Lena Savoie
Alcohol is one of the most heavily taxed products in the UK, attracting a standard VAT rate of 20% on most beverages containing more than 1.2% alcohol by volume. This includes beer, cider, and wine, but spirits are currently exempt. The VAT rate is calculated based on the price and alcohol content of the beverage, and it is usually included in the retail price. In addition to VAT, alcohol is also subject to alcohol duty, which is a flat-rate tax based on alcohol content, resulting in a higher tax rate for beverages with higher alcohol content.
| Characteristics | Values |
|---|---|
| VAT Rate on Alcohol | 20% |
| VAT Rate on Low-Alcohol and Non-Alcoholic Beverages | 5% |
| VAT Rate on Tobacco Products | 20% |
| Alcohol Duty Rate on Products < 3.5% ABV | £9.61 per litre of alcohol |
| Alcohol Duty Rate on Products > 22% ABV | £32.79 per litre of alcohol |
| Alcohol Duty Rate on Beer (3.5-8.5% ABV) | £21.78 per litre of alcohol |
| Reduced Alcohol Duty Rate on Beer (3.5-8.5% ABV) | £18.76 per litre of alcohol |
| Alcohol Duty Rate on Still Cider (3.5-8.5% ABV) | £10.02 per litre of alcohol |
| Reduced Alcohol Duty Rate on Draught Beer and Cider | 9.2% |
| Alcohol Duty Rate on Wines, Spirits, and Other Fermented Products | 23% |
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What You'll Learn
Alcohol duty and VAT are separate
Alcohol is one of the most heavily taxed products in the UK, attracting a 20% VAT rate and alcohol duty. The two taxes are separate and applied differently.
VAT on Alcohol
VAT, or Value Added Tax, is a tax on the consumption of goods and services. In the UK, the standard VAT rate is 20%, although some goods and services are reduced-rated (5%) or zero-rated (0%). Alcoholic drinks are taxed at the standard rate of 20%, and this VAT is usually included in the price you see in shops, bars, and restaurants. If you buy alcohol from a pub or shop, the price you pay already includes VAT.
Alcohol Duty
Alcohol Duty is included in the price you pay for beer, cider, wine, or other fermented products, and spirits. The duty depends on the alcohol's strength, or 'alcohol by volume' (ABV), and the type of alcohol. The UK's alcohol duty was reformed on 1 August 2023, and the rate of duty to be paid now depends primarily on the alcoholic strength of the product, regardless of its type. However, for products with an ABV between 3.5% and 8.4%, the rate still depends on a combination of alcoholic strength and product type. Additionally, draught relief provides a lower alcohol duty for qualifying beer, cider, wine, spirits, and other fermented products sold in pubs and bars.
VAT and Alcohol Duty Calculation
VAT is charged as a percentage of the final retail price, while alcohol duty is a fixed rate based on the strength and type of alcohol. Alcohol duty is usually included in the wholesale cost of a product and is paid by the producer or importer. VAT is then added at the final sale to the customer. For example, the price of a one-litre bottle of 40% ABV spirits reflects the pre-tax price, plus the duty, plus 20% VAT on both the pre-tax price and the duty.
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VAT is charged at 20%
In the UK, VAT (Value Added Tax) is charged at 20% on most alcoholic drinks. This standard rate of VAT has been consistent since 2011. It is a consumption tax levied on goods and services sold in the UK and is calculated based on the sale price of a product. For alcoholic beverages, the VAT is calculated based on the price and alcohol content of the beverage. The basic formula for determining VAT on alcoholic drinks is: VAT = (price of the alcohol/price of the product) x 20%. For example, if a bottle of wine costs £10 and the alcohol content is 13%, the VAT on the wine would be: (10/113) x 20, which equates to £1.87. So the total price of the wine with VAT would be £11.87.
VAT is charged in addition to alcohol duty, and the two taxes are applied separately. Alcohol duty is a flat-rate tax charged based on the strength and type of alcohol, while VAT is a consumption tax imposed on the value added during the production of the product. The final price of an alcoholic beverage is inclusive of both VAT and alcohol duty. However, it is important to note that some beverages may be subject to reduced rates of VAT or may be exempt from VAT altogether.
Businesses that are VAT-registered must include VAT in the final price of alcoholic drinks sold and declare and pay this VAT to HMRC as part of their VAT return. These businesses may be able to reclaim VAT on alcohol purchased for resale or staff purposes, but client entertainment is typically excluded from this.
Non-alcoholic and low-alcoholic alternatives are generally subject to the reduced VAT rate of 5%. However, HMRC considers drinks marketed as alcohol substitutes to be luxury items and applies the standard VAT rate of 20%.
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Alcohol duty is based on ABV
Alcohol duty is a flat-rate tax levied on alcoholic beverages in the UK, and it is determined by the drink's alcohol content, or alcohol by volume (ABV). ABV is a standard measure of the volume of alcohol in a given volume of an alcoholic beverage, expressed as a percentage. For instance, a beer with 5% ABV contains 5% pure alcohol, with the remainder consisting of water, malt, hops, and other ingredients. The higher the ABV, the stronger the drink, and the higher the duty. ABV is calculated by measuring the volume of alcohol in a fixed volume of liquid at standard temperature and pressure, providing a more accurate measurement than the previous method of weighing alcohol content.
The ABV measurement is an important factor in the quality, taste, and regulation of alcoholic products. It is also used for scientific and medical purposes, such as determining blood alcohol concentration (BAC) and safe drinking limits. As such, it is a mandatory labelling requirement for alcoholic beverages in most countries, including the UK and the US. In the US, for instance, the Alcohol and Tobacco Tax and Trade Bureau (TTB) mandates that all distilled spirits labels must display the ABV percentage on the front or back label.
In the UK, alcohol duty is included in the price of beer, cider, wine, and spirits, as well as other fermented products. The duty rate varies depending on the type of alcohol and its ABV. For example, a pack of 18 cans of 5% ABV lager will incur a different duty rate than a 1-litre bottle of 40% ABV vodka. Additionally, draught alcohol sold by hospitality venues may be subject to lower duty rates for products below 8.5% ABV.
On top of alcohol duty, VAT (Value Added Tax) is also applied to alcoholic beverages in the UK at the standard rate of 20%. VAT is charged as a percentage of the final retail price, while alcohol duty is a fixed rate based on ABV and type of alcohol. Both taxes are collected by HMRC but are calculated and applied separately. While VAT is charged at the point of sale and included in the final price, alcohol duty is typically included in the wholesale cost and paid by the producer or importer.
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Alcohol duty is paid by manufacturers
Alcohol duty is a flat-rate tax charged on alcoholic products based on their strength (ABV) and type. Alcohol duty is included in the price of alcoholic products and is paid by the manufacturers or importers of the product. The duty is then passed on to the consumer as part of the product's price. The UK government changed the alcohol duty system in August 2023, increasing the duty in line with inflation (RPI). This marked the first increase in alcohol duty in over a decade.
The new duty system taxes alcohol products based on their strength, with higher-strength products being taxed more. This ensures that products associated with more risk contribute more in taxes. The World Health Organization supports this approach, identifying alcohol duty as an effective way to reduce alcohol-related harm and provide public health benefits. The revenue generated from alcohol duty is estimated to have cost the public purse around £1.8 billion every year since 2012.
The increase in alcohol duty is intended to support the hospitality industry and pubs. The government increased the value of draught relief for draught beer and cider products and for qualifying wine, other fermented products, and spirits. This change also encourages the taxation of alcoholic drinks sold in shops and supermarkets, allowing the government to target tax increases where they will have the greatest effect.
Businesses that are VAT-registered must declare and pay VAT to HMRC as part of their VAT return. VAT-registered businesses may reclaim VAT on alcohol used for resale or staff purposes but not for client entertainment. Alcohol duty and VAT are separate taxes, with VAT being charged as a percentage of the final retail price and alcohol duty being a fixed rate included in the wholesale cost.
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Businesses can reclaim VAT on alcohol
In the UK, VAT is charged at 20% on all alcoholic drinks, and it is usually included in the price you see in shops, bars and restaurants. Businesses can reclaim VAT on alcohol under certain conditions.
Firstly, your business must be VAT-registered and not in any way be partially exempt. Secondly, the alcohol must be used for resale or staff purposes, but client entertainment is excluded. Client entertainment is considered a non-deductible business expense. For instance, if you take a client out for dinner, you can only reclaim VAT on the alcohol you consume and not that of the client.
VAT can be reclaimed on alcohol that accompanies a meal, but not if it is considered entertainment. Christmas parties are considered a 'reward' for staff and VAT can be reclaimed on alcohol for this occasion as they count as business gifts. However, client dinners with more than one employee need to be assessed on whether that other employee was playing host or not. If the employee is simply there on a business trip and not entertaining the client, VAT cannot be deductible from their meal.
It is important to keep clear records and ensure your receipts are valid for VAT purposes. Reclaiming VAT on anything can be a complex process, so it is recommended to seek professional advice to know exactly what value-added tax you can reclaim when it comes to alcoholic beverages.
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Frequently asked questions
The standard VAT rate on alcohol in the UK is 20%.
Alcohol duty is a flat-rate tax charged based on alcohol content. VAT is a consumption tax levied on the sale price of goods and services.
You can reclaim VAT on alcohol under the same rules as other goods and services. It is important to keep all your receipts and have a good bookkeeping system in place.
Low-alcohol drinks are typically subject to a reduced VAT rate of 5%.
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