Tax by tax, spend by spend

Alcohol duties

Alcohol duties are levied on purchases of beer, cider or perry, wine or ‘made-wine’ and spirits. Made-wine is any alcoholic drink made by fermentation that is not beer, cider, perry, spirits or wine – mead, for example.

In our latest forecast, we expect alcohol duties to raise £11.6 billion in 2018-19. That would represent 1.5 per cent of all receipts and is equivalent to 0.5 per cent of national income. Duty on wine accounts for 37 per cent of all alcohol duty revenue, followed by beer and cider (32 per cent) and spirits (31 per cent).

There are different rates for each type of product:

  • The rate on beer (with a strength of between 2.8 and 7.5 per cent) is 19.08 pence per litre for each percentage point of alcohol. For example, the rate on a 5 per cent strength beer is 95.40 pence per litre – around 54 pence per pint. Beers with a strength below 2.8 per cent are taxed at a lower rate and beers with a strength above 7.5 per cent are taxed at a higher rate.
  • The rate on wine depends on its strength and whether it is still or sparkling. Stronger wines and sparkling wines are taxed at a higher rate. For a still wine (with a strength of between 5.5 and 15 per cent) the rate is 288.65 pence per litre.
  • The rate on spirits is £28.74 per litre of pure alcohol. For a litre bottle of spirits (with a strength of 40 per cent) the rate is therefore £11.50.
  • The rate on cider depends on its strength and whether it is still or sparkling. For a sparkling cider (with a strength of between 1.2 and 5.5 per cent) the rate is 40.38 pence per litre – around 23 pence per pint.

VAT is applied after alcohol duty, so, for example, the price of a one litre bottle of spirits (with a strength of 40 per cent) currently reflects the pre-tax price plus £11.50 of duty plus 20 per cent VAT on both the pre-tax price and the duty.

  • Recent trends

    The charts below show tax receipts in both cash terms and as a share of national income (GDP). Receipts measured in cash terms are a simple metric for analysing trends over time. But without putting the cash amount into context – by asking how much national income is available to be taxed – interpreting changes in cash receipts is difficult, particularly over long time periods.

    Trends in receipts as a share of GDP are useful to understand how they move in line with the underlying economic activity that is being taxed. In cash terms, both receipts and GDP will tend to rise over time because economic growth and inflation. Receipts as a share of GDP is the most relevant metric when considering the sustainability of the public finances. Movements in this ratio can be thought of in two parts – movements in the tax base relative to national income (i.e. whether asset prices have grown faster or slower than the whole economy) and changes in the effective tax rate (i.e. the amount of tax raised per unit of the tax base).

    Alcohol duties have fallen as a share of GDP since 2011-12, driven by beer duty receipts. That reflects the long-run decline in beer consumption as well as cuts to the headline rate in 2013, 2014 and 2015. This is partly offset by wine duties, which have risen over the past five years, driven by continued growth in consumption. Paragraphs 5.25 to 5.27 of the 2017 Fiscal risks report look at the trends in alcohol consumption.

    Alcohol duty receipts: ONS (ID: MF6V)

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  • Latest forecast

    Our latest fiscal forecast was published in March 2018. Alcohol duty receipts are set to remain broadly flat as a share of GDP over the next five years. Receipts fall as a share of GDP in 2018-19, reflecting the freeze in duty rates. The Government’s default indexation policy is for duties to be uprated in line with RPI inflation from 2019-20 onwards, which we expect to rise at a faster rate than prices in the rest of the economy. That upward effect is offset by our forecast for a continued decline in beer consumption.

    More detail on our latest forecast and how it was revised relative to our previous forecast in November was provided in paragraphs 4.62 and 4.63 of our March 2018 EFO.

    Expand to read the extract from our March 2018 EFO

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  • Latest monthly data

    Receipts from alcohol duties are spread evenly over the first half of the year. They tend to peak in the run up to the Christmas period, before dropping off in the new year. Receipts can be volatile in months before duty rate rises are expected as traders attempt to forestall and benefit from lower input costs. Duty rises have typically occurred in April in previous years, although will occur in February from 2019 onwards, absent any policy changes.

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of alcohol duties from HM Revenue and Customs (HMRC) for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then use models to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    Alcohol duty receipts are estimated by multiplying taxable alcohol consumption – known as ‘alcohol clearances’ – by the corresponding duty rate.

    Beer, wine, spirits and cider clearances are modelled separately. Beer, wine and spirits clearances are modelled using econometric equations that are driven by our forecast real household consumption, an underlying trend and includes an own-price elasticity for duty rate changes. Cider clearances are modelled in a similar way, with changes in consumption mainly driven by our forecast for real household consumption.

    The Government sets out policy assumptions for the uprating of alcohol duties each year. Where specific policies have not been set, alcohol duty rates are set to rise in line with RPI inflation in each year.

    Main forecast determinants

    The main determinants of our alcohol duty forecast are those related to the tax base and those that are used by the Government in setting the parameters of the tax system. See the ready reckoners section below for more information on the effects of these determinants on alcohol duty receipts.

    1. Inflation (RPI)
    2. Real household consumption

    Main forecast judgements

    The main judgements in our alcohol duties forecasts include:

    • In-year estimate – Our estimate for alcohol duty receipts in the current year is determined by year-to-date performance of receipts and indications from HMRC’s internal receipts monitoring. The in-year estimate determines the base year from which we use our model to forecast receipts growth.
    • The underlying trend in different types of alcohol consumption – trends in alcohol consumption have demographic and behavioural drivers. The extent to which the downward trend in beer clearances, and upward trends in spirit and wine clearances, will continue is a source of uncertainty in our forecast.

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  • Previous forecasts

    Alcohol duty receipts have come in weaker than many of our forecasts, in part reflecting trends in the duty rate. That in turn has reflected both policy decisions to freeze or cut beer duty rates and the period of lower-than-expected RPI inflation that followed the 2014 fall in oil prices.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 14 policy measures affecting our forecast for alcohol duties. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook. These policy costings include:

    • Beer duty – at Budget 2013, 2014 and 2015, the beer duty rate was cut (by 1 pence per pint). At Budget 2016 and Autumn Budget 2017 the beer duty rate was frozen;
    • Spirits duty – at Budget 2014, Budget 2016 and Autumn Budget 2017, spirits duty was frozen. At Budget 2015, spirits duty was cut by 2 per cent;
    • Cider duty – at Budget 2015, cider duty was cut by 2 per cent. Cider duty was frozen at Budget 2014, Budget 2016 and Autumn Budget 2017; and
    • Wine duty was frozen at Budget 2015 and Autumn Budget 2017.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2017 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published alongside our 2017 Fiscal risks report.

    The table below shows that:

    • real household consumption is a driver of total demand for alcohol; and
    • higher RPI inflation would increase alcohol duty receipts (in line with the uprating assumptions set out by the Government in its Autumn Budget 2017 policy costings document, our default assumption is that duty rates are indexed in line with RPI).

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  • Other information

    Our forecasts for alcohol clearances can be found in our published supplementary tables.

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