House of Lords - A new EU Alcohol Strategy?

A new EU Alcohol Strategy? - European Union Committee Contents

CHAPTER 6: PRICING

Taxation

124. Within the EU, the rates of taxation and the structure of the taxation of alcohol products are laid down in two Directives of 1992.

RATES OF EXCISE DUTIES

125. The minimum rates of taxation of alcoholic beverages are laid down in Directive 92/84/EEC.[126] It is open to Member States to tax drinks at a rate higher than the minimum rate, and the UK has one of the highest rates of tax: "a litre of wine in France incurs less than four euro cents excise duty and a similar litre of wine here in the UK incurs £2.73 excise duty".[127] This explains the busy cross-channel trade in wine bought for personal consumption in the UK. It also explains why, as Mr Cummins told us, "alcohol duty fraud is one of the largest tax crimes in the UK; HMRC's published estimates suggest it costs taxpayers around £1.3 billion a year. They advise that the problem has grown somewhat since the introduction of the European single market in the early 1990s, and there is no doubt that the significant differences in excise duty rates between Member States can help, to some extent, to incentivise that fraud."[128]

126. Harmonisation of the levels of duty is not even a distant dream. In 2013-14 the Government collected £10.5 billion in alcohol duties, around 2% of all tax revenue collected by HM Revenue and Customs (HMRC). Most of the revenue came from wine (£3.7 billion), beer (£3.3 billion) and spirits (£3.1 billion), with cider making a much smaller contribution to receipts (£0.3 billion). Alcohol duty's contribution to HMRC receipts has remained around 2% since 2005. As Ms Willmott told us, "the problem is that every time there is a discussion about harmonised taxation, all the British MEPs go, 'Oh no', because we know this is something that the UK will not even discuss."[129] In 2006, at the specific request of the Council, the Commission put forward a proposal for amendment of the Directive by 'revalorising' the rates of excise duties,[130] but it was last discussed in the Council in 2010, and the Commission's Work Programme for 2015 proposes that it should be withdrawn because there is "no foreseeable agreement".[131] We regret that the Commission's attempt to update minimum rates of duty set over twenty years ago should have been blocked in the Council in 2010 and not subsequently discussed.

THE STRUCTURE OF TAXATION

127. Amending the structure of taxation is another matter. The principal provisions of the relevant Directive[132] are as set out in Box 8.

Box 8: Structure of EU taxation of alcoholic beverages

The excise duty on beer is fixed by reference to the number of hectolitre/degrees of finished product.[133] Member States may divide beers into categories and may charge the same rate of duty per hectolitre on all beers falling within each category.

Member States may apply reduced rates, which may fall below the minimum rate, for beer with an actual alcoholic strength by volume not exceeding 2.8%.

The excise duty levied on still wine and sparkling wine and on other fermented beverages, including cider, is fixed by reference to the number of hectolitres of finished product.

Member States will be required to levy the same rate of excise duty within each category of alcoholic beverages.

Member States may apply reduced rates of excise duty to any type of wine and other fermented beverages, except for beer, with an actual alcoholic strength by volume not exceeding 8.5%.

128. The illogicality of the current position was explained in the written evidence of ScHARR:

"Specifying that wine and ciders must be taxed by product volume while permitting beer and spirits to be taxed by ethanol content prevents excise duty being levied in a way which reflects the public health risk associated with products. Under the current system, a 750ml bottle of wine must attract the same level of duty irrespective of whether it contains 90ml of ethanol or 120ml ethanol, despite the public health risk being greater in the latter case. In terms of duty levied per UK unit of alcohol, a 500ml can of normal strength cider would attract substantially more duty per unit than a 3L bottle of high strength cider (8p per unit vs. 5p per unit at current UK duty levels). For those motivated to purchase the maximum ethanol for the minimum price, such duty structures create perverse incentives to purchase beverages with higher alcohol contents in greater quantities. Consideration should be given to reforming alcohol duty structures to permit taxation which consistently reflects the alcohol content of products and the public health risk which this entails."

129. In her oral evidence Prof Meier elaborated on this: "The way taxation is currently legislated in EU Directives is such that you cannot tax all alcohol by alcohol strength. Alcohol strength is the driver of harm, so it entirely makes sense to have something that is proportionate to alcohol content. You can do that for beer and spirits but not for wine or cider under current EU legislation. Several countries have tried to find ways around that, but it is not currently possible."[134]

130. This was the only topic on which the health lobby and the manufacturers and retailers had a measure of agreement, though perhaps for the manufacturers this is less a matter of principle and more a desire to see wine taxed more highly. In written evidence the Scotch Whisky Association told us: "The defect of existing EU legislation is that it produces distortions of competition by taxing differently the same level of alcohol purely because it appears in a different kind of drink. The SWA supports all alcoholic beverages being taxed on the same basis according to alcohol content, with clearer horizontal minimum rates applying to all alcohol. We believe this is the only fair and responsible way to tax alcohol." The WSTA agreed, and thought that this was "an area in which a reviewed strategy could more reasonably be involved and provide potential benefits to consumers in a less intrusive and possibly more effective way than Minimum Unit Pricing."

131. As Prof Sheron pointed out, wine, unlike beer and spirits, is taxed in bands: "There is a band at 7.5% and at 15%, so there is no financial incentive for manufacturers to make weaker wines, which, given the population-level link, would be much healthier."[135] A revised structure might also promote the sale of weaker beers: Brigid Simmonds, the Chief Executive of the British Beer and Pub Association (BBPA) explained: "Under the Structures Directive … low-strength beer can be taxed at a lower rate only if it is less than 2.8%. We would like to have the ability to innovate and to make the taste better by raising that to 3.5%."[136]

132. The Government also agrees on the desirability of amending the Structures Directive. Mr Acton said: "The Directive already allows taxation to relate closely to alcoholic strength for beer and spirits but not for wine and cider. You can argue that that is illogical … We are arguing that it should be possible for duty across the board to relate to alcohol strength."[137]

133. EU rules on the structure of alcohol taxation should be reviewed to allow the implementation of variable tax rates for wines and ciders in line with alcoholic strength, and to give an incentive to the manufacture of lower strength beers.

Pricing

134. There is a considerable measure of agreement that one of the main causes of binge drinking in the UK is 'pre-loading'. Paul Waterson, Chief Executive of the Scottish Licensed Trade Association (SLTA), explained: "We see many young people now preloading before they come out, so they come into the pubs and nightclubs and they have already had parties at home, where they are drinking significant amounts of alcohol … people, especially younger inexperienced drinkers, are seduced into drinking more than they would normally by price. Within the [Licensing (Scotland) Act 2005] there is a package of measures in Scotland to stop irresponsible promotions, but it cannot be totally prescriptive. Minimum pricing would be a far more efficient way of stopping irresponsible promotions." He did not agree with the idea that alcohol "should be sold cheaper than water and more or less given away as a loss leader to get people into stores to make money off other products".[138]

135. Needless to say, industry representatives did not agree with this view. Mr Beale's dismissive comment was: "What often gets in the way of a good story are the facts."[139] He was referring to the reduction in recent years in under-age drinking. This reduction, however, does not seem to us to be inconsistent with the sort of conduct described by Mr Waterson.

136. It is entirely within the competence of Member States to take steps to prevent alcohol being "sold cheaper than water" or "given away as a loss leader". A ban on selling alcohol below the "permitted price" was introduced through the Licensing Act 2003 (Mandatory Conditions) Order 2014[140] and came into force on 28 May 2014. The schedule to the Order defines the "permitted price" as the level of alcohol duty plus VAT. This means that a 440 ml can of average strength lager (4% ABV) cannot be sold for less than 40p, a 70 cl bottle of vodka (37.5% ABV) for less than £8.89, or a 75 cl bottle of wine (12.5% ABV) for less than £2.46.[141] Sale at these prices still results in a loss to the retailer.

137. We recommend that the Government review the formula laid down by the 2014 Order for calculating the minimum permitted price of alcoholic drinks. We hope that other Member States may take equivalent action.

Minimum Unit Pricing

138. Minimum unit pricing (MUP) of alcohol is a legislative prohibition against the sale of alcoholic drinks at a price below a fixed cost per unit of alcohol. It is not to be confused with minimum pricing, which does not relate to the price per unit but is the prohibition of the sale of an alcoholic drink below a fixed price—for example, a prohibition on the sale of wine below cost price as a loss leader.

139. No Member State currently has a MUP law. Indeed John Duffy, a statistics and policy consultant, told us that MUP had "never been applied anywhere in the world". He explained that a policy applied by certain Canadian Provinces, described to us by Professor Theresa Marteau, the Director of the Behaviour and Research Unit at the University of Cambridge, in fact related to minimum pricing rather than minimum unit pricing.[142]

THE MUP DEBATE

140. MUP is a highly controversial topic on which we received a great deal of evidence, with sharply polarised views. ScHARR has carried out modelling studies into the impact that the introduction of MUP would have on drinkers across the different socio-economic groups. In written evidence ScHARR concluded: "MUP would provide a substantial public health benefit which, for a 45p MUP implemented in England in 2014-15, was estimated to be a reduction in alcohol-related deaths of 860 per year, in hospital admissions of 29,900 per year and reductions in direct costs to the NHS of £561m over 10 years."

141. Ms Brown, describing the work of ScHARR, said:

143

142. Prof Sheron supported this view: "a minimum unit price does not affect the price of all alcohol, only the price of the cheapest alcohol. Specifically, we are talking about 7.5%, three-litre bottles of electric soup cider, which is what my patients with cirrhosis are drinking—and frankly, if you are drinking that stuff, you have a drink problem. Normal people do not drink that stuff. So it is not perfect, but it is very heavily targeted to where the problem is compared to a general increase in taxation."[144]

143. On the other side of the fence is the industry, led by the Scotch Whisky Association, who gave us both written evidence and oral evidence through their Chief Executive, David Frost. In their written evidence, supported by spiritsEUROPE, they cited the same Sheffield research to reach the opposite conclusion: "According to modelling by [ScHARR], hazardous and harmful drinkers do not anyway mainly drink alcohol which is cheap relative to its strength (and most such drinkers are relatively well-off anyway)".

144. Mr Frost amplified these views: "We think that minimum unit pricing is quite a heavy-handed way of getting people who already drink responsibly to drink slightly more responsibly by making their drink that bit more expensive, while having no effect on those who drink harmfully or hazardously … all the international studies that we are aware of suggest that harmful and hazardous drinkers, in those circumstances [if the price is increased], simply cut other things in order to maintain alcohol consumption or they go to illicit alcohol instead. In other words, the price responsiveness of heavy drinkers is close to zero."[145]

145. Mr Beale supported this view and strongly criticised the Sheffield model: "Any economist will tell you that this [MUP] is a populationbased measure. It is in no way targeted; it cannot be. As a result, it hits the poorest drinkers hardest. There is no evidence to suggest that they are the most irresponsible drinkers—quite the reverse … Equally, the heaviest drinkers we know very well are the least responsive to price. The only thing I am sure about with minimum unit pricing is disappointment will ensue."[146]

146. Mr Waterson explained to us that the SLTA had supported MUP since the late 1960s, and that MUP would be an efficient way of stopping "the constant race to the bottom in supermarkets on price".[147] But he was the only one of our witnesses from the industry to support MUP.

THE POSITION IN SCOTLAND

147. Health in Scotland is a devolved matter. As we have explained in Chapter 2, Scotland has particularly high rates of alcohol abuse and alcohol-related harm, and aims to be the first country in the world to introduce MUP. One of the leading protagonists has been Scottish Health Action on Alcohol Problems (SHAAP), an independent medical advocacy organisation set up by the Scottish Medical Royal Colleges, who sent us very full written evidence. The Scottish Government carried out a consultation in 2008, and in November 2009 Nicola Sturgeon MSP, then the Scottish Health Secretary, introduced a Bill to give effect to MUP by amending the Licensing (Scotland) Act 2005. The MUP provisions of the Bill were opposed by the parties other than the SNP, and those provisions were removed. After the 2011 election a second Bill was introduced, and the Alcohol (Minimum Pricing) (Scotland) Act 2012 received Royal Assent on 29 June 2012.[148] There is, as we explain below, a challenge to its legality, but if and when it enters into force, it will prohibit the sale on licensed premises of alcoholic drinks at a price which is less than the product of the volume, strength and minimum price per unit. The price will be set by Order, and Scottish Ministers propose a minimum price of 50p per unit.

THE POSITION IN ENGLAND AND WALES

148. The United Kingdom Government is of course responsible for health in England and Wales.[149] The Government's Alcohol Strategy of March 2012[150] included the following commitment: "We will introduce a minimum unit price (MUP) for alcohol meaning that, for the first time ever in England and Wales, alcohol will not be allowed to be sold below a certain defined price. We will consult on the level in the coming months with a view to introducing legislation as soon as possible." This was specifically endorsed by the Prime Minister in his Foreword: "So we are going to introduce a new minimum unit price."

149. This is not what happened. In November 2012 the Home Office issued a consultation paper, entitled A consultation on delivering the Government's policies to cut alcohol fuelled crime and anti-social behaviour, which, as anticipated in the Strategy, sought views on the proposal that the minimum price per unit should be 45p. In July 2013 the Home Office issued a further paper, entitled Next steps following the consultation on delivering the Government's alcohol Strategy,[151] in which the Home Secretary stated: "[The consultation] has not provided evidence that conclusively demonstrates that Minimum Unit Pricing (MUP) will actually do what it is meant to: reduce problem drinking without penalising all those who drink responsibly. In the absence of that empirical evidence, we have decided that it would be a mistake to implement MUP at this stage. We are not rejecting MUP—merely delaying it until we have conclusive evidence that it will be effective."

150. In other words, 16 months after giving a commitment to introduce legislation for MUP "as soon as possible", following a consultation ostensibly limited to the level of the minimum price per unit, the Government changed its mind because of opposition from 56% of respondents to the consultation. That opposition was, however, to the specific suggestion of a 45p minimum price; the Minister conceded that he did not know how many thought the minimum price should be higher, or lower, or were opposed to MUP altogether.[152]

THE LACK OF EVIDENCE

151. The Government is not alone in using the argument that there is "no conclusive evidence" that MUP would be effective. We heard this also from the SWA in their written evidence: "Accordingly, there is no convincing evidence that MUP as a policy will reduce alcohol-related harm because it has not been shown that it will reduce the number of hazardous and harmful drinkers."[153] The written evidence of spiritsEUROPE was identical. The WSTA written evidence concluded: "There is no evidence that Minimum Unit Pricing of alcohol would promote public health and it fails to take into account differing taxations levels, consumer prices, consumption, cultures and harm across each of the EU Member States."[154] In Brussels Paul Skehan, the Director General of spiritsEUROPE, told us: "It astonishes me how much people talk about the robust evidence that is behind it [MUP]. It is a model and a model depends on the data you put in and the assumptions you apply to those data. If you put in the right assumptions you might get good evidence coming out. If you do not, you will not. We have seen the Sheffield model change two or three times now. We do not have a lot of faith in it."[155]

152. It is of course true that there is no hard evidence that MUP will work in reducing alcohol-related harm, especially among the lowest socio-economic groups; there could not be, since it has never been tried. But that alone is not a reason for not trying it; if governments never embarked on any policy without proof that the policy would be successful, they would be giving a poor example of leadership. As the Prime Minister said in his Foreword to the Alcohol Strategy: "Of course, I know the proposals in this strategy won't be universally popular. But the responsibility of being in government isn't always about doing the popular thing. It's about doing the right thing." We agree, and we regret that the Government has decided not to introduce the legislation to which it was committed.

153. The Scottish Government is faced with a particularly acute problem of alcohol-related harm. It has carried out a consultation. The SNP went into the 2011 election with MUP as one of its key policies. Having been elected, it introduced the legislation. It cannot, however, be predicted whether the legislation, if and when it enters into force, will be successful.

THE LEGALITY OF MUP UNDER EU LAW

154. Within a month of the Scottish Act receiving Royal Assent, the SWA, together with two European groups of wine and spirit manufacturers, petitioned for judicial review of the Act. Shortly before the hearing in the Outer House of the Court of Session they abandoned the argument that this was not a devolved matter, and so was outwith the powers of the Scottish Parliament. They maintained however that the Act, and any Order made under it, were contrary to the prohibition by Article 34 TFEU of quantitative restrictions on imports and measures having equivalent effect, and not saved by the derogation in Article 36 which provides that these prohibitions do not preclude prohibitions or restrictions justified on grounds of the protection of public health.

155. Lord Doherty dismissed the petition and declined to refer questions to the Court of Justice. The petitioners appealed to the Inner House. There the Lord Advocate and the Advocate-General for Scotland conceded that the Act would be in breach of Article 34 TFEU unless justified under Article 36. The court decided that the relationship between the two Articles was unclear, and referred a number of questions to the Court of Justice of the European Union (CJEU) for decision. There the matter now rests.

156. Since the United Kingdom is the Member State concerned, the United Kingdom Government has intervened in support of the Scottish Government, and in written evidence to the Committee the Department of Health said: "In our response in July 2013 to the consultation on a proposed minimum unit price of 45p for England and Wales, we made clear that we remain confident of the legal basis for the policy and we will continue to support the Scottish Government in the current legal case."

157. The Commission will in due course be submitting its observations to the Court, but its views are already known. Article 8 of the Directive on technical standards[156] requires Member States to seek clearance from the Commission for any new technical regulation. Accordingly on 25 June 2012 the UK Government sent to the Commission the draft Alcohol (Minimum Price per Unit) (Scotland) Order 2013,[157] under which Scottish Ministers would set the 50p minimum price per unit. The Commission's opinion was that the draft Order would be in breach of Article 34, noting that 82% of French brandy was sold at a price lower than a 50p minimum price, and that all major supermarket chains would have to increase the price of French brandy. The Commission then considered the possible justification under Article 36, but concluded that MUP would be a disproportionate way of achieving the goal of reducing alcohol-related harm. Its view therefore was that the draft Order, if made, would be in breach of Article 34 TFEU. Mr Carlin described the Commission's response as "ill-informed, inaccurate and plainly wrong and strongly influenced by industry lobbying". He added: "From the discussions that we have subsequently had with DG SANCO officials, it appears that they were not even involved in preparing that response."[158]

158. The Commission took it upon itself to advise the Government that, in its view, a better way of achieving its object would be to raise alcohol duties. It does not seem to us to be any part of the Commission's functions to advise a Member State on the policy it should adopt in a matter almost entirely within its competence. Moreover, as a number of our witnesses pointed out, the EU Directive on the structure of alcohol taxation actually prohibits a taxation system for all beverages based on their alcoholic strength.[159]

159. It is regrettable that the Commission's decision appears to favour economic interests over the health and well-being of EU citizens, and seeks to deny Scotland the opportunity to test whether MUP will achieve the result it seeks.

160. If the Court rules that minimum unit pricing is lawful under EU law, we recommend that the United Kingdom Government monitor the effects of its introduction in Scotland. If MUP does appear to be successful in bringing health benefits to the heaviest drinkers, the Government should implement the undertaking it gave in 2012 to introduce MUP in England and Wales.

126 Council Directive 92/84/EEC of 19 October 1992 on the approximation of the rates of excise duties on alcohol and alcoholic beverages (OJ L 316, 31 October 1992, page 29). Back

127 Q183 (Stephen Cummins) Back

128 Ibid. Back

129 Q162 Back

130 Proposal for a Council Directive on amending Directive 92/84/EEC on the approximation of the rates of excise duty on alcohol and alcohol beverages, COM(2006) 486 final Back

131 Annex 2 to a Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on the Commission Work Programme 2015: A New Start, COM(2014) 910 final Back

132 Council Directive 92/83/EEC of 19 October 1992 on the harmonization of the structures of excise duties on alcohol and alcoholic beverages (OJ L 316, 31 October 1992, page 21). Back

133 In essence, a measure of alcohol by volume. Back

134 Q6 Back

135 Q37 Back

136 Q192 Back

137 Q28 Back