Post duty point dilution for wine and made-wine
Published 11 July 2019
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Who is likely to be affected
This measure will affect businesses involved in the production (including bottling) of wine and made-wine products where dilution after the duty point is used, as well as retailers and consumers of such products.
General description of the measure
Currently, wine and made-wine producers can, in certain circumstances, opt to pay duty on product before it is diluted for final sale to the consumer. The dilution increases the volume of wine or made-wine for sale, but no further duty is paid on it, meaning less duty is paid on that wine or made-wine than it otherwise would be. This situation carries significant legal and revenue risk for the Exchequer, and has led to distortions in the duty market.
This measure will introduce new prohibitive sanctions for anyone diluting wine or made-wine once that product has passed a duty point.
Policy objective
Post duty point dilution (PDPD), otherwise known as ‘wine dilution’, is a practice that enables wine and made-wine producers to reduce the excise duty they pay by diluting the product after duty has been paid. Because the dilution increases the volume of wine or made-wine for sale, with no additional duty being paid, less duty is paid on that wine or made-wine than otherwise would be.
UK legislation is silent on the issue and does not expressly prevent PDPD for wine and made-wine, although it is prohibited for all other alcohol products. This creates a legal and revenue risk for the Exchequer as well as distorting the market through undermining competition between those categories of alcohol products where PDPD is allowed and those where it is not, and also within categories where some producers choose not to use PDPD while others do.
Introducing new sanctions intended to prevent wine dilution will maintain the principle that duty is calculated only on finished product when released from production premises. This will ensure fairness by providing equity of treatment across the drinks industry, removing any competitive advantage.
Background to the measure
At Autumn Budget 2017 the Chancellor of the Exchequer announced a review into post duty point dilution. HMRC requested information from industry about the practice and received 13 responses. These showed that although those who used the scheme were largely opposed to its possible removal, the tax loss from continuation of the practice was likely to be significant.
Following this, the proposed prohibition of wine dilution was announced at Budget 2018, with plans to publish draft primary legislation and regulations in summer 2019 with prohibition implemented in April 2020. We now intend to make legislative changes to primary law only, and as such, there will be no new regulations to follow.
Detailed proposal
Operative date
This measure will take effect from 1 April 2020.
Current law
The current law is included in sections 54, 55 and 56 of the Alcoholic Liquor Duties Act 1979 (ALDA), and the Wine and Made-wine Regulations 1989.
Proposed revisions
Legislation will be introduced in Finance Bill 2019-20 to insert a new section to ALDA, applying penalties and forfeiture provisions on those that add water (or any other substance) to wine or made-wine after the duty point, if that addition would have resulted in a greater amount of duty being payable.
Summary of impacts
Exchequer impact (£m)
| 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 |
|---|---|---|---|---|---|
| - | +65 | -15 | +85 | +85 | +90 |
These figures are set out in Table 2.1 of Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
Economic impact
This measure is not expected to have any significant macroeconomic impacts. Behavioural adjustments have been made to the costing to account for the increase in the price of diluted product, forestalling, and changes to producer behaviour.
This measure is likely to have an effect on those wine and made-wine producers who currently dilute after the duty point.
Those who do will have to pay duty at a different stage in the production process and this may mean they pay more duty. This could lead to an increase in prices to the consumer, reduced investment and reduced employment in the sector.
To mitigate this, the government has given a long lead-in time for this change to allow businesses to adjust.
Impact on individuals, households and families
This measure could have an impact on consumers of wine and made-wine products if higher prices are passed on to them by producers and manufacturers of wine and made-wine products. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
Due to differences in alcohol consumption, any changes to alcohol duties could have an equalities impact that reflects consumption trends across the adult population.
Research has found that, when they drink, women are more likely to drink wine than men. Consequently, these changes may affect women more than men.
Impact on business including civil society organisations
Currently less than 20 producers are involved in the dilution of wine and made-wine. For these businesses some of their products will be liable for alcohol duty at a different stage in the production process, potentially increasing their duty liability. This may negatively impact the finances or outgoings of these businesses as well as their potential to invest in capital and labour.
They will also face negligible administrative impacts and one-off costs associated with familiarisation with the new rules. There are not expected to be any additional on-going costs beyond those associated with the change in duty liability.
By introducing the change from April 2020 the government has recognised the need to give these businesses time to plan and minimise or prevent any adverse effects.
The majority of wine and made-wine producers do not operate wine dilution processes and will face no changes.
This measure is not expected to have any impact on civil society organisations.
Operational impact (£m) (HMRC or other)
HMRC will incur a negligible enforcement cost to ensure compliance with this change.
Other impacts
Health impact assessment: as wine or made-wine may become slightly more expensive, there may be a positive health impact with less wine being consumed. However, this benefit may be offset if any increase in price leads to consumers switching to higher strength products.
Other impacts have been considered and no significant impacts have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this measure, email Excise Alcohol Policy: holding.movement@hmrc.gov.uk or write to:
Alcohol Policy – 3rd Floor West
Ralli Quays
3 Stanley Street
Manchester
M60 9LA
United Kingdom