In this chapter we consider some of the main forms of excise duties with information about:
- Whether UK taxes are the lowest in the world
- The history of excise duties
- What excise duty is and why it’s charged
- What the excise duties are on tobacco, alcohol and fuel
- Increases in excise duties from March 2017
- Bringing goods into the UK from the EU
- Customs duties on goods from outside the EU
- Other types of indirect taxation
Are the UK’s taxes the lowest in the world?
When politicians boast that the UK has one of the lowest income tax rates in the world, it’s slightly misleading since it doesn’t take into account the rates for indirect taxation. You’d probably be aware of some of the most publicised taxes but you may not be totally aware of the complexity, scope and increases in indirect taxation in recent years unless you work in the industry concerned.
Unlike direct taxation, there’s often less controversy and protest about indirect taxation since it isn’t something that you take into account when you pay for goods and services. As a consumer, your main concern is how much you pay for the finished product and how it affects your monthly budget. However, you are of course paying it since all industries pass any rises in indirect taxation onto the consumer in the form of higher prices.
Unlike direct taxation, there’s often less controversy and protest about indirect taxation since it isn’t something that you take into account when you pay for goods and services.
It would be impossible to analyse every single indirect tax in the UK so in this chapter, we’ve concentrated in the ones which do have an effect on most Britons. We begin with excise duties especially how they affect goods like alcohol and fuel before turning our attention to other indirect taxes such as Air Passenger Duty and Insurance Premium Tax. But first of all, how did all these taxes come into being?
The history of excise duties
Excise duties have their origins in the taxes (or customs duties) which used to be imposed on the import and export of certain goods into the UK. In the centuries before income tax, imposing such duties was a guaranteed way for the monarch – and later Parliament – to raise revenue for state expenditure. Customs duties could be imposed on very different things from salt to horse-drawn carriages. The list of products liable for excise would change according to the fashions and customs of the time.
Of course, smuggling goods into Britain – usually from France – developed into a business in itself and many present-day English ports built their fortune on money made from such contraband. In order to counteract the increases in smuggling, excise officers were given broad powers (before the creation of the Police Force) including the possession of a ‘warrant’ which allowed them to question suspected smugglers and seize contraband. They were also allowed to carry firearms in the pursuit of their duty; something which seemed strange to us when modern-day policemen aren’t allowed this right.
This situation changed in the early to mid 19th century when the Free Trade movement led to the suppression of many excise duties but it’s no coincidence that this marked the beginning of income tax to replace the lost revenue. Customs & Excise continued to be a separate branch for collecting revenue until April 2005 when it was combined with the Inland Revenue to form a single HMRC (Her Majesty’s Revenue and Customs).
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What is excise duty and why is it charged?
Excise duty is a tax levied on the production and sale of certain products and services and is a separate tax from VAT. Although many goods and services are liable to excise duty, in most people’s minds it’s associated most with products like alcohol, tobacco and motor fuel. This tax is charged at a flat rate (per pint, per litre, per packet, etc.) although tobacco products have an additional ‘ad valorem’ tax of 16.5% on the retail (or total) price. Although there are exceptions, excise duty falls due when these products are released for consumption.
Of course this tax is imposed in order to increase state revenue. However, many of the goods and services are felt to have a social cost and so citizens are discouraged from their consumption by the imposition of a tax which makes them more expensive. This cost could be on a personal level such as the associated health risks of smoking or excessive drinking or it could have wider repercussions such as the Climate Change Levy to reduce damage to the environment and raise people’s consciousness.
Unfortunately, from the state’s point of view, the more successful a tax is in changing people’s behaviour (smokers give up smoking), the less revenue it’ll bring in.
Excise duties used to be imposed on the export and import of goods into Britain before the introduction of income tax.
The Free Trade movement in the 19th century saw changes in the size and importance of excise duty.
The increasing use of income tax meant the 2 taxes ran in parallel until the creation of a single HMRC in 2005.
Nowadays, excise duty is a tax imposed on certain goods and services, most notably alcohol, tobacco and motor fuel.
Although excise duty is intended to raise revenue, the imposition of indirect taxation is often intended to change people’s behaviour.
What are the excise duties on tobacco, alcohol and fuel?
Road Tax is officially considered a duty, as reflected in its name: Vehicle Excise Duty although many people may not realise this. Excise duty is imposed on many other different goods and services so for the sake of simplicity we’ll consider the ones which most commonly spring to people’s mind when this tax is under discussion: cigarettes, alcohol and petrol. Do you really know how much of the price you pay at the supermarket or petrol pump goes to the state in revenue?
The tax codes for the purposes of customs and excise are quite complicated. For example, there is no standard excise duty for wine since it depends on the type of wine (still or sparkling), where it was made, size of the bottle and its alcohol content at a temperature of 20 degrees centigrade. However, in general terms the taxation is as follows: (all figures supplied by HMRC are from a 2016 report on taxation by IFS).
|Product||Excise Duty||Total Taxation (with VAT)|
|Unleaded Petrol (litre)||54.4%||71.1%|
Impact of increases in excise duties (March 2017)
The announcement of increases in excise duty on beer, cider, wine and spirits from March 2017 after a 2-year freeze has led to protests from producers, campaign groups as well as pub owners; the rise will be in line with RPI inflation. CAMRA (Campaign for Real Ale) have been particularly vocal in their opposition to this rise saying that the price of beer has risen by 43% in the last 10 years. They also point out that although the UK only consumes 12% of beer in the EU, it pays 40% of all duty imposed on beers.
There are also worries about the hidden costs of raising tax revenue in this way. Not only the implications for the competitiveness of UK alcohol producers in the world market but also what effects the increases would have on the domestic market. CAMRA claim that the last rises led to the loss of 75,000 jobs, the closure of 3,700 pubs and a 24% fall in beer sales.
Faced by further increases in excise duties for alcohol, what will your reaction be? For workers struggling on low wages, it could be no more evenings out to the pub whilst some people in the UK might think about going on a ‘Booze Run’ to France. However, do you know what you’re entitled to bring back from the continent – and in fact are there any limits?
How much will increases in duty affect the prices of alcohol?
Beer will increase by an estimated 2p a pint while the excise duty on a bottle of Scotch whisky will now be £8.02 (or £10.20 if we also include VAT).
How does excise duty in the UK compare to other European countries?
Of course excise duties vary from country to country. However, according to the Wine & Spirit Trade Association, the average duty on a bottle of wine is £2.08 on still wine and £2.67 on sparkling wine in the UK compared to 3-6p in France.
How much is collected by HMRC from excise duties?
Tobacco duties collected £9.2 billion (1.3% of all government revenue) while duties on alcohol raised £11 billion (or 1.5% of the total) in 2016-17. (Estimates supplied by IFS).
How much is collected through VED (Vehicle Excise Duty)?
VED (or Road Tax) raised £5.5 billion in 2016-17 (IFS figures).
How much excise duty is lost because of modern-day smuggling?
Because of its illegality and the possibility of smugglers getting away with it, it’s difficult to know. However, just taking the example of seized contraband, in 2013-14, customs officers seized 56.5 million litres of alcohol, 318.9 million cigarettes and 262,000 kilograms of tobacco. All of these were potentially £114 million in lost tax revenue.
Questions on indirect taxation
Indirect taxes are collected by intermediaries on behalf of the government. For instance, sales tax, value added tax (VAT), per unit tax, good services tax, excises, or tariffs are collected by an intermediary such as a retail store from the person who is expected to pay this tax, meaning the consumer who proceeds with their purchases of goods or services.
Income tax is considered a direct form of taxation. Direct taxation concerns those taxes that are paid directly by the individual employee or employer. Income tax is paid through the PAYE system. Indirect taxation, on the other hand, is enforced by having intermediaries collect the tax from consumers on behalf of the government.
The largest differentiating factor between direct and indirect taxation is the following. Direct taxes are levied on the income of individuals or businesses. This would include, for instance, corporate tax, income tax, wealth tax, and inheritance tax. Indirect taxes are paid by consumers, via intermediaries, when they purchase goods or services.
Bringing goods in from the EU
In 1999, Britons lost the right to bring in duty-free items from the EU but for most people, this was offset by the fact that the previous restrictions about how much alcohol or how many cigarettes you could bring back were lifted.
You’re allowed to bring as much as you’d like from EU countries as long as you transport it yourself (i.e. you can’t send it by post), it’s intended for your own personal use or as a gift and you paid the necessary duty/tax in the country where you purchased them. However, in order to stamp out the possibility of modern-day smugglers (people who buy extra alcohol in order to sell it at a profit), customs officers would be suspicious if you carried too much with you. Questions would probably be asked if you had more than 800 cigarettes, 110 litres of beer, 90 litres of wine or 10 litres of spirits.
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In light of the recent pro-Brexit vote, it still isn’t clear how the government plans to deal with the problem of excise duties. Will we return to a system of a duty-free allowance or will some of the more recent freedoms still remain? Whatever is decided, it has the potential of being a political nightmare especially when you bear in mind the continued increases in excise duty.
Although excise duty is imposed on many goods and services, the most well-known are for: tobacco (59% duty), alcohol (13.6%-54.4% duty) and fuel (54.4% duty).
The announcement of increases in excise duty from March 2017 have concerned some groups because of the effects on British exports, possible job losses and further pub closures.
You’re allowed to bring as much alcohol and cigarettes as you want from EU countries as long as you meet certain conditions although the situation may change post-Brexit.
Customs duties on goods from outside the EU
If you bring in goods from outside the EU, customs restrictions still apply. If you exceed your duty-free allowance, then you should be ready to declare anything over this limit. If you don’t and are caught, all the goods will be seized and you may face a fine and be prosecuted. So how generous is the duty-free allowance for goods purchased outside the EU?
As long as you’re aged 17 or over, you’re allowed to bring in 16 litres of beer, 1 litre of spirits, 4 litres of wine and 200 cigarettes. Customs duty is also levied at 2.5% on goods worth up to £630 and you may also be liable to import VAT.
Insurance Premium Tax
Insurance Premium Tax was first introduced by the Finance Act of 1994 since it was felt that because of its exemption from VAT, the insurance industry wasn’t paying enough taxation. Initially, there was a single rate of 2.5% for all types of general insurance policies.
Insurance Premium Tax is charged on most types of general insurance where the risk is located in the UK such as car and home insurance and is also levied on foreign travel insurance when the policy lasts under 4 months. There are certain types of insurance policies which are exempt from this tax. This includes any kind of long-term insurance such as life insurance as well as certain kinds of commercial insurance. For example, reinsurance, insurance for goods in international transit, insurance for commercial ships or aircraft.
Rates and increases in Insurance Premium Tax
There are 2 rates for Insurance Premium Tax: Standard (which is 10%) and Higher (20%). The higher rate applies to travel insurance, mechanical or electrical insurance for some appliances and some vehicle insurance. This higher rate is also charged when insurance is sold as an add-on to another product. For example, when you buy travel insurance from your holiday company or if the purchase of your vehicle includes break-down cover.
It is felt that the successive increases in Insurance Premium Tax is one of the reasons for the continued increases in motor insurance.
From June 2017, the price of the standard rate is due to increase to 12% causing complaints from the insurance industry. It is felt that the successive increases in Insurance Premium Tax is one of the reasons for the continued increases in motor insurance in the UK. The insurance industry say the 2% rise in the standard rate will lead to an average £25 rise in motor insurance for each driver. The ABI (Association of British Insurers) say that this increase is the third rise in the tax in 18 months and isn’t fair for policyholders nor the industry.
Air Passenger Duty
Considering the numbers of Britons that go abroad every year either for their holidays or on business, another indirect tax which affects us all is Airport Passenger Duty.
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This tax, which began in November 1994, is an excise duty on our travel from UK airports. Because of their isolation, only airports in the Scottish Highlands and islands are exempt from paying this tax as well as some exceptions for flights from Northern Ireland. Although it’s intended to raise tax revenue, it was also planned to offset the environmental impact of air travel. Despite this claim, critics say that it doesn’t take into account the fuel efficiency of the type of plane.
Recent reforms have meant that the rate of this tax is calculated by 2 main factors: the distance of the capital city of the flight’s destination from London and the class of the passenger. Since March 2016, children who travel in the plane’s lowest (economy) class are exempt from paying this tax.
For destinations under 2000 miles, passengers in the lowest travel class pay £13 (the reduced rate) while all those in the other classes pay £26 (the standard rate). For destinations which are further than 2000 miles away, the reduced rate is £73 while the standard rate is £146. From 2017 the rates for more distant destinations (over 2000 miles) are due to rise to £75 and £150.
A duty-free allowance still applies for passengers arriving from destinations outside the EU.
Begun in 1994, Insurance Premium Tax is imposed on all general insurance policies with a few exceptions.
At present, there are 2 rates: standard (10%) and higher (20%) although the standard rate will rise to 12% in June 2017.
Air Passenger Duty is calculated according to the distance of the destination from London and the passenger’s travel class.
Are there any exceptions to paying excise duty for goods from non-EU countries?
Yes. You wouldn’t have to pay if the duty came to under £9.
How much revenue does the Insurance Premium Tax bring to the state?
In 2016-17, the Insurance Premium Tax raised £4.6 billion or 0.6% of all state revenue (IFS figures).
How does the rates for Insurance Premium Tax compare to other European countries?
According to the ABI (Association of British Insurers), the third rise in this tax in 18 months makes the rates in the UK the 6th highest in Europe.
How many air passengers are there from UK airports?
According to statistics supplied by the CAA (Civil Aviation Authority), in 2016 there were just over 270 million passengers flying from UK airports from the 40 most popular airports. The top 3 were Heathrow (nearly 76 million), Gatwick (43 million) and Manchester (25 million).
How much money does Air Passenger Duty raise for the Treasury?
According to IFS estimates, in 2016-17 Air Passenger Duty raised £3.2 billion or 0.4% of all state revenue.