VAT and duty: Cigarettes and alcohol hit by 'hidden' excise charge

The cigarette and booze industries have been hit by a "hidden" excise charge this year, after the Government failed to cut the duty to make up for higher VAT.

There were no changes to alcohol and tobacco duty rates in yesterday's pre-Budget report, after they had been increased a year ago to offset the temporary reduction in VAT. Industry expects predict that the impact of VAT going back up to 17.5 per cent on 1 January and no respite in the burden on excise duties would add up to 18p on a packet of cigarettes and at least 6p on a pint of beer.

Daniel Lyons, indirect tax partner at Deloitte, said: "Alcohol and tobacco companies didn't beneift from the VAT cut, and will lose out when it returns to 17.5 per cent. It is a hidden charge and clearly bad news for those sectors, which have traditionally been seen as easy targets for taxation in the past," he said.

Christopher Ogden, chief executive of the Tobacco Manufacturers' Association, said the move would inevitably lead to a "significant increase in smuggling and associated criminality". The lack of relief on excise duty and VAT hike would add between 13p and 18p on a packet of cigarettes, he said.

Yet the Government said tobacco duty would bring in £500m more than expected in the 12 months to the end of the tax year in April lifting the takings to £8.8bn. The pre-Budget report said sales may have been boosted by the weakness of sterling against the euro, "which would make cross-border shopping or illicit behaviour less attractive".

Alcohol is expected to bring in £300m more to the Exchequer than expected, at £9bn, up from £6.2bn in the previous tax year. The Government separately said that the tax regime covering cider will be reviewed and proposals will be brought forward for the 2010 budget.

British consumers will have to pay 2.5 per cent more for retail products and services after the Chancellor of the Exchequer confirmed that VAT will rise from 15 per cent to 17.5 per cent from January.

Brigid Simmonds, the chief executive of the British Beer and Pub Association, said the rise in VAT will hit struggling pubs at a time when a record 50 pubs a week are closing and the sector has had to endure an 8 per cent increase in beer duty since last December. She said: "Since the Budget of 2008, our tax bill has gone up by £600m during one of the deepest and longest recessions in living memory," she said, adding: "Beer tax already accounts for around a third of the price of a pint and these increases will put yet more pressures on hard-pressed pubs and consumers."

However, retailers said they were "relieved" that Alistair Darling had not proposed further hikes in VAT and welcomed the Government giving them four weeks, instead of two, to update price labels in stores after 1 January.

Stephen Robertson, the director general of the British Retail Consortium, said: "It's a relief that VAT won't increase beyond 17.5 per cent. Consumer confidence is weakening. Big price increases would fuel inflation, make people less likely to spend and hold back recovery."

He added: "It's come late but this change will give retailers more time to achieve this costly exercise without undermining their key mission – serving customers." Retailers are concerned that the next government may introduce a 20 per cent rate of VAT to help plug the gaping hole in the public finances. The grocers also fear the next administration may put a new 5 per cent VAT rate on food, which is currently exempt.