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”) centers 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 minimize 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 an 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 a 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.

Photo of Richard Welfare Richard Welfare

Richard Welfare focuses on regulatory compliance work within the Commercial Law practice area.  Richard works with manufacturing companies to ensure that they comply with legislation and regulatory frameworks, including requirements governing product composition, labeling, packaging and claims, rules relating to advertising and marketing campaigns and other key considerations when launching a product in the EU/UK. Richard has helped clients resolve issues with UK enforcement authorities, including Trading Standards, the ASA (Advertising), MHRA (Medical Devices) and the FSA (Food).

Richard has worked with in-house counsel and corporate affairs teams to design and implement public affairs programs and targeted communication strategies, and has worked with companies to design safety programs, following safety or product quality crises.

Richard advises clients on the contracting arrangements, providing commercial support to in-house teams. He works on a variety of contracts including those for supply, co-manufacturing, distribution, logistics, warehousing, agency and general trading terms. Richard also represents companies in the appointment of celebrities for advertising or endorsement campaigns and major sponsorship opportunities.

Photo of Jane Summerfield Jane Summerfield

Jane focuses on regulatory compliance and commercial agreements in the life sciences and food sectors. Jane advises on legal and regulatory requirements that apply during the product lifecycle, including clinical trial requirements, early access schemes, marketing authorisations, manufacturing and distribution licences, CE marking, product labelling, product composition, advertising and marketing activities, and pricing and reimbursement. Jane also advises on a wide range of commercial contractual arrangements, including consultancy, sponsorship, co-promotion, collaboration, manufacturing, distribution, services, quality and pharmacovigilance agreements, as well as helping clients to resolve issues with UK enforcement authorities and regulatory bodies, such as the Medicines and Healthcare products Regulatory Agency (MHRA), Prescription Medicines Code of Practice Authority (PMCPA), Advertising Standards Authority (ASA), Food Standards Agency (FSA) and Trading Standards.
Jane combines commercial acumen with deep regulatory knowledge. She understands the business pressures faced by clients, having provided in-house regulatory compliance and commercial support to a major pharmaceutical client and a multinational food company. Jane provides “clear responses with business impact” Chambers UK.

Photo of Lisette Lach-Reichle Lisette Lach-Reichle

Lisette is the go to person for supply chain restructurings. She makes things happen!

Her background in antidumping investigations and business and diplomacy studies enable her to communicate with senior executives of large multinationals with complex supply chain and transfer pricing arrangements to help them reshape the way they do business more efficiently.

Lisette joined Hogan Lovells Solutions Limited in September 2016. She worked previously at two of the Big Four and more recently at the restructuring and consulting firm, Alvarez & Marsal in London. Prior to pursing her MBA, Lisette also spent a number of years at the US department of Commerce’s Anti dumping Investigations Division.

Lisette received her undergraduate degree from Georgetown University’s School of Foreign Service in the US and an MBA from Henley Management College in the UK.

Photo of Adela Komorowska Adela Komorowska

Adela is an associate in our London Tax Group. Her work to date has focused mostly on real estate funds and included advising M&G Real Estate in relation to setting up a property investment partnership and associated post-completion matters. Adela also provides advice on other aspects of business taxation and has experience in corporate and finance transactions.