How would Boris’s sugar and sin tax review impact business?

As Boris Johnson calls for a review of UK sin taxes, we have a look at what it could mean for stocks, including the food and drink industry that is increasingly being pressured to develop healthier products.

Boris Johnson Source: Bloomberg

Boris Johnson, the favourite to become the next prime minister of the UK, has sparked a debate on whether taxation is the best way to tackle problems spawning from alcohol, tobacco, gambling, and unhealthy food and drink.

The former foreign secretary claims a review is needed to analyse whether these ‘sin taxes’ unfairly target poorer households, which tend to spend a larger proportion of their income on such products. Taxing alcohol and tobacco has become the weapon of choice of governments around the world in controlling consumption, but as discussion evolves into new areas – from vaping to sugary drinks – questions are being raised about the effectiveness of sin taxes.

Johnson has said, if elected, no further sin taxes will be rolled out until a review has been completed. While this will include alcohol and tobacco, a dramatic U-turn on how these products are taxed is unlikely. Instead, the primary focus is on the effectiveness of newer policies, such as the sugar tax on soft drinks, and whether similar initiatives should be expanded to cover other unhealthy food and drink.

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UK is one of many countries to have introduced tax on sugar

The UK Soft Drinks Industry Levy, better known as the sugar tax, was introduced in 2016 by the-then chancellor George Osborne. The tax imposes an 18 pence-per-litre charge on soft drinks containing between 5-8 grams of sugar per 100 millimetres, and a higher 24 pence charge on drinks containing more than 8 grams.

Those below the 5-gram threshold are exempt from the tax, as are certain drinks such as fruit juices and milk-based beverages. It is worth noting that it is a tax on business and not consumers – manufacturers decide whether they want to pass the additional tax on to their customers or absorb the cost themselves.

What’s the impact of the sugar tax?

According to stevia maker PureCircle, around 27 countries have adopted some form of sugar tax and 80% of them introduced the tax within the last two years, demonstrating more countries are deciding to tax their way out of the global obesity problem.

How much do sin taxes raise for the UK government?

Sin taxes raise money for the government which can be used to invest in the National Health Service (NHS) or other counter-measures like anti-smoking campaigns or programmes to help those addicted to alcohol or gambling. The sums raised by the sugar tax are being used to fund sports and breakfast clubs for school children.

Income from sin taxes has continued to grow over the last five years but at a much slower rate than overall receipts. Total receipts of Her Majesty's Revenue and Customs (HMRC) have increased by 21% since the 2014-2015 tax year but those raised by tobacco, gambling, alcohol and (now) sugary soft drinks have increased by just 11%. As a result, sin taxes now account for just 3.95% of HMRC’s total income, down from 4.3% five years ago.

2014/15 2015/16 2016/17 2017/18 2018/19 % of total HMRC receipts in 2014/15 % of total HMRC receipts in 2018/19
Tobacco 9548 9486 8909 8827 9290 1.85% 1.50%
Betting 2116 2666 2742 2860 2987 0.40% 0.50%
Alcohol (of which:) 10,490 10,687 11,164 11,440 12141 2% 1.90%
Spirits 3023 3147 3378 3430 3810 0.60% 0.60%
Beer 3310 3271 3320 3460 3661 0.60% 0.60%
Wine 3837 3973 4169 4256 4392 0.70% 0.70%
Cider 320 296 288 294 278 0.06% 0.04%
Soft drinks 0 0 0 0 240 - 0.03%
Sin taxes 22,154 22,839 22,815 23,127 24,658 4.3% 3.95%

(Source: HMRC)

Smoking rates have been in decline for decades, younger people are drinking less than older generations and, while gambling addiction has been under the spotlight in recent years, the government has introduced strict new laws on Fixed-Odd Betting Terminals (FOBTs) to try to curb the problem.

Some argue the introduction of the sugar tax was a way of boosting income at a time when other sin taxes are growing slowly. However, the sugar tax raised £240 million in its first year, just half the originally anticipated £530 million.

Drinks manufacturers reformulate to avoid sugar tax

But the reason why the sugar tax has generated less income than expected is because manufacturers have gone to great lengths to reformulate their drinks to avoid the tax. Businesses had around two years to prepare and when it was introduced there was about half as many drinks subject to the tax than first expected. They either reduced sugar in existing drinks, introduced low or sugar-free alternatives or tinkered with the size of their cans or bottles.

This has seen some companies shun added sugar altogether. AG Barr, best known for producing IRN-BRU, says 99% of its drinks are exempt from the sugar tax. Others have stood behind their recipes, like Coca-Cola, and passed the cost on to the consumer while introducing sugar-free alternatives to cater for everyone. According to Beverage Daily, sales of Coke Zero in the UK rose 50% over the past year while Pepsi Max sales climbed 17%, while sales of their traditional sugar-ladened drinks both declined. Britvic, which has the rights to sell Pepsi in Great Britain, said in its recent interim results (to 14 April) that Pepsi Max 'generated more incremental retail value than any other cola variant'.

Many are rightly unconvinced that the sugar tax is having a real beneficial effect on the country’s waistline, but there is little doubt that it has encouraged companies to reformulate their drinks and that people are consuming less sugar from soft drinks as a result.

Reformulating recipes and tinkering with new packaging is not cheap. AG Barr spent around £1.4 million on changing its recipes in 2018. Fevertree Drinks, the champion of making mixers for alcoholic beverages, said it took a £4.4 million revenue hit from the sugar tax last year, although its gross profit and adjusted earnings were both unaffected.

What could a review of the sugar tax mean for food and beverage stocks?

While Johnson has suggested a review could see a reversal of the sugar tax, the current health secretary Matt Hancock is pushing in the complete opposite direction. Hancock has called for the tax to be expanded to include sugary milkshakes if industry refuses to voluntarily reduce sugar in their beverages. He also outlined several other initiatives that could be adopted, including:

  • Banning sales of energy drinks to people under the age of 16
  • Banning junk food advertisements before the 9pm watershed
  • Removing junk food from prominent shelving space, such as at the end of supermarket aisles.
  • Tighter rules for promoting junk food, such as banning 'buy one, get one free' (BOGOF) deals.
  • Introduce marketing restrictions for junk food to prevent the use of cartoon characters.
  • Increasing VAT on foods with high levels of fat, salt or sugar.
  • New rules to encourage smaller portion sizes of junk food.

Drinks manufacturers in the UK and around the world see further taxation as a major threat to their businesses. Coca-Cola is among those that list further taxation of sugary drinks as a principal risk, and rightly so: if the sugar tax is applied to the likes of milk-based drinks or juices then other brands in its portfolio like Innocent could be impacted.

The implications of a potential review by Johnson are different. If he is elected and a review found that the sugar tax is not effective and therefore rolled back, it is highly unlikely that those that have spent millions reformulating their beverages will decide to start pumping them full of sugar again. Drinks have already been reformulated and consumers are already shifting to low-or-no-added-sugar alternatives. Some could argue that a reversal on the tax would mean the sums that have been invested to reformulate has been wasted. However, with the global shift toward taxing sugar evident, manufacturers were already moving down this avenue. If anything, a sugar tax pushes companies to invest and reformulate at a quicker rate. Those that have stuck with their sugar-heavy recipes, like Coca-Cola, would benefit if the tax was reversed.

The political picture is one painted with uncertainty for the industry. Johnson has to win the Conservative leadership race and will have much bigger fish to fry than the sugar tax if he takes office, with Brexit set to dominate the agenda until at least the end of October. He would also have to gain support from parliament if he wanted to amend the sugar tax. While Hancock’s review has been in the pipeline for a while and supported by the current Conservative government, he could be out of a job if Johnson takes over as prime minister and the review could be scuppered. It may be a confusing time for the industry, but manufacturers are likely to continue to follow the wider consensus that products need to become healthier.

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Will similar taxes be applied to unhealthy foods?

Hancock has made it clear that more regulation and tax needs to be imposed on a wider range of food and drink if the UK is to truly tackle the obesity crisis. If all of the health secretary’s potential proposals were adopted then the food industry could be hit by a crippling wave of new rules: their marketing operations could be limited, Tony the Tiger and Coco the Monkey could vanish from cereal boxes, and portions could become even smaller while becoming more expensive because of higher tax.

It is important to understand that most food and drinks makers were already reducing the likes of sugar in their products in line with government guidelines before the soft drinks levy was introduced. The majority of London-listed food producers are following Public Health England’s (PHE) sugar reduction targets, including Greggs, which has said its sweet products will have 20% less sugar by the end of 2020 compared to 2015. Others have been trying to stay far ahead of government guidelines, like Hotel Chocolat, which has been prioritising cocoa over sugar in its products for over 15 years. Premier Foods, the firm behind Mr Kipling and Cadbury Desserts, has been focusing on reducing the amount of sugar, salt, fat or calories in its products by around 30%.

With this in mind, some could argue that a new tax on unhealthy food would be harsh. Hancock has said the sugar tax should be expanded if it is clear the industry isn’t doing enough on its own – but that is clearly not the case as most companies appear to be meeting or exceeding the voluntary targets set by PHE.

It is clear Johnson is sceptical on taxing unhealthy food and that any review would, at a minimum, slow the introduction of new taxes and rules on the industry. Whether it would lead to a longer period of freedom is unclear.

Sweeteners over sugar

Sugar is falling out of favour. Many food and drink producers have been publicly supportive of attempts to lower sugar content and the move toward a healthier lifestyle, but not all. Associated British Foods, the UK’s biggest sugar supplier and owner of Primark, said in 2016 that efforts were being made to 'demonise sugar' and claimed a wider approach needed to be taken, one that involved exercise and overall diets – not just sugar.

But what is a loss for one business is a gain for another. Several companies producing sweeteners have embraced the move to reduce sugar as it is proving to be a real boost to their businesses. Tate & Lyle, which moved to sweeteners after selling off its sugar business in 2010, has seen continued growth in sales of its sugar-replacement formula for beverages, confectionery and bakery products. PureCircle has been transforming its business to focus on 'next-generation stevia sweeteners' that it says will lead to higher margins.

Similarly, Treatt, a global supplier of flavour and fragrance ingredients, has a business that helps food and drink producers reduce sugar content. Sales have improved because of the general shift toward lower-calorie beverages but it says this has been particularly true in countries like the UK where a sugar tax has been implemented. Alongside tea, Treatt is deploying the bulk of future investment in its sugar reduction business.

Focus to remain on healthier products regardless of taxation

Although there is division about what direction the UK should take in terms of taxing items that are detrimental to people’s health, both sides agree that the current system doesn’t work. One side argues it is regressive and ineffective, while the other believes they need to be expanded if they are to make a real change.

The debate now is whether the UK expands this idea of taxation or reverses its decision and considers other measures. One of the reasons there is a debate over the effectiveness of the sugar tax is because people look at it from different views. Is it aimed at reducing sugar intake from soft drinks, or overall? Is it aimed at making companies reformulate? Is it aimed to bring in revenue for the government to help fund anti-obesity or other health policies? Or a combination of all three?

There are arguments for and against the sugar tax. Every age group in the UK consumes at least double the amount of sugar than they should, and children consume almost treble. Soft drinks represent the single biggest source of sugar in our diets and health issues such as diabetes that are related to obesity, which has almost doubled since the 1990s, is thought to swallow up huge amount of the NHS budget (up to 10% in Scotland). The tax has reduced the amount of sugar consumed through drinks and encouraged manufacturers to reformulate them for the better at a much faster rate. However, many argue people are consuming the same amount of sugar because they are simply consuming other unhealthy products and that the soft drinks levy does nothing to tackle obesity on its own. Others, including Johnson, believe it is regressive and unfairly targets poorer households, punishing people for doing damage largely to themselves. Some consider it one step closer toward a nanny state that tries to control how people live their lives.

How could it impact food and drink manufacturers?

While division has emerged over the sugar tax, soft drinks companies are likely to continue to reduce sugar in their products and develop healthier options regardless. They have already invested large sums to reformulate their drinks and are taking a global view. If it was suspended or rolled back, then it could slow the pace of investment and allow greater profitability in the meantime.

Food producers face the most uncertainty. The UK’s current policy looks set to introduce stricter advertising rules and new/higher taxes on their products which, depending on how it is introduced, could cause significant disruption. If Johnson becomes prime minister then it is likely that they will be given some breathing space but, like the drinks manufacturers, they are likely to continue developing healthier products even if the government doesn’t encourage them. It will come down to how fast the government wants that change to happen.

How could it impact alcohol and tobacco stocks?

The alcohol and tobacco industries are unlikely to see their heavy taxation reversed, although there could be some movement on duties depending on who the next chancellor is if Johnson becomes prime minister.

Cigarette companies will also have to be wary about how governments will approach vaping, which has been key to revitalising growth for the tobacco industry. For example, British American Tobacco (BAT) has said revenue from its vape, heated tobacco and combustible products are to rise 40% over the full year (FY) – well ahead of its long-term growth target for overall revenue of just 3%-5%. Imperial Brands said revenue from its next-generation products, which includes vape brands like blu, jumped 245% in the first half (H1) compared to just 2.5% overall revenue growth.

At least 20 countries have banned vaping while others have restricted their use or sale. San Francisco recently became the first major US city to ban the sale of vapes. However, a tax on vaping in the UK could be harder than in other countries due to how they are categorised. Although vaping products are freely marketed like cigarettes were decades ago in countries like the US, they are regarded more as a smoking cessation tool in the UK. It will be hard to promote vaping as a healthier alternative to smoking and slap a sin tax on the activity at the same time.

How could it impact bookmakers and gambling stocks?

The gambling industry has been hit hard by the introduction of stricter limits on FOBTs, reducing the maximum stake from £100 to just £2. These FOBTs – gaming machines that are found inside every bookmaker – had become the main revenue driver for the industry but were blamed for fuelling a rise in gambling addiction, including in children. Hancock has previously called the machines a 'social blight'.

This has dealt a severe blow to the industry. Not only is it facing the same troubles as the rest of the high street, such as higher costs and tougher online competition, but its most lucrative business has been practically shutdown. William Hill has already announced it will close 700 stores as a result, putting 4500 jobs at risk, while GVC – the owner of Ladbrokes Coral – could close up to 1000 shops. It is unlikely that the run of bad luck will change in the near future.


Deze informatie is opgesteld door IG Europe GmbH en IG Markets Ltd (beide IG). Evenals de disclaimer hieronder bevat de tekst op deze pagina geen vermelding van onze prijzen, een aanbieding of een verzoek om een transactie in welk financieel instrument dan ook. IG aanvaardt geen verantwoordelijkheid voor het gebruik dat van deze opmerkingen kan worden gemaakt en voor de daaruit voortvloeiende gevolgen. IG geeft geen verklaring of garantie over de nauwkeurigheid of volledigheid van deze informatie. Iedere handeling van een persoon naar aanleiding hiervan is dan ook geheel op eigen risico. Een door IG gepubliceerd onderzoek houdt geen rekening met de specifieke beleggingsdoelstellingen, de financiële situatie en behoeften van een specifiek persoon die deze informatie onder ogen kan krijgen. Het is niet uitgevoerd conform juridische eisen die zodanig zijn opgesteld dat de onafhankelijkheid van onderzoek op het gebied van investeringen wordt bevorderd, en dient daarom als marketingcommunicatie te worden beschouwd. Hoewel wij er niet uitdrukkelijk van weerhouden worden om te handelen op basis van onze aanbevelingen en hiervan te profiteren alvorens ze met onze cliënten te delen, zijn wij hier niet op uit. Bekijk de volledige disclaimer inzake niet-onafhankelijk onderzoek en de driemaandelijkse samenvatting.

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