Ask the Collective

Should duty be included or excluded from gross profit margin calculations in drinks business financial reporting?

The industry standard is to report gross profit margins on a Net Sales Value (NSV) basis, which excludes duty, VAT, and trade promotions from Gross Sales Value (GSV). This is how major drinks companies like Diageo structure their reporting. Duty should be treated as a separate line item rather than lumped into general COGS, allowing clearer visibility of actual margins and easier comparison between UK and export sales (where duty isn't paid). One member implemented a separate nominal code for duty in their accounting system specifically to isolate it from COGS, enabling brand and customer-level margin analysis. While financial accounts must include duty in turnover and COGS per accounting standards, management accounts can separate it out for analysis purposes. Members note this approach prevents duty rate changes artificially distorting apparent margins and gives a more accurate representation of operational performance. When raising capital, presenting margins on a gross sales (duty-inclusive) basis will damage credibility with industry-familiar investors. The practical challenge is that with multiple SKUs carrying different duty rates, systems need proper setup to automatically extract duty from GSV each month—members recommend examining Diageo's published chart of accounts as a template for structuring your own reporting framework.