Childhood obesity: follow-up Contents

2The soft drinks industry levy

Committee recommendation

16.In Childhood Obesity—brave and bold action, we considered evidence to support the introduction of a tax on sugary drinks to address the problem of childhood obesity. We concluded:

The Scientific Advisory Committee on Nutrition has recommended that consumption of sugar sweetened drinks should be minimised. This is particularly important for children, as 29% of sugar intake of 11–18 year olds comes from sugar sweetened drinks, larger than any other population group. We therefore support Public Health England’s recommendation for a tax on full sugar soft drinks, and recommend that it be introduced at a rate of 20% to maximise its impact on purchasing and help to change behaviour.16

Budget 2016 announcement of the levy

17.In the 2016 Budget, the then Chancellor, George Osborne, announced plans for the introduction of a new soft drinks industry levy:

Budget 2016 announces a new soft drinks industry levy targeted at producers and importers of soft drinks that contain added sugar. The levy will be designed to encourage companies to reformulate by reducing the amount of added sugar in the drinks they sell, moving consumers towards lower sugar alternatives, and reducing portion sizes. Under this levy, if producers change their behaviour, they will pay less tax.17

18.A consultation on the proposed legislation was published in August 201618 and provisions for the levy were included in the draft Finance Bill, published later in December 2016. The levy will come into force in April 2018, two years after it was first announced. The delay is intended to give the affected companies time to reformulate their products to reduce added sugar content.

19.The levy has been usefully summarised in a recent House of Commons Library briefing as follows:

20.In his 2017 Budget statement, the Chancellor of the Exchequer confirmed that the rates of the levy would be as follows:

Mid sugar drinks (5-8g of sugar per 100ml): 18p per litre

High sugar drinks (>8g of sugar per 100ml): 24p per litre.20

21.Income from the levy was originally projected to be £520million in 2018/19, £500million in 2019/20 and £455million in 2020/21.21 The declining rate over time takes account of the behavioural response of both industry and consumers to the levy, as the OBR explains:

The costing accounts for a behavioural response whereby producers reformulate their product mix by lowering sugar content, promoting lower sugar alternatives, and reducing portion sizes. It also accounts for the behavioural responses resulting from any change to the associated prices.22

Effect of the levy

22.The soft drinks industry levy—the Government’s version of the “sugar tax” which we recommended and for which so many organisations have been campaigning23—has already started to have an effect, even before its actual introduction. A number of soft drinks companies and retailers have announced, in advance of legislation, that they will be reformulating their products. Examples include Tesco,24 Lucozade Ribena Suntory25 and Britvic.26 As a consequence, in his Budget 2017 statement, the Chancellor noted that the expected yield from the tax was reduced from the original projections.27 It is now expected to raise £385m in 2018/19, £390million in 2019/20 and £385million in 2020/21.28

23.As significant as the effect on reformulation is the effect which the announcement of the levy is having on the implementation of the rest of the childhood obesity plan. Emma Reed, the deputy director responsible for delivering the childhood obesity plan at the Department of Health, told us

The other benefit I want to mention about the sugar levy is the way it has shifted the paradigm and the conversation about sugar. I am absolutely certain that the work that PHE is leading on reformulation has started in a different place as a result of the sugar levy, and that is certainly the case when it comes to thinking about the broad implementation of the childhood obesity plan—its reach. Shifting the conversation and ensuring that consumers know more about the issue of sugar has been quite seismic.29

24.Her comments were confirmed by Dr Alison Tedstone, Chief Nutritionist at PHE:

One thing that is totally different for this reformulation agenda from anything we ever had with salt is that the levy has totally changed the conversations. I was in a lot of meetings on the salt work, and there was always this narrative going on: “Well, what are you going to do to us if we don’t do it?” We would always mumble something, because actually nobody had ever done anything internationally. Now we do not have to mumble anything, because the narrative has completely changed. Of the 100 companies we have met, two asked us what we were going to do.30

25.This ‘halo effect’—the high-profile nature of the levy acting independently of its effect on prices to raise awareness of, and prompt action to counter, the dangers of high sugar consumption—is an important benefit of its introduction.

26.The impact of the levy could be lessened, however, if its effect on the cost of high-added sugar drinks is not fully passed on to the consumer. Manufacturers could decide to absorb the whole cost themselves, either to protect their sales or, more cynically, to undermine the rationale for the introduction of the levy and limit its impact. Alternatively, manufacturers could reduce the pre-tax price of high sugar drinks, whilst simultaneously choosing to marginally increase the price of other drinks not subject to the levy (for example diet drinks, fruit juice and bottled water). Prices across the company’s portfolio would increase, in order to limit the overall effect on profits, with consumers of healthier beverages cross-subsidising high sugar drinks.31 There is evidence of this “umbrella pricing” having occurred in the US after the introduction of a sugar tax in Berkeley, California.32

27.We were encouraged by the commitment by Coca Cola’s representative, made in response to our questioning, “to pass [the cost of the levy] on as it should be”—albeit that it was a difficult commitment to extract.33 However, we are concerned that other manufacturers may not be willing to follow suit. We pressed the Government representatives who appeared before us on whether the Government would take steps to ensure that the price differential between high- and low- or no-sugar drinks would be passed on at the point of sale:

Q120 Chair: One point that emerged very powerfully from the previous panel and we have heard in evidence is the concern that price differentials might not be passed on at the point of sale and it will have a much greater impact if that happened. Is there anything the Treasury can do? Minister, perhaps you can comment on what the Government might do to encourage that price differential to be passed on at the point of sale so there is an incentive for people to choose a lower-sugar product.

Mike Cunningham [Deputy Director, VAT & Excise, Business & International Tax Group, HM Treasury]: In general terms, the key here, certainly from the tax perspective, is not for us to be worrying so much about the price but the actual product reformulation. That was very much the intention here. Our focus was all on getting producers to do things differently, and therefore the levy is designed to do that.

[ … ]

Nicola Blackwood: Both the soft drinks industry levy and the reformulation programme are designed primarily to be producer-led measures so that the sugar is taken out at the point of supply. I understand the point you are making; I do not miss it. It would be enhanced if there was also a price differential, but the policies have been designed specifically to impact at point of supply rather than point of price.34

28.We acknowledge that the soft drinks industry levy has been designed primarily to drive reformulation to reduce sugar content in soft drinks, and we welcome the success which it has already achieved in doing so. We are nonetheless concerned by the prospect of manufacturers and retailers undermining the effectiveness of the levy by failing to pass on a price differential between high- and low- or no-sugar drinks—and by the fact that the Government does not appear to have a plan to counter that eventuality. We want the benefit of the levy to be maximised in every possible way to encourage a reduction in sugar consumption. We are also concerned that consumers of low sugar drinks could, in effect, be forced to subsidise high sugar products if a price differential is not passed on at point of sale.

29.We commend the Government for introducing a levy on the manufacturers of sugary drinks and welcome the progress already being made in reformulation as a result. We recommend that the Government’s monitoring of the effectiveness of the levy should include monitoring of whether the levy is being passed on to include a price differential between high- and low- or no-sugar drinks at the point of sale. Failure to do so would leave consumers of sugar-free products subsidising higher sugar drinks and would also reduce the effectiveness of the levy in helping to change choices. We recommend that the Government should develop and if necessary implement measures to ensure that that differential is clear in the price paid by consumers.

Milk-based soft drinks

30.The draft bill by which the levy is proposed to be implemented excludes milk-based drinks, even when they contain added sugar.35 We questioned the Treasury official who appeared before us, Mike Cunningham, on the reasons for that exclusion. He replied

We designed it to be clear, simple and transparent. We had to make choices about what products would be in, so we targeted fizzy drinks. Fruit juices, for instance, are not in, because of the benefits of fruit juice. [ … ] There is a whole difficulty with looking at milk drinks, not least because there are good milk drinks, and obviously the kind that you are talking about with the high sugar content. It is a different challenge to tackle that kind of product. [ … ] In the first instance, we have gone for soft drinks—sugary drinks—because they are very easy to target; it is very easy to do that. With milk, it is much harder. The narrative on milk is a different one in any case, in the sense that milk is one of the things that we also promote as a good thing for children to have.36

31.Mr Cunningham added that the exclusion of milk-based drinks from the levy “does not mean that at some point we could not come back to it and look at it”,37 but confirmed that the Treasury was not doing so at the moment.38 The Minister noted that although they were excluded from the levy, milk-based drinks were included in the reformulation programme being led by Public Health England.39

32.We are unconvinced by the rationale for excluding milk-based drinks from the soft drinks industry levy. The suggestion that milk-based drinks have been excluded because “milk is one of the things that we also promote as a good thing for children to have” is particularly unconvincing: as we pointed out in questioning, milk is better for children without sugar added to it.40 While it is welcome that milk-based drinks will be included in the wider reformulation programme, their exclusion from the levy appears to be a missed opportunity to drive progress much faster than it might otherwise take place. We urge the Government to extend the soft drinks industry levy to milk-based drinks which have extra sugar added.

Use of the revenue from the levy

33.The Government’s childhood obesity plan says

In England, the revenue from the levy will be invested in programmes to reduce obesity and encourage physical activity and balanced diets for school age children. This includes doubling the Primary PE and Sport Premium and putting a further £10 million a year into school healthy breakfast clubs to give more children a healthier start to their day.41

Revenue from the levy will be distributed to the devolved administrations in accordance with the Barnett formula.42

34.Concerning use of the revenue from the levy in England, the childhood obesity plan adds

Given the considerable new funding that the soft drinks industry levy will make available for school sports, the Government is keen that schools are supported as much as possible in how they spend the available funds for maximum impact. During inspections, Ofsted assess how effectively leaders use the Primary PE and Sport Premium and measure its impact on outcomes for pupils, and how effectively governors hold them to account for this. Physical activity will be a key part of the new healthy schools rating scheme, and so schools will have an opportunity to demonstrate what they are doing to make their pupils more physically active.

Schools will continue to have the freedom to consider spending the Primary PE and Sport Premium on specific interventions but to help schools understand what help is available, PHE will be developing advice to schools for the academic year 2017/18. This will set out how schools can work with the school nurses, health centres, healthy weight teams in local authorities and other resources, to help children develop a healthier lifestyle.

35.Further correspondence from the Minister for Public Health sets out the detail of the Government’s plans for the use of the levy:

36.Our 2015 report concluded

90. There has been much debate about whether a tax on sugar sweetened drinks would be regressive, in disproportionately affecting low income families. We do not believe this needs to be the case because zero sugar alternatives are available which would be unaffected. There is compelling evidence of the disproportionate harm to disadvantaged children from high sugar products which can no longer be ignored. Nonetheless, given the concerns that the income raised by a tax could come disproportionately from lower income families, there is a strong case that those families should also derive the most benefit. A sugary drinks tax should act as a child health levy, with all proceeds directed to measures to improve children’s health. Those measures should be especially targeted to help the children who are at the greatest risk of harm from obesity.

37.We note that the funding promised for schools as a result of the imposition of the soft drinks industry levy is being directed by ‘soft hypothecation’—that is, an assumption has been made about how much the levy will bring in, and that amount has been committed to the programmes described above, whether or not the levy actually raises the amount predicted.46 In his Budget statement the Chancellor confirmed that, notwithstanding the reduced revenue expected from the levy as a result of the progress on reformulation already made by producers, the Government “will nonetheless fund the Department for Education with the full £1 billion that we originally expected from the levy this Parliament, to invest in school sports and healthy living programmes.”47

38.We commend the Government for responding positively to our recommendation (and that of others who called for a sugar tax48) that the proceeds of the soft drinks industry levy should be directed towards measures to improve children’s health. It is particularly welcome that some of the proceeds will be directed to breakfast clubs, whose greatest benefit is to children from lower income families. We intend to follow up how the income from the levy is distributed in order to help reduce the inequalities arising from childhood obesity.

17 HM Treasury, Budget 2016, Mar 2016, paras 1.93–94.

19 The Soft Drinks Industry Levy, Briefing Paper 7876, House of Commons Library, 25 January 2017.

20 HC Deb, 8 March 2017, col 815.

21 HMRC, Soft Drinks Industry Levy Policy Paper, 5 December 2016.

22 Ibid

24 Tesco, Tesco reduces sugar content in all own brand soft drinks, November 2016 [accessed 21 March 2017]

27 HC Deb, 8 March 2017, col 815.

28 HM Treasury, Spring Budget 2017, 8 March 2017, page 28.

29 Q126

30 Q143

31 See Q10, Q35.

32 Jennifer Falbe, Nadia Rojas, Anna H. Grummon, Kristine A. Madsen, “Higher retail prices of sugar-sweetened beverages 3 months after implementation of an excise tax in Berkeley, California”, American Journal of Public Health, 105 (2015).

33 Qq 39–48

34 Q125

35 Draft Finance Bill 2017 [accessed 13 March 2017], clause 56(1)(a)

36 Qq 127–129

37 Q131

38 Q132

39 Q133. See also Childhood Obesity: A Plan for Action, pp. 4–5, and Chapter 3 below.

40 Q130

43 Minister for Public Health and Innovation (CHO016)

44 Minister for Public Health and Innovation (CHO016)

45 Minister for Public Health and Innovation (CHO017)

46 Q134, Q139.

47 HC Deb, 8 March 2017, col 815.

23 March 2017