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.