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.