Clause 44 - Meaning of “alcoholic product”

Finance (No. 2) Bill – in a Public Bill Committee am 2:45 pm ar 16 Mai 2023.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Esther McVey Esther McVey Ceidwadwyr, Tatton

With this it will be convenient to discuss the following:

That schedule 6 be the Sixth schedule to the Bill.

Clauses 45 and 46 stand part.

Clause 49 stand part.

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

It is a great pleasure to serve under your chairmanship, Ms McVey. Clauses 44 to 46 and 49 introduce part 2 of the Bill, which delivers on the Government’s commitment to reform alcohol duty. Clauses 47 and 48 were debated in the Committee of the Whole House, which accepted that they should stand part of the Bill. The clauses change the structure of alcohol duty by creating a standardised series of tax bands based on alcohol strength.

At Budget 2020, the Government announced that they would take forward a review of alcohol. This legislation is the result of that review and makes changes to the duty structure for alcohol, moving from individual product-specific duties and bands to a single duty on all alcohol products and a standardised series of tax bands based on alcohol strength. In making these changes, the Government aim to support public health, encourage innovation and ensure that the duty system reflects modern drinking practices.

Clause 44 sets out what is meant by “alcoholic product” and points to definitions in schedule 6. Clause 45 explains the meaning of alcohol strength and gives HMRC the power to make regulations about how strength is to be determined for duty purposes. Clause 46 gives His Majesty’s Treasury the power to amend the categories of alcohol product and treat products as falling within a certain category, even though they may otherwise have fallen in another. Clause 49 explains when excise duty on alcohol is payable, how the amount is determined and how it is paid.

The changes made by the alcohol duty clauses are expected to impact up to 10,000 businesses that produce alcohol, import alcohol or supply it wholesale. This impact will be down to changes in how they calculate the amount of duty that is due on their products. The entire alcohol reform package will cost £155 million in 2022-23 and £880 million across the scorecard period.

To conclude, the clauses and accompanying schedule form an essential part of the Government’s ambitious reform of alcohol duty and will modernise the tax treatment of alcohol. I commend the clauses and schedule to the Committee.

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

It is a pleasure to serve with you in the Chair, Ms McVey. I wish you and Committee members a good afternoon. I take this opportunity to formally welcome the Minister to his new post. I am looking forward to this afternoon’s discussion, which I hope continues to be as productive as this morning’s was.

The clauses are in part 2 of the Bill, on alcohol duty. As the Minister said, clause 44 and schedule 6 introduce the term “alcoholic product” and set out what it means. The term is defined as spirits, beers, ciders, wines and any other fermented products if they have an alcoholic strength of more than 1.2%. Schedule 6 provides a definition for each of the categories I just listed.

The clauses introduce the new alcohol duty regime, which was touched on in the Committee of the whole House. In that debate, I made it clear that the Labour party agrees with the principles behind the alcohol duty review. Indeed, we want to see an alcohol duty system that is simpler and more consistent, while recognising that there is a balance to be struck between supporting businesses and consumers and protecting public health—as the Minister mentioned—and retaining a source of revenue for the Exchequer.

The clauses are administrative in detail so we will not oppose them, but let me lay out some of our underlying concerns about messaging and decision making, which will drive Labour’s scrutiny of the clauses. The Committee may remember that the Government announced a call of evidence on potential alcohol duty reform way back in October 2020. The aim of the review was to make the system

“simpler, more economically rational and less administratively burdensome on businesses and HMRC”.

But since then businesses have seen indecision, U-turns and delays.

The Government’s response to the alcohol duty consultation was published in September 2022, just before the chaotic Tory mini-Budget that crashed the British economy. In that mini-Budget, the then Chancellor announced a freeze on alcohol duty that was due to come into place in February 2023. The new Chancellor then scrapped the planned freeze in October’s autumn statement.

Businesses were scrambling to get their heads around the changes, and some scrapped product lines and slimmed back orders, losing out on the revenue they would expect to see in the run-up to Christmas. The situation has been reflected in many conversations that I have had with businesses up and down the country. I am sure it has caused real distress and difficulties for businesses involved in the supply chain—whether in manufacturing or hospitalities—in the constituencies of all Committee members.

Then, in December, the Government announced a screeching halt and another U-turn. They decided that the freeze was back in place and would last until August 2023. This caused a sigh of relief among businesses facing uncertainty, but it was too late to undo the damage inflicted on their balance sheets. We all know a pub that is facing closure as soaring inflation becomes unmanageable, or perhaps a small brewery that employs local people and has now had to reconsider its expansion plans. Such businesses desperately need certainty, so I hope that the Minister can confirm today that there will be no further U-turns or changes.

The new duty regime will see duty rates adjusted in line with inflation and moved to a system that links them to the ABV—alcohol by volume—of drinks. Clause 45 sets out how alcoholic strength is to be measured and understood, and provides for HMRC commissioners to make regulations on determining the strength of alcoholic products. Alcoholic strength, otherwise known as ABV, is what it says on the tin: the proportion of alcohol contained in a product’s total volume, expressed as a percentage. It is calculated while the product is at a temperature of 20°C.

Clause 46 will allow the Treasury to amend by regulation the categories and definitions of alcoholic products listed in schedule 6. It also provides that any product exceeding 1.2% strength can be treated as a different category from the listing in schedule 6, even if it would otherwise come under another category. To help us to better understand that, will the Minister explain precisely what the intention is and give an example of a situation in which it might be necessary to recategorise a product?

Finally, clause 49 provides for the determination of the excise duty point, the amount of alcohol duty chargeable and how it is to be paid. The clauses lay out the framework and definitions for the new duty regime, so we will not oppose them.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey 3:00, 16 Mai 2023

I take this opportunity to welcome the hon. Member for Grantham and Stamford to his new position as Exchequer Secretary to the Treasury. I am told that this is his first Committee as a Minister. I trust that he has been having sleepless nights about it in the run-up, and that he has had his advisers put every size of bottle and every alcohol stamp on his desk, so that he could get to understand how the system works.

Photo of Esther McVey Esther McVey Ceidwadwyr, Tatton

But has not been sampling them.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

Of course not; otherwise, I am sure the Minister would be in a much worse situation than we find him in today. However, we will make that judgment after he has finished answering our questions. I genuinely welcome him to his position. It is a fantastic job, and he will be fascinated by it. He will wake up suddenly to realise that his job is to tax all vices, and how interesting that can be.

The Minister is inheriting a completely different regime of alcohol taxation from the one that is about to make an exit. As he heard from my hon. Friend the Member for Erith and Thamesmead, in principle, the Opposition are not opposed at all to the changes, but although there is that agreement, there is an awful lot of detail, potential issues and problems. He will find that definitional issues are not always easy, not least because if tax and duty are to be based on alcohol by volume, the manufacturers will switch the volumes around to get from one band into another. I am interested, philosophically, in what he thinks the right banding is to prevent too much of that.

The public policy reason for having that kind of duty system is, I presume, to persuade people gently that if they are to drink alcohol products with a higher percentage of alcohol in them, they will have to pay more tax, because in general higher-alcohol products are thought to have a greater effect on health than products with less alcohol. That was always the reason, philosophically, for moving to such a system. The Minister will find that, at the margins, manufacturers will try to ensure that their products are in a lower rather than a higher band, although some of the most glorious alcoholic beverages cannot begin to do that. I am thinking of spirits, such as whisky, which are much higher in alcohol.

If we look at the reaction of business and manufacturers to this change, there seems to be an equal division between those with higher alcohol by volume percentages, who find themselves in the higher-taxed bands, and those in the lower-tax bands, such as beer manufacturers. There is an inverse relationship between manufacturer satisfaction and where they are in the ABV bands. The beer and cider manufacturers are basically happy, whereas the wine and spirit manufacturers are less happy. Presumably the Minister will, if he has not already, have them in his office, making it quite clear to his face precisely what they think about that.

Issues other than definitional ones will come to bear on the new system, which will come into being on 1 August. I assume the entire system and HMRC are ready for that; it is a big change. The Minister is presumably confident that when 1 August comes along, the system will come into place seamlessly, and as the old system exits, the new system will appear. I assume he will confirm today that he is more than confident that this large change will come off without any problems. Obviously, we eagerly await his reassurance that there will not be some disaster as the new system comes in.

What, if any, work has been done on the implications for our export trade of changing the way we tax alcohol products? Obviously, countries have different ways of categorising products for tax purposes. I seek reassurance our deviating from a system that used to be EU-wide will not have any deleterious effect on our capacity to export what are often well-known products. I am thinking of not just Scottish whisky—we know how important that industry is to the Scottish economy, but other well-known products associated with this country, which we see when we are on holiday abroad. I assume that he is happy with that.

The OBR has said that it expects alcohol revenue to be £13.1 billion this year. Again, I assume the Minister is confident that the changes will not have an unpredictable effect on alcohol revenue. The OBR expects that to rise to only £15.8 billion by 2027-28. Given that we will have a 10.1% increase—I assume that will happen on 1 August, when the uprating happens—that seems like quite a small amount of increased revenue. I note the uprating is by retail price index when that suits the Government, because it means that they get more revenue, but we learned from our earlier conversations that they link by the consumer prices index when indexing something that gives money out. RPI makes some sense, but I just note that in passing.

Will the Minister talk about the transitional arrangement? There is quite a lot of worry in the trade about certain products that do not qualify for wine industry support. The more general rate is meant to be a transitional arrangement, lasting for the 18 months before the different ABV levels are brought it, in full force. Will he talk about draught relief? When I was Exchequer Secretary, there were big issues between the on-trade and the off-trade. It looks like the trade relief is trying to deal with some of the issues between the on-trade and the off-trade through tax. If I have understood correctly, it looks like there will be tax relief for the on-trade in order to balance out the price differential with the off-trade, and presumably to prevent people from loading up down the shop before they go into a pub. I assume it is an attempt to support the licence trade and the on-trade at the expense of the off-trade, given the “buy one, get one free” discounting that goes on in our supermarkets.

This may make the Minister very unpopular in the southern part of the country, but I note that there is still what is known as cider exceptionalism in the levels. Cider is taxed less than other alcoholic beverages, even though it is the same ABV as them. He might have an explanation for the cider exceptionalism. Now that we are not in the EU, he does not have the excuse that I had that: we could not do anything about cider exceptionalism because of EU rules. I note that he has decided to continue with cider exceptionalism. Perhaps he will tell us why. Does the Treasury prefer cider as a drink, or is there some terrible prejudice against beer that is being found out through this?

The changes introduce a huge range of different forms of taxation. Nobody objects to the principle, but there are quite a lot of anomalies. There are issues between the on and the off-trade, definitional issues, and issues surrounding revenue—why does it continue to be so flat, unlike the beer being taxed? I look forward to the Minister’s response, and I hope that he will not mind me leaping up if he says something that piques my interest, so that we can have a debate about it.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Cabinet Office)

Who knew that a debate on alcohol would be so popular in this place? I will try to limit myself to the clauses that we are talking about, but I will mention a couple of general issues. In Committee of the whole House, we discussed our specific issues with rates. In particular, we discussed the concerns raised by the Scottish whisky industry. We gave our wholehearted backing to the amendment on the subject tabled by Mr Carmichael, because we had concerns about the changes and increases. However, as I said, that has already been discussed, so I will not major on that.

This is a direction of travel for which we have been calling for a very long time. We are pleased that the Government are moving towards applying differential tax rates based on the alcohol in beverages. I share the concerns raised just now about cider, and about exceptionalism for a certain type of product, rather than going simply by the alcohol by volume ratio. It would have been more sensible and fairer across the board to be more consistent.

It is pretty unusual for me to criticise explanatory notes, but those on this part of the Bill are not particularly good. They mention that 77 clauses relate to the changes to alcohol duty, but they give a very general explanation of what the clauses do, rather than a specific explanation of what each clause does. Therefore, we cannot see easily by looking at the explanatory notes what each clause is intended to do. For example, I will ask questions later about clause 87. The explanatory notes could have answered my questions, had an actual explanation been written in there, but the notes just say, “This is what we intend to do with the entirety of the alcohol regime,” rather than providing a commentary on each clause. I understand that a commentary on each clause would have been significantly more work, but presumably the Treasury has an idea of why it is putting forward each clause; it would not have cost it too much to expound on that in the explanatory notes.

My last question relates to HMRC commissioner regulation timelines and guidance. The provisions mention commissioner regulations that will come through; there will also be guidance. Can the Minister give reassurances that the guidance and the regulations will come through in good time, so that everybody can take it into account when making decisions about producing alcohol, and will understand the tax that they are likely to pay? The changes are not that far off, and it takes quite a long time to produce some alcohols. I am thinking of Scottish whisky; I am aware that other spirits and alcohols are generally an awful lot faster. Even those who are brewing take decisions and build up their production lines significantly more than six months in advance. If people do not have the guidance or the regulations in good enough time, they cannot make investment decisions properly, because they will not properly understand the changes in the tax regime.

It would be incredibly helpful if the Minister could be clear that he intends and hopes that the guidance will come out as quickly as possible, so that people have as good an understanding of it as possible—I am talking about the guidance and regulation that is not in this Bill, but will follow. That would ensure that businesses and companies could make the best and most informed decisions.

Photo of Gareth Davies Gareth Davies The Exchequer Secretary 3:15, 16 Mai 2023

That was an extensive display of preparation and reading, and quite right too, because that is exactly what we are here to do—scrutinise the Bill. Let me try to answer some of the many points that were raised in the three speeches. First, let me thank Opposition Members for their very generous and kind words. It is a great pleasure to serve in this position in the Treasury.

First out of the gate, let me say that the reforms were extensively consulted on; a lot of the comments related to that. As was pointed out, the reforms were first mentioned in 2020. The hon. Member for Wallasey is quite right: one of my first meetings was on this subject. Engagement with industry is paramount, and that is an ongoing process. Many in the various industries affected by the reforms very much welcome the public health focus that is driving this significant change. Many also welcome the simplification that we are bringing in across the board, and the fact that we are correcting several inconsistencies. I was asked by Opposition Members to give several examples. I can do that. One that springs to mind is the fact that sparkling wine pays 28% more duty than still wine, yet has significantly less or the same alcohol content. The driving principle behind the reforms is that the more alcohol in a product, the more tax that the producer pays. That is very clear for businesses to understand.

We were asked at the beginning about our support for businesses, and were told that businesses require certainty. I completely accept that, and we are providing it with the reforms. This is a massive simplification of our tax system for alcohol, and it builds on all the support that the Government have provided through covid and the energy crisis, as hon. Members will be well aware.

Let me try to rattle off a couple of quick responses to the hon. Member for Wallasey. I was asked about the differences in banding and how certain categories of alcohol can fall into different bands. That is true of spirits; Scotch whisky is required to be over a certain level of alcohol, but cocktails in a can and other items that I am aware of are lower in alcohol content, and so will have a lower tax requirement. That is very pertinent to businesses that have a portfolio of different products in their range.

The question about HMRC readiness is absolutely fair, and we are very confident that the processes have been put in place and businesses are ready to adapt to the new system. As I say, it is based on an extensive programme of consultation and engagement. The hon. Lady asked about exports. They are not subject to alcohol duties, although we are aware of the importance of exports to our alcohol industry. That is a live discussion that we have with the Scotch whisky industry all the time.

Let me address the point about the wine easement, which also relates to the question that the hon. Member for Aberdeen North asked about engagement with industry and others. There is a unique circumstance involving wine that comes from fresh grapes: the alcohol content changes by season, according to seasonal factors. That is different from fortified wine, which involves a more artificial process in which spirits are put into the wine to achieve a specific alcohol content. As part of the consultation that I mentioned, we listened to the wine industry, and for 18 months we have put in place a transitional arrangement for still wine of between 11.5% and 14.5% derived from fresh grapes to enable the industry to transition accordingly.

The hon. Member for Wallasey asked about draft relief. If she will forgive me, that was fully covered in Committee of the whole House, but she is right that it will benefit drinkers of pints in a pub over supermarkets. Draft relief applies to all alcohol below 8.5%. It is something that we are doing in support of beer drinkers and to support our community pubs, which are a vital part of all our communities.

Finally, I will just say that cider is also subject to the general principle that we seek to adhere to—namely, that the higher content of alcohol, the more cider producers will pay. Producers of super-strength ciders above 8.5% will pay more duty, but those of fruit ciders will pay significantly less. At the moment, on certain fruit ciders that are not apple or pear cider, producers pay two to three times the amount of duty. The outcome of these reforms will be a range of differential impacts for the cider industry. I will always support the cider industry, because it is incredibly important to the south of our country, but also to those across the country who enjoy drinking cider in the pub or at home.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

The Minister talked about simplification, and changing the system to make it easier for people to understand often brings important benefits. However, the reliefs that are coming in complicate it again. Is he satisfied that he has the right balance in extending the reliefs to the new simplified system, particularly the draft relief and the transitional relief?

As the person who brought in the small brewers relief, I have a certain attachment to it, although we will not be talking about that. What revenue does the Treasury believe these reliefs will rob it of, and does he think he has the right balance in imposing a more complicated relief-based system on his simpler system?

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

It is a fair question. We are seeking to simplify the entire system of alcohol taxation, and in the round that is broadly what we are doing. However, we are conscious that certain sectors are under acute pressure—smaller cider makers may have particular vulnerabilities to some of these reforms, for example, and we are mindful of that.

However, we are still applying the principle that I have discussed: the higher the alcohol content, the more tax will be paid. As I mentioned, the wine easement is a reflection of the particular and unique circumstances that I heard about from the wine industry. That is a transitional arrangement, not a permanent reform; overall, we are seeking to simplify the system.

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

I thank the Minister for his explanations so far. I want to get clarification on a few points. As I mentioned, clause 46 and schedule 6 have been drafted to allow the reclassification of categories. Is any guidance being drafted at the moment? Can the Minister give us more information about how the operation will be carried out to make sure that no issues are identified later? The legislation is not very clear.

To follow on from the points made by my hon. Friend the Member for Wallasey, extra work will be given to HMRC as a result of this. I know that the Government have done work on the issue for some time, but I would like reassurance that adequate processes are in place. How much resource has been allocated to ensure that this is carried out? There will be extra work for HMRC to make sure that the alcoholic strength regulations are determined. It is important that we know whether there have been issues for HMRC in delivering because it has been under a lot of pressure. More information about that would be very helpful.

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

Let me answer the point about guidance. I assure the hon. Lady as well as the hon. Member for Aberdeen North that guidance will be issued very shortly. The hon. Member for Erith and Thamesmead will be able to review that and it should answer a lot of the questions that she has just asked.

Let me repeat what I said about HMRC. The organisation has some incredibly hard-working staff who I have had the pleasure of meeting just in my first two weeks. As a Treasury, we have been preparing for this for quite some time. I have every confidence that our colleagues at HMRC are ready and waiting to implement the system. I have nothing further to add on this, so I urge that the clauses stand part of the Bill.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Cabinet Office)

I have a brief comment about the guidance. I appreciate that a proportion of the stuff coming out is guidance so will not need to go through any parliamentary processes. However, some of the issues are to do with statutory instruments. Is the Minister satisfied that enough parliamentary time would be given for those, whether under the negative or affirmative procedure? Will they happen as quickly as possible? Clause 119 is about procedure and regulations. Will there be enough time for all that as well as for the less formal guidance coming through from HMRC?

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

We all take parliamentary scrutiny incredibly seriously and of course we will allow appropriate time for scrutiny of the Bill and all the guidance in the appropriate way.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

Given the newness and thoroughness of the changes that the Minister has outlined, and obviously extensively consulted on, I am presuming that the Treasury will also have a review process once the introduction has happened, so that it can look at how the changes have gone and whether further tweaks are necessary. Certainly, but not surprisingly, some aspects of the industry at the higher ABV end wish the transitional arrangements for wine to be extended beyond 18 months, as the Minister would expect. Is there going to be a review process? Could the Minister briefly outline the kind of time scales that are on his mind?

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Cabinet Office) 3:30, 16 Mai 2023

Does the hon. Lady share my concern that the post-legislative review scrutiny that is supposed to take place in Government Departments does not always take place—and does not always take place timeously? Does she also share my sense of thanks to the Treasury Committee, which does get hold of and scrutinise the post-legislative review guidance? I am hoping that, as part of the Treasury Committee, she will be keen for the review to take place and for the information to go to the Committee so that it can do the appropriate scrutiny of whether the legislation has achieved what was intended.

Photo of Angela Eagle Angela Eagle Llafur, Wallasey

I agree with the hon. Lady’s comments about the potential role of the Treasury Committee, although I am not the Chair—I am only one modest member. She might want to have a word with the current Chair to ask whether that is appropriate. We are clearly all interested and want the system to work effectively. We do not, however, want to see a sudden reduction in revenue, unless that is because people have started drinking less high-ABV products, and are out running and being very healthy all of a sudden. In that case, they are going to live longer and put much less pressure on our NHS.

Will the Exchequer Secretary give an outline of the Treasury’s thoughts on when it will do a review? Will he also bear in mind the balance between having changes to definitions and those detailed things that make up the essence of a system such as this, which are required by negative and affirmative procedures in this House, and guidance, which does not get to be looked at in the House? That would ensure that his welcome comments about respecting the rights of this House to effectively scrutinise how the system beds in and evolves in the future are realised.

Will the Exchequer Secretary give us an undertaking that he will bear in mind the right of the House to have appropriate scrutiny rights over some of those things—not just shove everything into guidance, which does not have to come before the House at all?

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

All taxes are always under review, as the hon. Lady knows. The Treasury Committee, of which we were both members, plays a vital part in the scrutiny process—of course it does. That process started when the Chancellor appeared before it, and carries on through the parliamentary procedures we are going through right now. The Treasury is unusual in that it has two fiscal events per year—

Photo of Gareth Davies Gareth Davies The Exchequer Secretary

I was waiting for that.

The Treasury has two fiscal events in which the full House has the opportunity to scrutinise our decisions. That also gives the Treasury the opportunity to review existing rates and systems, which is what we are doing as part of the spring Budget.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.

Clauses 45 and 46 ordered to stand part of the Bill.

Clause 49 ordered to stand part of the Bill.