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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