Government is sweet on taxing soft drink producers

The recent budget was not short of controversy but one item to attract headlines was the proposed ‘Sugar Tax’. Welcomed by health campaigners, most notably Jamie Oliver, as a way to fight childhood obesity, the tax will target producers and importers of soft drinks that contain added sugar. The hope is that the tax will encourage producers to amend their recipes.

How will it work?

The tax will be charged according to two bands, one for total sugar content above 5g per 100ml (likely to be at 18p per litre) and a higher band for any drinks containing 8g or more per 100ml (likely to be 24p per litre).

Who will be affected?

If the tax goes ahead as planned, the lower band will hit the producers of drinks such as Fanta, Sprite, Dr Pepper and Indian tonic water. The higher band will affect the producers of Red Bull, Coca-Cola and Iron Bru.

Pure fruit juice and milk-based drinks will be excluded and there will also be an exemption for smaller producers. The tax targets soft drinks only so confectionary items such as chocolate will be unaffected. This is supposed to reflect the fact that those items are seen as a ‘treat’, whereas fizzy drinks are often consumed throughout the day.

Has this been attempted before?

Yes, with varying degrees of success. Mexico introduced a 10% tax on soft drinks in 2014 which was reported to cause sales in soft drinks to fall. However, Denmark found the tax ineffective and subsequently abolished it.

Will it work and what does it mean for retailers?

While the tax is being seen as a positive step to tackle obesity, as we reported in January’s Retail Bites, there is an argument to say that individuals switching to artificially sweetened fizzy drinks are more likely to eat more food than those consuming drinks containing sugar. The pressure to reduce the sugar content in these drinks therefore may not be the solution, on the basis that producers may increase the use of artificial sweeteners in its place and the effect of that might be that people still consume too many calories.

If the tax goes ahead, soft drink producers will presumably seek to pass any increased costs on to retailers who will therefore need to decide whether to push back on this or, where this is not possible, pass the increased costs on to consumers. The latter could in turn mean that certain retailers and soft drink producers still lose out in the form of falling sales.

If you would like to discuss this article in further detail, please contact Amy Pierechod on 0113 227 2109 or at amy.pierechod@gordonsllp.com or Andy Brian on 0113 227 0354 or at andy.brian@gordonsllp.com.