We’ve done a recent piece on the government’s idiotic taxation strategy pushing up the price on wine, now here’s one explaining how the weak pound has affected prices.

Just to clarify, for those of you didn’t know, the government has increased duty on wine under 15% abv by 36 pence (&vat) per bottle in the last 15 months – even more on wines over 15%! Beer and spirits have also been the victim of huge duty hikes too. Has this achieved the government’s desired goals and increased revenue for them? No. Quite simply, due to these price increases, people are drinking less and the government’s revenue from excise duty on alcoholic drinks has actually fallen sharply! Well done Darling, once again. That man really is an own goal specialist – not only has his strategy reduced revenue from excise duty on alcohol, it’s also contributed hugely to the demise of the on trade business in the UK with pubs and restaurants closing down on a daily basis, putting hundreds and thousands of people out of work where they were paying tax and vat, and onto the benefit system where they’re claiming money. In reality it’s costing the UK billions of pounds per year, but Darling just can’t see it.

Unfortunately, Darling’s clown like antics aside, this has had a desperate affect on the licensed trade and we’re seeing businesses closing down on a daily basis as a direct result.  The pubs are the hardest hit, then probably restaurants and hotels, but it affects everyone in the trade particularly independent wine merchants who have to compete with the supermarkets who can afford to sell at a loss.

Anyway, onto the weak pound. 15 months ago the Pound traded at 1.40 Euros or just over US$2 . Last month it was down as low as 1.07 Euros or  $US 1.39.

So a bottle of wine costing a merchant 5 Euros in 2008 was £3.57 plus £1.36 duty which is £4.93 plus vat (@17.5%) which is £5.79. This wine may retail at £7.99.

The same bottle still at 5 Euros in 2009 was £4.67 plus £1.60 duty which is £6.27 plus vat (@15%) which is £7.21. This wine would then have to retail at £9.99 – an increase of 25%.

However, as there’s a credit crunch worldwide, the producers have also put on their own price increases and shipping & packaging charges have also increased. Throw in the chancellor’s duty increases and you’ll see wine has increased by as much as 40%!

We’re already in June. VAT is set to revert to 17.5% next January, although there’s plenty of speculation that it’ll actually increase by even more – that’s around £5 a dozen on a case of £10 a bottle wine.

But to put all these consecutive price rises into perspective take a look at this illustration: a wine which cost £8 plus vat last year, cost you £9.40 per bottle, or £112.80 per case. Next year it will cost £10 plus vat at 18.5% which is £11.85 - £2.45 per bottle more, that’s an increase of £29.40 per case! And that’s before Darling increases duty yet again in the next April budget by his already declared 2% above the rate of inflation! So be wise and stock up in the next few months.

Did you know that the only place in the UK where vat is not applicable to retail alcohol sales is the bar in the House of Commons? And parliament has a wine cellar funded by the tax payer to rival any in the world? We may be questioning their personal expense claims but there are still plenty of perks to being an MP!

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We wine lovers have seen a rollercoaster ride over the last 13 months. In the April budget 2008 the darling, Darling, increased duty on still wine under 15% by 12 pence per bottle, with an even bigger increase on stronger wine and champagne/sparkling wine.

Then in December, with the stealth of a Royal Marine Commando, he slipped in another 12 pence per bottle hike but kept it under the radar from the public by also lowering VAT at the same time. What’s wrong with that, you may ask? One tax is the same as another to the consumer. So it would appear on the surface, but that’s an illusion. To the retailer, whether a pub, restaurant or shop, they must charge VAT on the wine when they sell it, but can claim back the VAT they paid when they bought it, before forwarding the difference to the taxman, effectively the VAT on the profit. Now this is where it gets complicated – a bottle of wine can pass through several different ‘pairs of hands’ in the supply chain before it reaches the consumer. Each one charges VAT when they sell it,  and each one reclaims  the VAT on the price they paid for it (which is lower of course). The net result, regardless of how many people handle the wine, is that Customs & Excise get VAT (currently 15%) on the final sales price.

But by increasing the duty,  the price of the wine has increased and the retailer can’t reclaim it. Factor in an agent’s percentage and a retailer’s margin on this duty increase - again worked on a percentage basis, and the wine has increased significantly in price – and here’s the trick – the Inland Revenue although lowering the VAT rate to 15%,  are able to charge it on a higher price and make their money back! Now here’s the double whammy. The VAT rate is set to revert to 17.5%, if not even higher,  in January 2010 and you can bet the Chancellor isn’t going to give that 12 pence per bottle back! As a third whammy, let’s not forget the original 12 pence per bottle additional revenue  too.

This April he increased excise duty by the same amount yet again. And he’s pledged to increase duty each year by 2% over the rate of inflation so your wine is going to continue to increase significantly in price.

So how has all this affected prices?

They’ve rocketed! Duty on a case of wine back in 2001 was around £13.75, it’s now £19.26. Don’t forget, if it comes from outside the EU there’s an additional Customs Tax to pay as well.

That’s the duty.  Now the VAT. Let’s not forget, when the wine arrives in the UK, VAT is payable on the ‘value of the wine’ which also includes all it’s packaging, shipping and even insurance costs! And the masterstroke! VAT is actually charged on the Duty too!

What does this mean in real terms?

Well, the magical 3 bottles of plonk – say from South Africa or Chile – for £10, breaks down like this: DUTY £4.95, VAT £1.30, which is over £2 per bottle for the Treasury, which helps explain the government’s very lax attitude to the supermarkets’ highly irresponsible policy of promoting alcohol for sale below cost price. We’re talking about billions of pounds a year here for the Treasury.

So, back to the wine, you have £3.75 left, £1.25 per bottle, to cover the production of the wine and the producer’s margin, the glass, labelling and cardboard packaging, transport half way round the world, storage and transport in the UK, then the retailer’s margin!  Do you think the quality of the wine will have gone up or down? I thought it had already hit rock bottom and thought it couldn’t possibly get any worse.

What about good wine?

Well good wine has obviously been affected by the same duty increases, but because it costs more anyway, the increase is not so dramatic as it’s a fixed amount not a percentage. However this string of unwelcome increases has pushed prices up and consumers need to mentally readjust their expectations. You used to be able to buy a good wine for £10 and a fairly reasonable one for£5. That reasonable one is now more like £8 a bottle, due also to the weak pound, which is our next topic for discussion – the £ sterling has dropped about 30% in value in a year, which combined with duty increases has pushed up wine prices by 35%. It’s only thanks to some canny wine merchants who bought stock at the right time and have held their prices, that we’re not seeing even higher price increases.

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