TAC0073

 

Written evidence by the Scotch Whisky Association

 

Introduction

 

The Scotch Whisky Association (SWA) is pleased to make this submission of written evidence to the Committee.

 

The Scotch Whisky Association represents over 70 companies involved in the production and distribution of Scotch Whisky, accounting for 90% of our sector.  Our membership is diverse, from listed, multinational spirits producers through to small family-run distillers, bottlers and blenders.

 

The SWA works to sustain Scotch Whisky’s place as the world’s leading high-quality spirit and its long-term growth globally. This includes ensuring that Scotch Whisky has fair access to all markets worldwide and taking action to prevent unfair competition from fake products.

 

Scotch Whisky is the world's number one internationally traded spirit. 90% of all Scotch Whisky produced is exported, with 42 bottles of Scotch Whisky shipped every second to 180 countries around the world. The value of Scotch Whisky exports in 2019 reached a record £4.91 billion, an increase of 4.4% compared to 2018.

 

The Scotch Whisky industry supports 40,000 jobs across the UK. The industry employs 11,000 people directly in Scotland, 7,000 of whom work in rural areas. With £5.5 billion economic impact across the UK economy, the sector is one of the largest net contributors to the UK balance of trade in goods. Scotch Whisky represents 75% of all Scottish food and drink exports, 20% of all UK food and drink exports, and 1.3% of all UK exports.

 

Scotch Whisky Association written evidence

 

 

The Scotch Whisky industry understands the fiscal pressures the UK government is now under, given the unprecedented levels of economic support necessary because of the impact of COVID-19.  The government has had no option but to borrow heavily to support businesses and the population during the coronavirus crisis.

 

The primary pressure on the UK tax system will be how to address the competing demands of servicing the increased budget deficit while continuing to fund public services – the Prime Minister having stated there is to be no return to austerity.

 

These competing demands must also be reconciled with the need to encourage and stimulate business growth, sustained investment and protect employment, which is ultimately what will drive the economic recovery.

 

The tax base will be compromised if the government pursues short-term measures to generate revenue that impede businesses’ ability to innovate, invest and grow - ultimately increasing their taxable revenue, which will generate more for the public finances.

 

Spirits excise duty is an example of where stability in the tax regime has enabled business growth and consequently increased tax revenue.

 

Recent freezes to spirits duty have driven increased spirits excise receipts. HMRC receipts were up by 1.6% in 2019/20 building on a 10.2% increase in 2018/19 – contrary to the Treasury’s official projections but consistent with industry modelling. Given the high elasticities in the spirits category, we expect further freezes and cuts to duty to further increase government revenue.

 

These decisions have demonstrated that cutting certain taxes and enabling business growth can deliver increased government revenue to support the public services.

 

Spirits have consistently been the fastest growing alcohol category in recent years. This reflects changing consumer preferences and behaviour, with increasing prioritisation of quality and experiences, in turn reflected by the pre-COVID-19 popularity of cocktail bars and experiences such as cocktail making classes. This trend has been accelerated during the UK COVID-19 lockdown, with web searches for at-home cocktail kits increasing by 286% compared with the same period in 2019.

 

To cater to consumers who are tapping into this trend, our member companies have invested and innovated to meet demand, and consequently the category is set to play a crucial role in delivering growth in excise duty receipts of the future.

 

The SWA believes there is a strong case for the government to think creatively about how to grow the tax base and boost the economic recovery. Recent experience has shown that a spirits duty cut to support business recovery and growth, which will deliver more in the way of receipts than a duty increase, will leave the industry better placed to support the wider economic recovery.

 

Conversely, increasing duty risks stymying business investment and innovation at a crucial time for the economy.

 

It would also compound the damage to businesses and their supply chains caused by punitive 25% tariffs on Single Malt Scotch Whisky and liqueurs in the United States, the largest export market by value for Scotch Whisky. These have been in place since October 2019 and were extended in August by the US Trade Representative. The tariffs currently cost the UK approximately £30 million a month in lost exports.

 

A duty increase would also compound the effect of lost tourism for distilleries during the coronavirus crisis. The industry has invested more than £500 million over the last five years in production capacity, world-class tourism facilities and associated infrastructure. Like the rest of the tourism sector, distillery visitor centres have been closed during the lockdown period and currently operate at reduced capacity, further impacting business revenue streams.

 

 

 

The UK government can protect its tax base from erosion by enabling business innovation and growth, which will increase taxable revenue and generate more for the public finances. In the case of Scotch Whisky and the wider UK spirits sector, this should include reducing a heavy existing tax burden.

 

Spirits are the highest-taxed alcohol category in the UK. Currently, three in every four pounds spent on the average priced bottle of Scotch Whisky in the off-trade is collected in excise duty and VAT, with the tax burden on Scotch Whisky and other UK spirits currently 70%. In addition, the upcoming structural review of alcohol taxation is an opportunity to address the inherent unfairness in the current system of alcohol taxation in the UK which taxes a unit of alcohol served as spirits 16% more than wine and 51% more than beer.

 

Further to the competitive disadvantage faced by Scotch Whisky and other spirits in the UK market, the high level of taxation impacts our international competitiveness. UK spirits duty is the fourth highest in Europe. While this is something that the government can address now the UK has left the European Union through the alcohol duty review, the way spirits are taxed in the UK is studied carefully in our export markets, and how Scotch Whisky is taxed and treated at home matters overseas. 

 

Supportive, balanced treatment of our sector that stimulates recovery is particularly important to us now, when governments overseas may be attracted to high excise taxes which would significantly impact Scotch Whisky sales in key exports markets. Mexico, our sixth largest market by volume, is currently considering significant rises in duty and is a case in point. The impact of such tax rises – using the high level of taxation in the UK as a cover - in turn has an impact on the industry’s ability to invest in the UK economy, our supply chain and workforce.

 

In part, yes. The SWA believes it is important the government continues to take forward the review of excise duty structures. The commitment, made in the Queen’s Speech, that the review will “ensure our tax system is supporting Scottish whisky and gin producers and protecting 42,000 jobs supported by Scotch across the UK” recognises the pressure the industry is already under in the UK and export markets.

 

Reform of UK alcohol taxation is long overdue, with the last major reforms implemented over 100 years ago. Taking forward the excise duty review as soon as possible would help deliver a fairer system to support businesses, at a time when business growth is critical to the economic recovery and deliver a modern taxation system which enables consumers to make responsible and informed choices.

 

See answer above.

 

As noted above, the SWA welcomes the government’s commitment to reviewing excise duty structures. This provides the opportunity to ensure domestic categories are treated fairly, addressing the current differentiation between categories whilst remaining at least revenue neutral for HM Treasury.

 

Data from HM Revenue and Customs has shown that a stable tax regime – i.e. the successive freezes in spirits excise duty - enables investment and innovation, ultimately delivering more in revenue to support the public finances. With spirits becoming ever more popular amongst consumers in recent years, an excise system that addresses current differentiation and treats spirits as a domestic category more fairly can support the economy by increasing receipts; whilst also benefitting the hospitality industry given spirits represent 34 percent of all alcohol sales in restaurants, pubs and bars.

 

 

Tax reliefs play an important role in protecting industrial competitiveness and in encouraging green growth.  This is indeed one of the principal aims of the Climate Change Agreement (CCA) scheme which helps energy intensive sectors, like Scotch Whisky, to claim relief against the Climate Change Levy (CCL). For most sectors, the CCA scheme enables all parts of the production process to qualify for CCL relief. However, for Scotch Whisky it has led to a competitive distortion in the UK food and drink sector.  Since the introduction of the CCL and the accompanying CCA scheme in 2001, distillers have not been able to claim CCL relief on fuels used in their non-distilling sites.  In particular the industry's large-scale blending and bottling facilities which are not co-located with distilling operations do not qualify for inclusion in the CCA scheme.  This places the sector at a disadvantage as other beverage producers which operate fully integrated production facilities (including packaging operations) are able to claim relieve throughout their entire production process.  We have long called for this anomaly to be addressed and call again on Government to take a whole sector approach to any future CCA scheme.  We can provide further information on this if required.


We are also concerned about current proposals, set out in an HMRC/HMT consultation, which would remove the tax relief for distillers who use red diesel or plan to use it as part of a transition to net zero.  Distilling is an energy intensive process which requires process heat (i.e. steam).  Heat typically accounts for around 80% to 90% of a distillery's energy demand.  Distilleries use a variety of fuels to generate heat, for example natural gas delivered via the gas grid, gases such as LPG and CNG, fuel oils (e.g. heavy fuel oil (HFO), gas oil, kerosene and red diesel) and renewables (e.g. biomass and biogas).  Many Scotch Whisky distilleries are located off the gas grid.   Those distilleries rely on deliveries of fuel by road. 

 

To help reduce greenhouse gas emissions, distilleries off the grid have started to look towards lower carbon or zero carbon fuels.  Some have made the transition directly from, for example, HFO to biomass.  Others have used, or plan to use, lower carbon intensive fuels as part of a longer-term transition to net zero.  In some locations (e.g. islands) there are currently few viable low carbon alternatives.  In the future we hope fuels like hydrogen will be available.  As zero carbon solutions are not yet available in some locations, some distilleries have moved from HFO (0.26775kgCO2e/kWh) to red diesel (0.24057 kgCO2e) as part of a longer-term transition.

 

Banning the use of red diesel would penalise those distilleries financially as well as possibly force them to revert back to other more carbon intensive fuels like HFO.  Where distillers have not moved away from HFO, the proposed ban on the use of red diesel may keep them on more carbon intensive HFO for longer.  This would therefore create a perverse environmental outcome.

Changes to the tax relief of energy, should look carefully at sectors like Scotch Whisky which could be adversely affected.


We can provide further information on this if required.

 

 

We would first call for simplification in the eligibility rules for the CCA.  A reformed CCA scheme could take a simplified sectoral approach to enable entire sectors to qualify rather than the current scheme which is based on eligible processes.


Moving away from energy taxation, we are working closely with HMRC on options to simplify and modernise the way excise tax is administered in the UK.  The scope of this work is broad and it is very technical.  We can provide further information on our key proposals, such as digital solutions, simplified approvals and reduced burdens for compliant traders.   

 

N/A

N/A

We welcome the open dialogue we have had recently with HMRC on excise modernisation.  That work is being carried out in bilaterals as well as in larger stakeholder forums such as the Joint Alcohol & Tobacco Consultation Group.  This could be used as a model to help identify where improvements can be made and to avoid any unintended consequences.

 

 

September 2020

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