Summary

The Soft Drinks Industry Levy (the levy) came into effect in the UK on 6 April 2018 following its introduction in Part 2 of the Finance Act 2017 (FA 2017) and represents the first tax on food and drink containing high levels of sugar in the country. The tax forms part of renewed efforts by the Government to "nudge" consumers towards healthier food and drink choices in an effort to reduce obesity and diabetes in the UK.

The levy imposes a charge on packagers and importers of soft drinks that contain added sugar and have a sugar content of more than 5 grams per 100 millilitres, with a higher rate levy applied to soft drinks containing more than 8 grams of sugar per 100 millilitres (the higher sugar threshold). For soft drinks falling within the scope of the levy, those satisfying the higher sugar threshold will be subject to a levy rate of GBP 0.24 per litre and those falling beneath the higher sugar threshold will be subject to a levy rate of GBP 0.18 per litre. HMRC issued full guidance on the levy on 3 April 2018, which can be found here.


Background

The Government announced plans to introduce a levy on high-sugar soft drinks in its 2016 Budget, having witnessed the impact of similar taxes on consumption of "sin foods" in Hungary and Mexico. Following a Government consultation on the proposed levy, it was envisaged that many manufacturers of high-sugar soft drinks would reformulate their drinks in order to lower their sugar content. The Government has estimated that over 50% of manufacturers have reduced the sugar content of their drinks since the announcement of the policy in March 2016.


Chargeable soft drinks

The levy applies to packagers and importers of soft drinks that meet the Sugar Content Condition. A soft drink will satisfy the Sugar Content Condition, unless exempt from the levy, if it contains:

  1. added sugar ingredients (broadly, the addition of any calorific mono-saccharides or di-saccharides other than fruit juice, vegetable juice or milk); and
  2. at least 5 grams of sugars (whether or not as a result of containing added sugar ingredients) per 100 millilitres of prepared soft drink.

The levy will not apply to soft drinks that fall within one of the specific exemptions, which include exemptions for alcoholic drinks and milk-based drinks.


Chargeable events

A charge will only arise on the occurrence of a chargeable event. Part 2 of FA 2017 sets the scope for two possible chargeable events, being:

  1. where chargeable soft drinks are packaged in the UK, on the removal of the chargeable soft drinks from the packaging premises (the packaging event); or, alternatively
  2. where chargeable soft drinks have been imported into the UK, on first receipt of the chargeable soft drinks by the first person carrying on a business involving the sale (be it wholesale or retail) of chargeable soft drinks (the first receipt).

Where the levy applies following a packaging event, the packager will be liable for it. Similarly, where the levy applies following first receipt by a person carrying on a business involving the sale of soft drinks, it will be the liability of the first person to receive the soft drinks.

Part 2 of the FA 2017 provides an exemption for small producers, however the scope of this exemption is limited to soft drinks produced by manufacturers producing less than 1 million litres of chargeable soft drinks annually.


Registration

Businesses must register for the purposes of the levy if:

  1. they own the brand of a chargeable soft drink;
  2. they produce a chargeable soft drink under another person's brand;
  3. they package chargeable soft drinks for someone else; or
  4. they import chargeable soft drinks.

Businesses can register online and must do so within 30 days of one of the following:

  1. the end of the month in which it packaged liable drinks for someone else;
  2. the date on which a business knows it's going to package liable drinks for someone else in the next 30 days;
  3. the end of the month in which the levy becomes due on drinks brought into the UK;
  4. the date on which a business knows the levy will become due on drinks brought into the UK;
  5. the end of the month if a business has produced over one million litres of liable drinks in the past 12 months (including any liable drinks produced before 6 April 2018); or
  6. the date on which a business knows that in the next 30 days it will produce over one million litres of liable drinks in the past 12 months (including any liable drinks produced before 6 April 2018).

Failure to register without reasonable excuse is a criminal offence and may lead to a fine of up to 3 times the amount of the potential levy lost during the unregistered period.


Returns, records and warehousing

Returns

The levy requires quarterly reporting (ending June, September, December and March) with returns sent to HMRC and payment of any levy due within 30 days of the end of each reporting period. Businesses will need to include how many litres of chargeable soft drinks they need to report in that accounting period in their returns. In addition, the return must include how many litres of chargeable soft drinks the business has packaged or brought into the UK (as applicable). The return should also include how many litres of chargeable soft drinks the levy is payable on in the reporting period and if the business is eligible for levy credit (for exported or lost / destroyed drinks).

Records

Accounts must be kept for the purposes of the levy and must include details of the quantity of the chargeable soft drinks packaged or imported by the relevant taxpayer. The quantities must be in litres and show any quantity that is subject to the small producer exemption. The accounts must also show:

  1. the rate of the levy applicable; and
  2. the amount of the levy payable.

The accounts must be retained by the taxpayer for a period of not less than 6 years from the last day of the relevant accounting period. A liable person must keep records relating to the dilution ratio of soft drinks, including details of when any changes are made to that ratio and what changes are made and why.

In addition, accurate records must be kept for the soft drinks destroyed, disposed of as waste, reprocessed or spilled and incapable of further use. These records must include the quantity lost, the relevant levy rate on those drinks, the date those drinks became lost or destroyed and place and case of loss.

Warehousing

The levy will not be applied to soft drinks that are warehoused prior to distribution, provided the warehouse satisfies the requirements set out in the Soft Drinks Industry Levy Regulations 2018.


Outlook

There is increasing concern among consumers and government health agencies about obesity and diabetes globally and the pressures facing food and drink producers to reduce their sugar content is likely to increase in intensity over the coming years. Increasingly governments are introducing a "sugar tax", often targeting high-sugar soft drinks, in an effort to reduce sugar intake amongst consumers and raise revenues. Similar taxes have previously been implemented in Finland, France, Hungary and Mexico which have led to reduced sales volume of high-sugar soft drinks. Further, this year sugar taxes have been introduced in Ireland (adding 30 cents per litre to liable drinks) and South Africa (being 2.1 cents per gram of sugar content that exceeds 4g per 100ml).

The levy may be the first step in measures taken by governments around the world as reforms to advertising and labelling regulations relating to soft drinks are discussed by public health professionals and government health agencies. The new environment facing the food and drink industry presents many risks of actual or threatened legal action and the negative publicity that may result. Accordingly, a holistic approach to dealing with government agencies going forward is recommended.

Baker McKenzie has a global network of indirect tax specialists as well as market-leading expertise in trade, regulatory compliance and disputes to assist in any strategic planning and discussions that you may have with the tax authorities both in the UK and globally.

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