Autumn Budget 2021: VAT and indirect taxes

The UK’s system for charging excise duty on alcohol will be reformed to align rates with alcohol strength and support small producers and draught products sold in pubs. The administrative system for approvals and excise duty returns will be simplified and moved online. 

Alcohol duty reform

  1. After an extensive consultation with the industry and public health bodies last year, the government has announced plans to reform the longstanding and complex structure of excise duties on alcohol. Five significant changes will take effect on 1 February 2023: 
  2. The number of different alcohol categories for excise duty proposes will be reduced and products will be taxed in direct proportion to their strength, with the rates of tax rising according to the alcohol content by ABV;
  3. An end to the current duty premium charged on sparkling wine to bring the duty in line with that on still wine. This update is intended to reflect the increasing popularity of sparkling wine in the market;
  4. The current small brewers’ relief for craft beer producers will be expanded into a wider small producer relief which will grant lower rates of excise duty to small producers of beer, cider, wine, fruit cider, fruit wine and spirit based products below 8.5% ABV;
  5.  A simplified alcohol duty registration and approvals system. Beer, cider, wine and spirits are currently subject to individual duty regimes with different rates and methods of calculation. Each type of alcohol has its own rules for submitting returns, paying duty and obtaining HMRC approval to produce them. This will be consolidated into a single monthly alcohol duty return and a single approval process that will allow production of all types of alcohol across multiple sites. The current paper-based system will be replaced with online submissions of applications and duty returns; and
  6.  A new ‘draught relief’ will be introduced, which will apply a reduced rate of duty on alcohol with strength below 8.5% ABV sold in containers of at least 40 litres, such as beer and cider. This appears to be a scaled down version of an earlier proposal to apply different rates of excise duty (and possibly VAT) to alcohol according to where it is sold (i.e. lower rates for alcohol sold in pubs and restaurants than those applying to alcohol sold in supermarkets and shops). The government has now ruled out applying different VAT rates and the focus on draught containers, rather than the place of consumption, means that responsibility for accounting for excise duty remains with the producer rather placing an additional record keeping burden on pubs.

In the meantime, the previously planned increases in alcohol duty have been scrapped. Draft legislation for the changes announced above will be published in summer 2022 for technical consultation with stakeholders.

While the overall simplification of the duty system is likely to be welcomed by most of the industry, from a tax burden point of view there will be winners and losers. Producers of sparkling wine, beer, low strength cider and low strength alcopops will pay less duty with producers of fortified wine and high strength cider likely to pay more. Alcohol producers should begin to review the impact of these changes on their business ahead of the introduction of the new regime in 2023.

Air passenger duty (APD) burden to shift from domestic flights to ultra long haul international flights

The government will make two key changes to APD, a tax paid by airlines on flights departing from UK airports. APD is levied on a per passenger basis according to the distance to be travelled and the class of travel.

Following a consultation earlier this year with stakeholders, including the aviation industry, regulatory bodies and environmental groups, two new APD tax bands will be introduced from 1 April 2023:

  • A reduced rate of £6.50 per passenger for economy class travel on domestic flights (all flights between England, Scotland, Wales and Northern Ireland). These flights are currently subject to a broader short haul flights rate of £13 per passenger.   
  • A new APD tax band for ‘ultra long haul’ flights – airlines will have to pay £91 per economy class passenger on a flight that covers a distance of over 5,500 miles from London. These plane tickets are currently subject to APD of £82 per passenger.

APD is generally passed onto the passenger by the airline, so travellers should feel a direct impact on the cost of travel once the new rates come into force. The impact of these changes will be to shift the emphasis of APD onto international flights, which the government says produces most of the carbon emissions.

The government also wants to use the lower rate for domestic flights to improve domestic transport connectivity within the UK, especially for communities that rely more heavily on air travel to reach the rest of the UK, such as the Scottish Highlands and Islands and Northern Ireland.

However, the rates related to travel from Scottish airports may change again when Scotland eventually moves over to its new devolved air departure tax.

For business travellers, it is important to note that the standard and higher rate bands for first and business class travel and private planes on domestic routes will be unchanged.  

For more information please contact 

Paul Russell Paul Russell

VAT Director