Whisky industry must swallow £30m tax hit

The Scotch whisky industry could face an extra £30m in tax charges after
losing a court battle with the Inland Revenue.

The issue stems from a 2002 Revenue ruling stating that companies should pay
tax on depreciated stock every year, rather than when stock is sold.

Companies that sell and replace their stock quickly would not be affected.
However, whisky distillers must keep stocks for a minimum of three years by law
before they can be sold. If implemented, the ruling could impose a one-off tax
hit on an industry that the Scotch Whisky Association has estimated at £25m-£30m
over the next five to 10 years.

William Grant & Sons, whose products include Glenfiddich and Balvenie
single malts, could be the distillery that is hit hardest, as it originally won
a test case on the issue in 2003 in concert with the confectionery giant Mars,
according to Scottish newspaper The Herald.

The Revenue changed its view on tax on depreciation following a ruling in
Hong Kong. However, the industry argued that the case would not have arisen in
the UK because of ‘fundamental differences’ between tax law and accounting
policies in the two jurisdictions. UK financial reporting rules state that stock
is carried forward, not sold, from one accounting period to the next.

Handing down a 60-page report yesterday, Lords Penrose, Osborne and Reed were
split two to one in favour of the Revenue’s position.

A SWA spokesman called the ruling ‘disappointing’ given the ‘negative impact
it could have on distillers’ and the earlier ruling of the Special Tax
Commissioners in favour of the industry.

He added it would be ‘closely studying’ the court’s split decision and the
grounds for appeal to the House of Lords.