The UK’s proposed soft drinks industry levy

On March 16, 2016, the UK Chancellor announced in his 2016 Budget a consultation on a new soft drinks industry levy to take effect from April 2018. Immediately, the press seized on the notion that the UK was to introduce a new “sugar tax” and much was made of this in the press coverage in the immediate aftermath of the Budget announcement.

However, much of the detail of the levy remains to be finalized; there is still scope for comments to be raised during the consultation over the summer of 2016 and so the detail is still very much subject to change. The actual levy will be introduced in the Finance Bill 2017. This article looks at the development of this kind of tax, its proposed contribution to the UK tax take and its overall potential effectiveness as well as the difficulties the UK Government will need to overcome in implementing the measure.

Whilst the details are still relatively patchy, the public statements to date indicate that it is proposed that the levy will contain the following features

• The levy will be imposed on producers and importers of drinks.
• It will be assessed on the volume of the sugar-sweetened drinks produced or imported.
• The levy will be charged as follows
  • for drinks with a total sugar content up to 5 grams per 100 milliliters, the levy would not be charged
  • for drinks with total sugar content above 5 grams per 100 milliliters, the levy would be charged at a basic rate
  • for drinks with total sugar content above 8 grams per 100 milliliters, the levy would be charged at a higher rate.
• Pure fruit juices and milk-based drinks will be excluded from the levy. It has been confirmed that fruit juices with added sugar would be subject to the levy.

The political rationale for the levy is, on its face, a simple one. As the Chancellor put it in his Budget speech

“Sugar consumption is a major factor in childhood obesity, and sugarsweetened soft drinks are now the single biggest source of dietary sugar for children and teenagers. A single 330ml can of cola can contain more than a child’s daily recommended intake of added sugar. Public health experts have identified sugarsweetened soft drinks of this kind as a major factor in the prevalence of childhood obesity.”

This statement is reflective of the growing focus in the press that added sugar may be causing as many of the problems in the public healthcare system as the previous bogeyman of saturated fat. We look below at what hurdles will need to be overcome to ensure the levy has the desired effect.

Unlike many other measures in the Budget, this levy is not projected to be a serious revenue-raiser for the UK government; in fact, some commentators are suggesting it may cost more to administer than it raises. The financial projections released as part of the Budget show that the UK Government intends to raise approximately £520 million in 2018/19 as a result of the levy (with this amount reducing slowly over the following three years to £455 million). In the same speech, the Chancellor suggested that the money raised would be used to fund various initiatives to support children’s sport and other measures aimed at the school age population. This does suggest that the Government has in mind a fixed amount of revenue that will arise from the levy.

01 | Incidence of the levy

There is some debate over the question of who would bear the cost of the levy. Although it is the producers and importers of soft drinks who will have to account for the levy, there are concerns that, in some cases, the producer or importer may have to bear the cost of the levy, rather than the retailer or the ultimate consumer.

If this is the case, it would counter the desired effect of dissuading the public from buying a certain kind of soft drink.

02 | Level at which the levy is set

It is expected that the levy will be set at such a level as will raise £500 million in 2019/20. Research from the Institute of Fiscal Studies has suggested this implies a levy rate of 18 pence per litre for “main rate” drinks and 24 pence per litre for “higher rate” drinks.

This “stepped” profile is likely to create distortions in the market, in particular for products that are near the respective thresholds. We have seen in the past with such taxes as stamp duty land tax (which has recently removed such “steps’) and air passenger duty that it can create incentives for business to manipulate products and prices in unexpected ways.

03 | Dividing line between products

Similarly, a system that introduces a bright line between certain products that attract a tax and other similar products that do not will itself potentially create distortion. We have seen in the field of VAT longrunning debates over the question of whether Jaffa Cakes or chocolate teacakes should bear VAT. If added sugar really is the target, why apply the tax to some drinks and not others?

04 | What if the levy achieves its aim?

One of the perennial troubles with introducing a levy to dissuade certain types of behaviour is that, if it is successful in its aim, the tax take is lower than expected. This is especially the case where there is a specific figure quoted as the expected amount to be raised. In the UK, the bank levy has suffered from similar problems: designed to encourage banks to fund themselves on a long-term secure basis, the levy was successful and accordingly the rate had to be raised in order to preserve the expected tax take.

In this case, soft drink producers almost face a “game theory” challenge. If soft drinks producers reduce the sugar content of their drinks in advance of the levy applying, they may gain a competitive pricing advantage compared to their competitors. However, if the competitors also reduce the sugar content of their drinks, all soft drinks manufacturers will have reduced sugar content and the Government would be forced to raise the amount of the levy in order to ensure the expected revenue is maintained.

05 | Will the levy achieve its aim – the Danish experience?

There are a number of comparisons with the duty regime relating to saturated fats that was introduced in Denmark in 2011. This levy was abolished the following year amid complaints that its main effect was to harm Danish business on the basis that people simply bought their products from other EU countries such as Sweden and Germany. The duty was considered to be unwieldy and administratively difficult and the overall benefit to public health did not justify the downside.

Any UK soft drink levy is likely to face similar concerns and issues. We have seen in the past that, for example, the UK’s high tobacco duty has resulted in smokers making trips to France to restock in cigarettes.

There has been some discussion as to whether the levy could be challenged if it made its way into legislation. Clearly, at present, whilst a public consultation is taking place, the appropriate means to effect changes to the regime would be to participate in that process. Otherwise, once the regime finds its way into UK primary legislation, a challenge to that becomes more difficult.

Generally speaking, primary legislation can only be challenged in the UK on the grounds that it constitutes unlawful state aid, that it is incompatible with certain principles set in the EU treaty or that it contravenes the UK’s Human Rights Act.

Needless to say, it is likely that, if the final version of the tax results in significant unfairness between almost equivalent products or businesses, it is more likely that they will look to find a way to challenge the legislation. The UK government is, however, well aware of the possible pitfalls in introducing new taxes of this sort and overturning primary taxing legislation has been historically difficult. It remains to be seen whether the soft drinks industry levy will be subject to such a challenge.

In 1764, the British Parliament passed the Sugar Act (more properly known as the American Revenue Act) which aimed to preserve the sugar industry in certain British colonies by increasing the duty on other imported sugar. This was one of the contributory factors to the unrest that led to the American Revolution. Although the soft drinks industry levy is already proving controversial, it is unlikely to have such long-term ramifications as the Sugar Act. Nonetheless, those parties interested in the implications of the levy would be well advised to participate in the consultation process.