In a surprise move the Chancellor announced yesterday that the Government is introducing a levy on sugar in soft drinks. 

In his budget speech the Chancellor explained that the proposed levy would work as follows:

  • The levy will be charged on the volume of soft drinks manufactured or imported
  • There will be two tax bands for soft drinks with more than 5 g and 8 g of total sugar per hundred millilitres respectively
  • The levy will be introduced in two years’ time
  • Pure fruit juice and milk-based products will be exempt
  • The smallest producers will be “out of scope”
  • The tax raised will be spent on extra funding for sport in primary schools 

What the Chancellor has not announced is how high the tax will be. However, he has promised a consultation with the industry on implementation of the tax. The Chancellor’s comments suggest an underlying intention may be to encourage industry to continue to reformulate products and promote lower sugar alternatives rather than raise tax. The two year delay in implementation is presented as giving the industry the opportunity to take these steps. 

As we have previously discussed in our Winter 2016 Taking Stock article on the sugar tax there are various legal and practical concerns with a sugar tax. Mr Osborne’s speech hints at how the government intends to address these concerns.

In his announcement he said that the tax would be on “total sugar”. This suggests that even naturally occurring sugars may be taxed. This may have been designed to avoid manufacturers simply reformulating to use a different (untaxed) sugar. However, if all sugars are taxed then this will mean that drinks such as smoothies that are high in sugar but have other health benefits may be caught by the legislation. This may explain why there is a specific exemption available for “pure fruit juice”. Manufacturers will obviously want to scrutinise the exact scope of this exemption, as well as that for milk-based products. 

The Government’s stated primary concern is to tackle rising obesity in children but it is unclear whether or not the tax is actually intended for products targeted or predominantly sold to children or all soft drinks. From what has been said so far it seems likely that all soft drinks will be caught, potentially with unexpected consequences. Concerns are already being raised on Twitter regarding the impact on the price of a G&T. 

One issue not addressed by Mr Osborne is whether the tax is compatible with EU law on free movement of goods, assuming the referendum results in no BREXIT. As the recent decision on minimum pricing of alcohol illustrates the European Union can be very strict on the use of tax as a means to promote healthier lifestyles and it is likely that at least some manufacturers will attempt to challenge the new tax through the courts. This is discussed further in our previous analysis here.

The levy has caught some in the industry by surprise. The Government has been reported as expressing some inconsistent views over the last few months and had only just recently announced that it would be publishing its childhood obesity strategy in the summer of 2016. Many commentators had therefore not expected any decisions to be made regarding a sugar tax before this. If the Government still intends to publish the strategy then the delay allows for the possibility that the new levy may be expanded to cover other categories which will be a significant concern to many food and drink manufacturers. It will also be interesting to see how this impacts on the Sugar in Food and Drinks (Targets, Labelling and Advertising) Bill. 

It remains to be seen if the promise that all the taxes will go to fund primary school sport will be sufficient to sweeten the deal!