue of greatest concern across the whole of the alcoholic drinks sector is the level and structure of excise duties. Much effort has been expended on detailing what alcoholic drinks' producers see as the "unfair" burden they face. Several of the concerns affect all alcohol producers. But as HM Customs and Excise say, "Spirits are the most heavily taxed of the alcoholic drinks", as well as the most price sensitive.[46] Excise rates in the UK are considerably higher than those levied in most of the other parts of the EU.[47] The following table provides details of the comparative excise duty rates for beer and spirits (in sterling) for each EU member state.

Comparative excise duty rates for beer and spirits (in sterling) for each EU Member State


Duty on a pint of beer at 5 per cent alcohol by volume (or 12.5° Plato)


Duty on a 70cl bottle of spirits at 40 per cent alcohol by volume

Source: European Commission's Excise Duty Table (Printed July 2001)

1. Exchange rate: Financial Statistics (average rate for April 2001)
2. Beer at 5 per cent alcohol by volume equates to 12.5° plato. (Average strength of beer in UK is 4 per cent, but on continent is estimated to be 5 per cent.)
3. Netherlands, Denmark and Portugal calculate beer duty by using degrees plato but within a banded system.

45. Despite duty freezes on spirits in the last four Budgets, the spirits industry made a number of complaints about the system of excise duties, including that it is outdated. The SWA argued that the existing structure of excise taxes was largely formulated in the early part of the last century when, as it said, "market conditions were very different from today".[48] It called for a redesign of the tax system to recognise the changes since then. The Financial Secretary to the Treasury told us that the reason for the relatively high rates of excise duty on alcohol was largely one of tradition.[49]

46. Spirits producers claimed that the system is discriminatory. The excise system taxes alcohol served as spirits at one and a half times more heavily than the same amount of alcohol served as wine and one and three quarters as heavily as the same amount of alcohol served as beer. In price terms the SWA has pointed out that if alcohol in whisky was taxed at the same rate as wine, the current price of a 70 cl bottle would fall from around £10.70 a bottle to £8.81.[50] The Financial Secretary to the Treasury admitted that:

    "Undoubtedly ... there is an additional burden of taxation on spirits as opposed to wine and beer".[51]

47. It was suggested that the present system was not effective and that current levels are such that a reduction in duty and increased consumption may mean that the Government would actually increase the revenue obtained from spirits. The SWA claimed that "the Chancellor and the consumer would jointly benefit if the duty applied on spirits were less onerous".[52] The spirits industry argued that high excise duties encouraged smuggling and fraud as attempts were made to evade payment.[53]

48. We have sought to examine the basis of these arguments, starting with the structure of excise duties as currently applied in the UK and the argument that it discriminated against spirits. Dr Crawford of the Institute for Fiscal Studies (IFS) pointed out three reasons why the Government might wish to increase tax on any particular product.[54]

  • Economic efficiency

  • Distribution considerations

  • The wider impact of consumption on other parts of society.

49. It is economically efficient to impose high taxes on goods if there is evidence that people would continue to buy it even at a high rate. The memorandum from the IFS showed that spirits were the most price-sensitive of the three types of alcohol.[55] On this evidence, spirits should be subjected to a lower rate of tax than other alcoholic drinks.

50. The second reason is that a product may be subject to a lower rate of tax if it formed a relatively large part of the budget of the poorer sections of society. Dr Crawford believed that this argument did not appear to apply to any of the three types of alcohol, none of which had any particular distributional characteristics.[56]

51. Thirdly, goods may be taxed more heavily because their consumption created wider problems for society. Alcohol clearly has the potential to create such problems. The health consequences of alcohol consumption formed part of our remit, and are dealt with below.[57] However, while there might be some justification in taxing alcohol because of the wider social costs that it generates, we found no evidence that these costs vary by the type of alcohol consumed. Medical opinion has stated that "alcohol is alcohol is alcohol".[58] The SWA said that all governments accepted this fact.[59] This suggests that there is no logical basis for spirits to be taxed more heavily than other alcoholic drinks, nor did we discover any economic grounds. High excise duties on spirits relative to other alcohols unavoidably discriminate against Scotland, which now accounts for the vast majority of UK spirits production.

Taxation abroad

52. The SWA believed that the high rate of excise imposed in the UK provided a basis for foreign governments to apply their own high levels of duty on UK spirits, thereby hindering exports to the obvious detriment of the UK,[60] but offered only anecdotal evidence in support.[61] The IFS stated that they could "certainly see the argument", but they were not aware of any evidence which showed that high UK taxes had actually had this effect.[62] Scottish and Newcastle plc dismissed the assertion.[63] We have not taken it further.

Tax efficiency

53. The suggestion that lower excise rates would lead to greater revenue was the most technical argument encountered during the course of the inquiry. SWA documents[64] make reference to recent estimates of the price sensitivity of alcohol produced by both the IFS and the Government Economic Service (GES).[65] These price sensitivity estimates are the crucial statistics needed to gauge how revenues are affected by changes in duty rates. There are no statistically significant differences between these two sources, and we therefore focus on the IFS estimates.[66]

54. The IFS estimates of the price sensitivity of the three different alcoholic drinks are sophisticated, in the sense that they take account of the revenue effects that varying duty on one type of alcohol would have across all types. For example, if the duty on wine were reduced, this would increase the revenue obtained from wine.[67] The IFS also found that beer and wine were complements. When people drink wine, they also tend to drink beer at the same time. This means that the revenue from beer would also increase if the Government were to cut the duty on wine.

55. Wine and spirits were found to be substitutes. An increase in wine sales would lead to a fall in the sales of spirits and a reduction in the revenue obtained from spirits. This reduced spirits revenue would, the IFS estimate, be so large that Government revenue would decrease if the duty on wine were reduced, even though the revenue obtained from wine alone would increase. By examining the net revenue affects across all drinks, the IFS also gauged that a cut in beer duty would also lead to an overall reduction in excise revenues.

56. The likely effect of a cut in spirits duty is slightly more complex. The IFS estimated that this would lead to an increase in the revenue from spirits, as the SWA implied. In addition, a cut in spirits duty would also lead to an increase in sales of beer and an increase in beer revenue. But wine was a substitute for spirits. Although a cut in duty would therefore lead to more spirits and beer sales, a loss of wine revenue would follow as wine sales were reduced. The IFS considered that increasing the duty on spirits would mean that these two revenue effects would cancel out. Changes in the duty on spirits would therefore leave overall revenue from excise on alcoholic drinks unchanged.

57. This finding has several important implications. Firstly, it does not appear to be correct to say that a cut in spirits duty can potentially benefit both the Government and the consumer. The IFS results imply that, at current rates of duty, the Government was obtaining the maximum amount of revenue from spirits. This inevitably suggests that either a decrease or an increase in duty would result in a loss of revenue, and if the Government reduces spirit duties this will result in some loss of revenue. However, the same conclusion does not apply to either beer or wine. Here, the IFS results suggested that increasing the duty on either beer or wine would lead to an increase in excise revenues. The net effect is that, if we consider only the efficiency of excise duties as a means of raising revenues, the duty on beer and wine should be increased.

58. A European Commission study on competition between alcoholic drinks was published in February 2001.[68] It examined six areas: the extent to which price-sensitive competition exists between the various categories of drinks; the effects of the system of EU minimum rates; the effects of rates actually applied in member states; trends in consumption; reasons for these trends; influence of changes in taxation upon them.

59. The study found that "Overall...our estimates of own-price and cross-price elasticities accorded with those found in the literature".[69] This implies agreement with the work carried out by the IFS. But the study also said that there was a range of factors, including attitudes and fashion, which influenced the consumption of alcoholic drinks and the degree of switching between types. It concluded that there was no systematic pattern demonstrating whether drinks were complements or substitutes for each other across the various studies that had taken place.[70] "The demand for alcoholic drinks does not appear to be substantially dependent on relative alcohol prices".[71]

60. We would not propose that excise duties should be set solely with regard to the effect on government revenues. Due regard must also be given to the health issues related to alcohol; and how taxes affect employment. In its response to a report on motor fuel taxation from the Trade and Industry Committee, the Government said that it "continually monitors the effects of all tax measures".[72] But we could find no sound economic basis for a continuation of excise discrimination against whisky, or against any other spirit.

61. Several benefits might ensue if excise discrimination against spirits were ended. Consumption of spirits could increase relative to wine. This would have a positive effect on the Scottish economy and the trading position of the UK. The evidence from the IFS suggests that this could be achieved at little cost to the Exchequer. The health impact is likely to be neutral.

62. We would therefore recommend that the Treasury should continue on a long-term basis, its policy of freezing the tax on spirits until it is comparable with that levied on alcohol consumed in other forms. This would end discrimination against one of Scotland's major indigenous industries, and one of the UK's leading exports.

46  HC 324-i, Session 2001-2002, p.293, para 9. Back

47  See also HM Customs and Excise, Second Report from the Treasury Committee, HC53, Session 1999-2000, paras 74 to 77. On a related matter see Impact on Trade and Industry of Motor Fuel Taxation, Ninth Report from the Trade and Industry Committee, HC 268, Session 2000-01. Back

48  HC 973-ii, Session 1999-2000, p.40, para 3.1 Back

49  HC 324-i, Session 2001-2002, Q688; Q696. Back

50  HC 324-i, Session 2001-2002, pp.331-332. Back

51  HC 324-i, Session 2001-2002, Q706. See also Q709. Back

52  A Dynamic Spirits Industry for the New Millennium, p.14. Back

53  HC 973-ii, Session 1999-2000, p.40, para 3.5. Back

54  HC 114-ii, Session 2000-01, pp.143-144. Back

55  HC 114-ii, Session 2000-01, p.141. Back

56  HC 114-ii, Session 2000-01, Q.415. Back

57  Para 144 et seqBack

58  HC 114-iv, Session 2000-01, Q.636. Back

59  HC 973-ii, Session 1999-2000, Q.190. Back

60  Around 90 per cent of sales are exported, and whisky is one of the UK's top five manufactured export products. See HC 114-v, Session 2000-01, p.281, Annex A. Back

61  HC 973-ii, Session 1999-2000, Q.147 and Q.151. Back

62  HC 114-ii, Session 1999-2000, Q.433. Back

63  HC 114-i, Session 2000-01, Q.265. Back

64  See Moving Forwards, A Dynamic Spirits industry for the New Millennium, SWA, January 2000. Back

65  Professor Chambers of Essex University produced the GES estimates. See Government Economic Service Working Paper, Number 138. Back

66  These are reported in HC 114-ii, Session 2000-01, p.141, para 3, Table 3. Back

67  This is because wine is price sensitive-the effect is that the increased sales of wine are sufficient to compensate in revenue terms, for the loss of revenue consequent on a reduction in wine duty. Back

68  Study on the competition between alcoholic drinks: Report for the EC by Customs Associates Ltd, February 2001. Back

69  Ibid, para 1.6.8, p.20. Back

70  Ibid. Back

71  Ibid. Back

72  First Special Report from the Trade and Industry Committee for Session 2001-2002, Appendix 2, HC 197. Back

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Prepared 28 November 2001