Islay barley grower Raymond Fletcher

Scotch comes at a price

27 April, 2023

Scotland's whisky-making industry has been hard hit by many external factors – not least the UK’s Spring Budget. 

The UK chancellor Jeremy Hunt’s Spring Budget 2023 was branded a budget for growth. It included £27bn of tax cuts for businesses, including the “Brexit pub guarantee” which will see a freeze on draught beer duty from 1 August. Hunt said: “The duty on draught products in pubs will be up to 11p lower than the duty in supermarkets.” So far, so generous, but here’s the turn.

Hunt revealed that, from 1 August, other alcohol categories will see duty increase by 10.1%. The Scotch Whisky Association estimates this means 75% of the money spent on the average-priced bottle of Scotch will go directly to the treasury.

The UK wine and spirits industries were up in arms, while, presumably, the beer world tried to stifle a relieved sigh, and the SWA labelled it a “historic blow” to the industry, Nuno Teles, managing director of Diageo GB, described the decision as a “hammer blow” and economist Emma Congreve called the budget “difficult to tolerate”.

“The decision to hit the Scotch whisky industry with a double-digit tax increase is bewildering,” said Graeme Littlejohn, director of strategy and communications at the SWA.

“Over many years, freezes to duty in the UK, which is already one of the highest in the world, have enabled the industry to reinvest in the UK economy, creating jobs and prosperity in Scotland and across the UK supply chain. The 10.1% tax increase will impact all parts of the industry, it leaves less for the industry to be able to support businesses from farmers to hauliers, hospitality to tourism. And of course, consumers will be impacted as tax rises inevitably have to be passed on at a time when many are already struggling with the cost of living.”

To add some context, the new duty hike is the first tax movement that alcohol has seen since a freeze was announced in the 2020 Autumn Budget by Rishi Sunak. Plans to unfreeze duty were scrapped by Kwasi Kwarteng in September 2022 in his disastrous “mini-budget” and the freeze was extended for six months in December 2022 after Hunt had succeeded Kwarteng as chancellor.

“When they suspended the duty, we were lulled into a false sense of security that they were trying to protect the industry, so the 10% increase came as quite a shock,” says Allan Logan, production director at Bruichladdich. “It will impact the consumer. There’s only so much that companies can do to cover their costs and, eventually, it will get passed on to consumers.”

One of the reasons Scottish distillers may feel a sense of righteous indignation is that they were promised otherwise. The Queen’s Speech following the last general election in 2019, which saw a victory for the Boris Johnson-led Conservative Party, promised to “review alcohol duty to ensure our tax system is supporting Scottish whisky and gin producers and protecting 42,000 jobs supported by Scotch across the UK”.

But while this may be an unprecedented increase for most working in the industry today, its elder statesmen might remember a similar rise before.

“This is the largest tax increase on Scotch whisky in 40 years,” says Littlejohn. “We know that after a similar scale rise in 1981, the UK market for Scotch whisky fell by 25% over the next decade. In the past few years, following duty freezes, the UK market for Scotch whisky had started to recover, but we fear that this rise will once again damage our home market where smaller distillers invest and scale up to be the exporters of tomorrow.”

Market challenges

It’s here, among the industry’s smaller start-ups, that these changes will be felt more, and we can’t pretend that it’s only duty they will have to contend with – there are rising energy costs, the war in Ukraine has impacted grain supply chains and the implementation of a domestic bottle Deposit Return Scheme promises to incur more costs for producers.

“So much happened in the last couple of years and fundamentally it’s become a lot more expensive to make whisky now than it was three or four years ago,” says Logan.

“From the raw materials to energy costs to sourcing the barrels, the cost of casks has shot up by 40-50%. Even just the projects that we’re doing with the facilities and infrastructure are costing way more. We have a relationship with farmers, and we try to work on a partnership agreement, so we’re not just trying to get the lowest cost, but when the whole supply chain has increased, it’s not the farmers that get the margins, it’s their fertiliser companies, the energy companies, these massive companies, not the working man.

“Smaller producers are worse affected and pay more because of the scales they are buying at compared to the bigger companies,” he continues. “But there’s an upside to that, a lot of new start-ups can find a niche and squeeze a higher price point and still get a decent margin, even though it’s difficult to compete against the bigger brands in terms of margin.”

But there has been something of a parting of the clouds. In mid-April, Scotland’s first minister Humza Yousaf announced to the Scottish Parliament that proposals to restrict alcohol advertising are going “back to the drawing board”, and the Deposit Return Scheme, which was due to start in August, has been delayed until March 2024.

“In the UK, the dialogue between government and industry is opening, particularly in Scotland in light of the new first minister’s announcement on DRS and the alcohol consultancy,” says Kieran Healey-Ryder, global head of whisky discovery at Whyte & Mackay.

“But for larger producers, it's extremely complex and complexities introduce costs. So you’re faced with a choice between making your product available at home or making it available in a market where duty frameworks are more progressive, more supportive of spirits and where there's a greater dialogue between government and industry.

“There needs to be a progressive approach to duty that doesn't penalise spirits versus cider and beer. And that's the situation we're hoping to explore with the treasury.”

Thriving markets

Elsewhere, in markets blessed with “more progressive” duty frameworks, Scotch is thriving. In 2022, category exports grew by 37% according to the SWA, passing £6bn for the first time. India overtook France to become the industry’s largest market, increasing by 200% in the past 10 years and, given that the category only accounts for 2% of the Indian whisky market, the potential there is practically boundless.

In Mexico, where high-abv alcohols are taxed heavily, many brands will only operate in the export market, but while a logical, and perhaps shrewd, tactic, it’s just not on the table in Scotland.

“The relationship that Scotch whiskey has with its local community is part of the DNA of the product,” says Healey-Ryder. “I would say that’s a stronger connection than in any other spirits category, it’s similar to champagne.

“As a distillery worker on Jura, you would expect to go to the one pub on the island and enjoy the whisky that’s made over the road and the one whisky distillery on the island. There's an inherent relationship between the people who make it, the place that makes it and what is made.”

The current state of whisky offers a unique and new set of challenges for the industry, but this old dog has been around the block a few times.

“Business will find a way to overcome complexity,” says Healey-Ryder. “And if nothing else, through the past three years, we have demonstrated that we will and we can overcome. Complexity is not new. As a 200-year-old industry, we have overcome significant global and local challenges. And more recently, you feel that they’re more frequent than they had been in the previous 10 years, but there is that sentiment that overcoming complexity is common.”

There’s no sugar-coating it, Scotch is in for a harsh summer. Even if the incoming duty increases are scrapped, other challenges won’t disappear. It’s a time for the industry, especially its start-ups, to keep a firm hand on the purse strings and plan ahead, but that doesn’t mean the industry is on its knees – quite the opposite. It’s a vital employer, a cultural icon and one of the UK’s greatest ambassadors.

Now, if only the treasury would recognise that.

Digital Edition

Drinks International digital edition is available ahead of the printed magazine. Don’t miss out, make sure you subscribe today to access the digital edition and all archived editions of Drinks International as part of your subscription.


La'Mel Clarke

Service isn’t servitude: the skill of hosting

La’Mel Clarke, front of house at London’s Seed Library, looks at the forgotten art of hosting and why it deserves the same respect as bartending.