Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by the HM Treasury

REVENUE EFFECT OF FROTH SERVED ON BEER

  This note is provided to clarify the revenue implications caused by serving froth on beer following concerns that were raised at the meeting of the 26 March. Beer is liable to excise duty and VAT, consequently each of these taxes is dealt with in turn.

Impact on excise duty

  Revenue receipts from excise duty on beer amounted to some £2.9 billion in 2002-03. This includes all beer, whether bottled, canned or draught. Although there is no breakdown of receipts into packaging type, industry sources advise that draught beer currently accounts for approximately 60% of beer sales.

  Liability to excise duty is determined by the quantity of beer and its alcoholic strength. The stronger the beer, the greater is its liability to duty. The rate of duty following the Budget is £12.22 per hectolitre 1% of alcohol by volume. Importantly, this liability is determined when the beer leaves the brewery, or storage premises that have been authorised by Customs, for consumption in the UK. Consequently, it is determined prior to the place and point of retail sale and is calculated on the bulk or packaged amounts of beer that are delivered for consumption.

  If beer is subsequently lost through spillage or cleaning of pipe-work for example, this will have no impact on the duty that has been charged on the keg/cask. Similarly, the duty is not affected if a pint drawn from a keg contains 100% or only 95% liquid because the duty has already been accounted for. All this means that the volume of beer in a pint glass will not impact on the duty charged and collected.

  In summary, the level of froth served on beer has no direct implications for the amount of excise duty that is charged or revenue collected, even though the contents of the keg etc. may be "stretched" to produce more pints at retail.

  The only possible impact would be through any changes in the actual volume of beer that is sold to places of retail, and it is unclear (for the reasons outlined below) how volumes would be affected.

Impact on VAT

  All pints of beer sold are liable to the standard rate of VAT, and that VAT is payable by the retailer of the beer. Customs do not possess precise information on total VAT receipts from the sale of beer as there is no commodity breakdown of the sales declared by traders on VAT returns. The Office for National Statistics, however, gives expenditure on beer in restaurants, pubs and hotels in its Consumer Trends publication. For the calendar year 2002 this amounted to £14.96 billion. The notional VAT on such sales is £2.3 billion.

  The overall impact on VAT receipts from any change in the proportion of liquid in a glass is, however, unlikely to be large.

  It is probable that retailers would respond to an enforced rise in liquid from 95% to 100% by increasing prices, but the amount by which typical pint prices would rise is uncertain.

  Any increase in prices would lead to some reduction in the number of pints being consumed, but it seems unlikely that pricing and consumption behaviour would be such that the number of pints sold would fall by the full figure of around 200 million pints needed to leave the volume of beer consumed unchanged. More likely would be some fall in the number of pints, but some increase in the volume, of beer consumed. Expenditure on beer could therefore rise or fall, depending on which of these effects is the greater.

  It follows that VAT from beer sales could go up or down. Estimating how much VAT from beer would actually change would require specific assumptions about consumers' and retailers' behaviour, but it is unlikely that there would be a fall in receipts as large as the 200 million pint figure would suggest.

  In revenue terms that is not the end of the story, however. Most of any change in spending on beer that resulted from a move to 100% liquid would result in offsetting changes to expenditure on other goods and services, and most of these would themselves attract VAT. Again estimation is not simple as it would require an assumption about what other spending was increased or decreased, but the closest substitutes to beer are other alcohol products, which also pay VAT at the standard rate. So any change in VAT from beer is likely to be offset by changes in VAT from other sources.

  Taking these two factors together leads us to believe that a move to 100% liquid would not have a major impact on overall VAT receipts.


 
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