Is VAT Chargeable on Alcohol?

Alcohol Duty vs VAT: What’s the Difference?

To truly grasp how is alcohol taxed in the UK, it’s crucial to differentiate between the two primary taxes that contribute to the final price: Value Added Tax (VAT) and Alcohol Duty (formerly known as Excise Duty).

1. Value Added Tax (VAT) – The Standard Rate

VAT on alcohol is an indirect tax applied to most goods and services in the UK. The standard rate of 20% is applied to the final selling price of the alcohol, which is the product price plus the amount of Alcohol Duty.

The Standard Rate: The current UK standard VAT rate is 20% (as confirmed by HMRC).
The Calculation: For alcohol, VAT is calculated on the duty-inclusive price. This means the total cost to the business (including the Alcohol Duty they have already paid) is the base upon which the 20% VAT is then levied to determine the final consumer price. This compounding effect is a key reason for the high price of alcohol in the UK. (HMRC VAT Notice 700)
Business Obligation: Any VAT-registered business supplying alcoholic drinks must charge this 20% VAT on alcohol to the customer and then account for and remit this ‘Output VAT’ to HMRC. Conversely, they can reclaim the ‘Input VAT’ paid on their business purchases (subject to specific HMRC rules, particularly regarding entertainment).

2. Alcohol Duty – Tax by Strength and Volume

Alcohol Duty is the other significant tax, charged per litre of pure alcohol contained within the product. This duty is payable at the point of production or importation.

The structure of this duty was reformed on 1 August 2023, (Alcohol Duty Reform Guidance), with the guiding principle being that the higher the alcohol content (Alcohol by Volume or ABV), the higher the duty rate. This directly answers the question, How is alcohol taxed in the UK? – it’s taxed primarily by its strength.

The duty is calculated before the 20% VAT on alcohol is added.

Strength-Based Taxation: The duty rates vary significantly based on the ABV and product type (beer, wine, spirits, etc.), encouraging the consumption of lower-strength products.
Draught Relief: A specific relief exists to support the UK hospitality sector, providing a lower rate of duty for qualifying draught alcoholic products (below 8.5% ABV) when sold in venues like pubs. This is a targeted measure to help the ‘on-trade’ sector.
Wine Easement: Until 31 January 2025 (at the time of writing), there is an easement for still wine between 11.5% and 14.5% ABV, where duty is calculated as if the strength is 12.5% ABV, simplifying the transitional period after the duty reform.

Expert Insight (Accountant’s View): For a hospitality business, the Alcohol Duty is a cost included in the purchase price of the stock, while the VAT on alcohol they charge the customer is a tax collected on behalf of HMRC. Both significantly inflate the final shelf price, but only the VAT is reclaimable on the business’s own purchases of stock as input tax (assuming the supplier is VAT registered).

Although both VAT and alcohol duty increase the cost of alcoholic beverages, they function differently:

Tax Type	What It’s Based On	Who Pays It	Rate Type
VAT	Retail sale price	End consumer (via seller)	20% standard rate
Alcohol Duty	Volume and alcohol strength	Manufacturer/importer	Variable rates

VAT is a tax on the value added at each stage of production and distribution.
Alcohol duty is an excise tax, calculated per litre of pure alcohol.

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Read Our more Detailed Guides on VAT:

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What is VAT Exempt in the UK: All VAT Exempt Items
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Is VAT Chargeable on Alcohol in the UK?
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VAT on Entertainment Expenses: Guide for UK Businesses

The Crucial Question: What Drinks are VAT Exempt?

The term “VAT exempt” is often confused with “zero-rated.”

In the UK, the majority of food and drink is categorised for VAT purposes. Alcoholic drinks are never zero-rated or exempt.

For other beverages, the VAT treatment depends heavily on their category and how they are consumed:

VAT Rate	Category of Drink	VAT on Alcohol Status
Standard Rate (20%)	All Alcoholic Drinks	Always applies
Standard Rate (20%)	Cold soft drinks (carbonated, mineral water, most juices, cordials, smoothies)	Standard Rated (They are exceptions to zero-rating rules for food)
Standard Rate (20%)	Hot drinks (tea, coffee, hot chocolate) ready for immediate consumption	Standard Rated (Considered catering)
Zero Rate (0%)	Milk, milk drinks (e.g., milkshakes), and plain, unflavoured rice/soya milk, when sold to take away.	Not Applicable (Zero-rated for basic consumption)
Zero Rate (0%)	Tea and coffee beans/leaves/grounds (i.e., ingredients)	Not Applicable (Zero-rated as basic food)
Exempt	Non-Applicable (There are very few true VAT exemptions for goods, mostly covering financial services, property, and certain health/education services, not consumables).	Not Applicable

Therefore, to be precise, regarding the core focus of this article: no alcoholic drinks are VAT exempt or zero-rated for VAT. The VAT treatment of other non-alcoholic drinks is based on the general rules for food and beverages. The standard 20% VAT on alcohol is immutable. (HMRC Food VAT Rules)

How Is VAT Calculated on Alcohol?

The VAT calculation for alcohol is straightforward if you know the retail price:

Formula:

VAT = (Price ÷ 100) × VAT Rate

Example:
If a bottle of wine is priced at £12 and is subject to the standard 20% VAT rate:

VAT = (12 ÷ 100) × 20 = £2.40

So, the price excluding VAT is £9.60, and the total amount paid includes £2.40 VAT.

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The Impact of VAT on Alcohol on Businesses and Consumers

The high level of taxation, combining Alcohol Duty and the standard 20% VAT on alcohol, has a profound impact across the supply chain:

For the Consumer:

The end-price paid by the consumer is substantially increased by this dual-taxation model. For instance, a bottle of spirits sees a significant portion of its price dedicated to both the duty (which is high due to the high ABV) and the subsequent VAT on that higher, duty-inclusive price. Every time a consumer purchases an alcoholic drink, they are contributing to the public exchequer through the payment of VAT on alcohol.

For UK Businesses (Pubs, Retailers, Producers):

Compliance: Businesses must be meticulously accurate in applying the correct 20% VAT on alcohol to their sales and accounting for the correct amount of Alcohol Duty on their produced or imported stock. HMRC requires detailed records to be kept for all sales and purchases.
Pricing: The high duty and VAT rates limit pricing flexibility. This is why initiatives like Draught Relief are so important, as they offer a small reduction in duty for ‘on-trade’ sales, helping pubs and bars manage their costs and remain competitive against ‘off-trade’ (supermarkets and off-licences).
VAT Recovery: A key administrative task is ensuring correct VAT recovery. A VAT-registered pub or shop can reclaim the Input VAT paid on their stock purchases (e.g., barrels of beer, cases of wine). However, the rules around reclaiming VAT on alcohol for business entertainment are famously strict—generally, VAT on client entertaining is not recoverable, but VAT on staff welfare (e.g., an annual Christmas party) is often recoverable, subject to specific HMRC thresholds and conditions.

Advanced Considerations: Reclaiming VAT on Alcohol for Businesses

As an expert Tax Advisor, I must clarify the specific circumstances where a business can reclaim the input VAT on alcohol (the VAT they pay when buying the alcohol from their supplier).

Stock for Resale: If the alcohol is purchased by a VAT-registered business (e.g., a pub, restaurant, or off-licence) with the intention of selling it to customers, the input VAT on alcohol is generally fully recoverable. This is the most common scenario.
Staff Consumption: VAT on staff catering, including the provision of a reasonable amount of alcohol at a staff event (like a staff party), is generally recoverable as it is an expense related to the business. However, the definition of ‘reasonable’ is subjective and must be justifiable to HMRC.
Business Entertainment: This is the riskiest area. VAT on alcohol used for entertaining clients or non-employees is not recoverable. This is a specific restriction designed to prevent businesses from subsidising personal or social expenditure. If a business buys a round of drinks for a client, the 20% VAT on that alcohol is a non-recoverable cost to the business.

Compliance Note (HMRC Focus): HMRC often scrutinises VAT claims related to VAT on alcohol to ensure it hasn’t been used for non-recoverable business entertainment. Maintaining clear, verifiable records that separate client entertainment from staff welfare is paramount.

Summary of Tax Components

To reinforce the core understanding of how is alcohol taxed in the UK, here is a simple breakdown of the components that make up the final price a consumer pays for their alcoholic beverage:

Consumer Price = Product Cost + Alcohol Duty + 20% VAT on Alcohol

The $20%$ VAT on alcohol is applied to the sum of the product cost and the Alcohol Duty. This is a fundamental concept that answers both the VAT on alcohol and How is alcohol taxed in the UK? questions simultaneously.

You can get detailed information about how VAT works from HMRC’s VAT guide.

What About Non-Alcoholic and Low-Alcohol Drinks?

Drinks with less than 1.2% ABV (Alcohol by Volume) are generally not classified as alcoholic for VAT purposes. Many of these products are subject to the reduced VAT rate of 5% or, in some cases, are zero-rated.

Examples include:

Non-alcoholic beers and ciders (e.g. 0.5% ABV lagers)
Low-alcohol wines (e.g., under 1.2% ABV)
Alcohol-free spirits and mocktails

These products have gained popularity among health-conscious consumers and are often more affordable due to the lower tax rate.

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Are Tobacco and Vaping Products Also Subject to VAT?

Yes. Both tobacco products and vapes (e-cigarettes and vaping liquids) are subject to VAT at the standard rate of 20%.

Tobacco (cigarettes, cigars, rolling tobacco): 20% VAT + tobacco duty + NHS levy
Vapes and e-liquids: 20% VAT (no current excise duty, though under review)

It’s essential for retailers to properly apply VAT and, where applicable, account for other levies when selling these items.

VAT Compliance for Alcohol Sellers

If your business sells alcoholic beverages, you must:

Register for VAT with HMRC if your taxable turnover exceeds the threshold.
Charge VAT on sales of alcoholic beverages at the correct rate.
Keep VAT records and submit VAT returns.
Pay HMRC the VAT you’ve collected.

Failing to do so can result in penalties, interest, and reputational damage. Even small businesses and online sellers should ensure compliance.

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Summary: Is VAT Chargeable on Alcohol?

To summarise:

Yes, VAT is chargeable on most alcoholic beverages at the standard rate of 20%.
Alcohol is also subject to the alcohol duty, calculated separately.
Low-alcohol and non-alcoholic drinks may qualify for reduced or zero rates.
Tobacco and vape products are also taxed at 20% VAT.
Businesses must ensure they apply VAT correctly and comply with HMRC regulations.

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Final Thoughts

The UK taxation regime for alcoholic products is unequivocally clear: VAT on alcohol is mandatory at the standard rate of $20%$ . Furthermore, this tax is layered atop the already substantial charge of Alcohol Duty, which is calculated based on the drink’s alcoholic strength.

Businesses must manage both these taxes diligently, with particular attention paid to the strict rules governing the recovery of input VAT on alcohol, especially concerning the non-recoverable nature of VAT on client entertainment.

For those asking What drinks are VAT exempt?, the answer is that all alcoholic drinks are subject to the standard 20% rate, and other non-alcoholic drinks are either zero-rated (like milk) or standard-rated (like soft drinks) depending on specific, complex HMRC categories.

Adherence to these tax laws, as outlined by HMRC, is essential for every UK entity involved in the production, supply, or sale of alcoholic beverages.

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