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Drive Innovation March 18, 2016

New UK Sugar Tax Puts Onus on Industry: What It Means

Partner, Health & Life Sciences, Oliver Wyman
Key Takeaway
The goal of the UK #sugartax is to decrease individuals’ sugar consumption by encouraging reformulation

The new UK sugar tax is big news – it’s just not the news that people were expecting. On March 16, the UK Government released its Budget 2016. Included in the budget was the surprise announcement that the Government will introduce a sugar tax on the makers of sugary drinks. Here, Oliver Wyman Partner and Public Health Leader Crispin Ellison puts the news in context and offers insight into its long-term impact:

In the months leading up to the March 16 budget announcement, there was much discussion about the pros and cons of a sugar tax; but that debate centered on a point-of-sale tax. Such a tax is designed to influence consumer behavior and discourage consumers from purchasing sugary drinks. Similar taxes are already in place in Mexico, France, Hungary, and a handful of other nations. Health experts and advocacy groups had lobbied for such a tax in the UK. Celebrity chef Jamie Oliver was a vocal supporter of a point-of-sale tax, and helped draw attention to the issue.

But when Chancellor George Osborne revealed Budget 2016, he announced the onus would instead be on industry, with a tax assessed on the volume of sugar-sweetened drinks that manufacturers produce or import. Unlike a point-of-sale tax, the aim of this policy is to influence the behaviors of producers, NOT the consumers; and the goal is to decrease individuals’ sugar consumption by encouraging reformulation.

How the tax will be assessed

The new levy is actually made up of two taxes: one for total sugar content above 5 grams per 100 milliliters, and an additional, higher tax on the most sugary drinks—those with more than 8 grams per 100 milliliters. The Government estimates the tax will raise £520 million. Proceeds from the levy will go to boosting gym and sports activities in primary and secondary schools.

Because the tax will not take effect until 2018, industry will have “plenty of space to change their product mix,” Osborne told Parliament.

Why it may work

For more than a decade, Chancellors have considered taxing sugary drinks. The Government put sugar squarely in its sights in fall 2015, when a Public Health England report targeted people’s consumption of sugary snacks and drinks for fueling the national obesity crisis.

There are a variety of regulatory actions and restrictions that governments can take to reduce sugar consumption; but this new tax has several advantages over other regulatory measures. Here’s why:

  • It is aimed at having a longer-term impact on sugar consumption. Point-of-sale taxes tend to create a small, but temporary drop in consumption – usually for 18 months or so. (Unless the tax is imposed at a punitive level, generally recognized to be higher than 50 percent.) If the government succeeds in getting producers to include less sugar, this approach may have a long-term and sustainable impact on consumption. With this tax, the Government has successfully responded to the clamor from the healthcare sector, as well as pressure groups, to use tax to discourage the consumption of excessive sugar in drinks, but it has avoided the risks of a short-term solution with limited efficacy.
  • It avoids the risks of fraud, and the complex and costly infrastructure required for a point-of-sale tax. Such a tax would have required sugary drinks to be stored in bonded warehouses, as with alcohol.
  • It sends a powerful message. With this levy, the Government is telling industry it is quite serious about managing the obesity crisis, and that may indicate that the Government is prepared to take steps into other arenas as well, such as restrictions and promotions of high-sugar items.

How effective this new approach to ‘sin taxes’ will be will depend on the response of the beverage industry, which has been given ample time to reformulate their products. In his announcement, Chancellor Osborne praised soda makers who have already taken steps to reduce sugar content. Those soda makers show that “industry can act,” he said, “and with the right incentives I’m sure it will.”

Government has spoken; it is now up to industry to respond.

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