SDIL, also known as 'sugar tax', has been in force since 6 April 2018.
There are two rates of tax depending on the sugar content of the drink:
- 18p per litre on drinks that have a total sugar content of more than 5g and less than 8g per 100ml; and
- 24p per litre on drinks that have a total sugar content of 8g or more per 100ml.
The policy behind SDIL is to reduce childhood obesity by encouraging producers to change the recipes and lower the sugar content of the drinks. The Government estimates that over 50% of manufacturers had done so before SDIL came into effect. With equivalent taxes in force in a number of European jurisdictions (e.g. France, Belgium and Ireland), this will continue to be relevant to multinationals.
Some of our clients in the soft drinks sector are looking at ways to reformulate recipes to reduce the sugar content in their recipes, produce sugar-free products, and find sugar substitutes (e.g. stevia) which may be exempt from SDIL. Recipe reformulation, being carried out by research and development (“R&D”) centres of multinationals, is likely to take time as new recipes need to be tested before product launches.
On the supply side, one of the many headaches for the heads of procurement and R&D of the soft drinks groups is finding reliable sources of sugar substitutes of high quality and additional R&D budgets to carry out the required work, while competing with alcoholic drinks producers who need to source the same ingredients for their products. On the buy side, would the use of substitutes pass the consumer tasting tests to minimise a softening in consumer demand for the same product?
What drinks are caught?
SDIL catches drinks which have sugar added during production and contain at least 5 grams of sugar per 100ml of prepared drink. Only soft drinks with alcohol content of 1.2% alcohol by volume or less are within the scope of the levy.
SDIL applies to drinks on the basis of their ready-to-drink composition. When looking at the sugar content of drinks which need to be diluted or otherwise prepared before they can be consumed, the dilution ratio is set by the producer.
For the purposes of SDIL, sugar means calorific mono-saccharides or di-saccharides, including sucrose, glucose, fructose, lactose and galactose. Sugar substitutes like stevia, aspartame and sucralose are excluded. However, consideration may need to be given to consumers’ perception of the health factors in using such substitutes.
Certain types of drinks are exempt from the levy: milk-based drinks (containing at least 75ml of milk per 100ml of prepared drink), milk substitutes (containing at least 120mg of calcium per 100ml of plant-based drink), alcohol substitutes (sold or advertised as direct replacements for alcohol) or certain drinks used for medicinal purposes (including baby formula and diet aids).
Drinks which were packaged (e.g. bottled or canned) or brought into the UK before 6 April 2018 are also outside the scope of SDIL.
Who is liable?
SDIL is aimed at persons packaging, producing or importing sugary drinks. Who is liable depends on when the tax is triggered. For drinks which are packaged in the UK, the tax point is when the drinks are removed from the packaging premises (unless the drinks are taken to a registered warehouse or made available for sale on the premises), and the person liable is the packager. If the packaged drinks are imported to the UK, the tax is triggered the first time they are removed from a registered warehouse, made available for sale or free of charge, or received at premises run by a wholesaler or retailer of drinks liable to SDIL. In that case, the liability falls on the first seller or first recipient of the drinks.
There is an exemption for 'small producers' who produce less than 1m litres of drinks which are within the scope of the levy per year. There is no equivalent relief for importers.
What do you need to do?
If you are (or expect within the next 30 days to become) liable for SDIL, you should register with HMRC, keep records and file quarterly returns. The reporting periods are fixed at the end of March, June, September and December. The returns and the tax are due within 30 days of the end of the reporting period.
Potential transfer pricing issues to consider
Since sugar taxes are broadly applied on volume packaged in or imported into the relevant jurisdiction, it is likely to affect the profitability of any manufacturer, packager or distributor who sells, distributes or imports soft drinks. If the affected distributor purchases the finished products from an overseas related party, then the price at which it buys from that party will need to be adjusted to ensure that the relevant entity retains an arm’s length operating margin – in line with its function, asset and risk profile. If the distributor is limited risk in nature, it should retain a sufficient level of operating margin post sugar tax. That is, it should not be in a loss-making position.
Separately, consideration may need to be given to any reformulation of recipes or any additional R&D spend by an overseas related group entity may result in the creation of new, valuable intellectual property (e.g. technical or manufacturing know how) which may have an impact on a multinational’s existing business model and group-wide transfer pricing arrangements.
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