Sunday, 1 April 2018

Restricted relief

In 2002, Gordon Brown, when he was Chancellor of the Exchequer, introduced a system of Small Brewers’ Relief providing a lower level of duty for the smallest breweries. Basically, only half the standard level of duty is payable on annual production up to 5,000 hectolitres (3,050 barrels). Above this figure, the remission of duty is steadily withdrawn on a sliding scale, until it completely disappears once production exceeds 30,000 hectolitres (18,300 barrels).

The intention was to stimulate the small brewery sector by helping them overcome the economies of scale enjoyed by larger brewers, and thus establish more of a level playing field. On one level, it has undoubtedly succeeded, with the number of breweries in the UK rising to over 1,800, a higher figure than at any time since the 19th century. However, a number of criticisms have been levelled at the scheme.

It needs to be understood that it is very tightly drawn compared with what is permitted. EU rules allow the full duty rebate to be given to breweries producing up to 200,000 hectolitres (122,000 barrels), whereas in the UK it is only available in full up to a miserly 2.5% of that figure, and disappears entirely above 15%. Of course once we have left the EU, this is irrelevant, but we are not even doing anything like what we can already.

The current scheme excludes all but the smallest of the established family brewers, who feel that they end up being squeezed between microbreweries that are able to undercut them, and the international mega-brewers who benefit from economies of scale in distribution and marketing. The thresholds also act as a kind of glass ceiling that provides a disincentive to expansion. Some established brewers such as Hydes have scaled back their own production to take them below the 5,000 hectolitres figure, while several ambitious new breweries have complained that the rapid withdrawal of relief makes increasing production above 5,000 hl a very steep cliff to climb.

While the intention was to put smaller breweries on a firmer financial footing, much of the duty saving seems to end up in giving lower prices to pub operators. Thus SBR has ended up contributing to the widespread perception that cask beer is undervalued, and that there is oversupply and cut-throat price competition in the market. And, given that pub operators don’t tend to reflect lower prices paid in the price charged across the bar to customers, much of the benefit of SBR ends up flowing not to small brewers, but to pubcos.

Plus there is a law of diminishing returns when it comes to competition. Does it really make the drinker’s lot any better if there are 1,800 breweries rather than 900, especially if many of them are tiny and undercapitalised, with a minuscule share of the market? Might not customers be better served if there was a smaller number of stronger, more ambitious companies eager to fight to increase their market share?

It’s hard to avoid the conclusion that Small Brewers’ Relief falls into the same category as the Beer Orders, as something that was well-intentioned, but has ended up with a whole raft of unintended consequences and has failed to achieve the desired improvements in the overall marketplace. A group has been set up called the Small Breweries Reform Coalition to lobby for changes to the system, including both established family brewers and expansion-minded newer ones.

There are several options for reforming the regime. Simplest and cheapest would be to extend the tapered withdrawal of relief to a significantly higher figure, so the effect is more gradual and it becomes less of a disincentive to expansion. Or every brewery producing up to 200,000 hl could be allowed its first 5,000 hl of production at half duty. Or we could even follow the example of Germany and allow all breweries producing up to 200,000 hl the full benefit of the 50% relief, although obviously as UK duty is much higher, the cost to the Treasury would be commensurately greater.

Of course any suggestion of extending duty relief can be countered by the “schools and hospitals” argument, but CAMRA is happy to campaign for a general reduction in beer duty without specifying exactly where the funds are going to come from, and changes to Small Brewers’ Relief are at most only going to affect 10% o the overall beer market. A targeted measure could be a much better use of any money available for duty reduction, and be more in line with CAMRA’s objectives of increasing choice and diversity.

I wouldn’t want to propose depriving any small brewers of the relief they currently enjoy, but with the benefit of hindsight it might well have been better to design the system with a lower rate of relief, but a much gentler or even non-existent taper. And, if you’re only in business to take advantage of a tax relief, you probably shouldn’t be doing it in the first place.

I also must say I have considerable sympathy with the views expressed by Brian Sheridan in this letter which appeared in the April issue of the CAMRA newspaper What’s Brewing.

36 comments:

  1. 'Brewers on Benefits' is a good line. I doubt any of the shed brewers that have popped up around Tyneside and Northumberland of late would exist if they had to pay the full rates of duty, and they're often seen trawling around free houses offering beer that's too cheap (and too often of low quality). There's no benefit to the drinker either as said free houses take the opportunity for a larger margin.

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    1. I would be interested in hearing the opinions of anyone that actually understands the market?!

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    2. Yes, of course electricpics and I know absolutely nothing about the beer market.

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  2. Any industrial process is prone to economies of scale. Can anyone name others where it is deemed virtuous to give a tax advantage to small inefficient operators?

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    1. Farming and food production springs to mind, but there again that isn't in the same category as anything else I feel or shouldn't be.

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    2. Farmimg is directly subsidised. Not sure there are further tax advantages to advantage small scale production?

      A bespoke tailor gets no tax advantage above a high street retailer to maintain the craft of tailoring. The customer is expected to recognise the higher value of the product and pay a higher price.

      The customers of small scale brewing seem to argue it is a craft but expect to pay less than the larger scale products on the market. Except the craft kids. They know craftmanship costs. Those craft brewers claiming their tax break is life or death are acknowledging their output would not justify a price reflecting the alleged craft.

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    3. But, then again, can you name any other industry, except tobacco, that is taxed so punitively?
      And I don't think it is fair to characterise a small business as "inefficient" because it is unable to take advantage of the economies of scale which would accrue if it was larger..

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    4. CAP payments only benefit the larger producers/landowners. Small agricultural producers see little benefit.

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    5. but can you name other industries, where the product they produce is liable for a specific duty tax beyond and in addition to the standard business taxes ?

      there is a motion, motion 8, at this years CAMRA AGM which I believe, as its difficult to quite untangle the intention from just the brief sentence describing it, if passed would be for CAMRA to campaign to increase the relief to higher production values, but to decrease the amount of that relief overall, which seems the most government friendly approach if the tax take change is neutral but the result is it creates less of this glass ceiling/cliff edge on the small/mid size, the government wont countenance giving more money away.

      But its already being decried as CAMRA dinosaurs hate small brewers just by proposing it, so however much of a kernal of an idea that actually SBR should be reworked, and whether the motion as written is the right way I dont know, I dont think much is going to change.

      and I totally agree if you’re only in business to take advantage of a tax relief, you shouldn’t be doing it in the first place, but there are always people who start businesses on that kind of premise, and who then complain when it doesnt work out.

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    6. "can you name any other industry, except tobacco, that is taxed so punitively?"

      Road fuel.

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    7. In terms of the government giving money away. I would estimate in that in real terms the government got more out of 6 large efficient national brewers churning out a volume multiple times that of today than what it now collects from 2000 small brewers. Further, the cost of collecting and inspecting it all was likely far lower.

      So the government have likely "given money away" by subsidising via a tax break an inefficient labour intensive cottage industry over what was a large cost efficient industry.

      As the product of small scale brewing is largely a middle class affectation, you could also argue it to be a middle class tax break.

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  3. The other Mudgie !2 April 2018 at 12:25

    "Brewers on Benefits" sell firkins to Free Houses for £50 then these "beer range varies" pubs knock it up from 70p to £3.50 (x5) a pint or £5 (x7) if it's "craft" keg which is a lot less sensible than Humphrey putting out a similar product in a Proper Pub for £2.
    It's many years since I've seen a list by volume of significant British brewers and I would be interested to know how many, and which, medium sized ones are hampered like Hydes and have scaled down production or not expanded.

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  4. Saying that alll SBR brewers are just interested in a race to the bottom is a grotesque caricature - the likes of Cloudwater and Siren get SBR, but you wouldn't say their business model is based on undercutting. And if you want the absolute cheapest beer, then the big boys are still probably your best bet, the Carling-Doom Bar package from Coors for instance.

    In fact this feels like a discussion from 2016, things have moved on. Although there are some hard-discounters still out there, over the last two years a lot of breweries seem to have come to the conclusion that there just isn't the volume in the discount market to make it work - it's better to make £6/cask than £2/cask on twice the volume. So there's a definite move away from that market by the old hands, they're concentrating more on taps and wholesale, getting beers from distant breweries to supply the ticker market. Funky/Cross Bay are an obvious example, but Blackjack and Beartown are others.

    Personally if I had to tinker, I'd tweak the duty system to encourage the breweries on the edge of SBR to export aggressively, which would benefit the country as a whole. At the moment the system pushes the family brewers into acquiring ever more tied pubs, which personally I don't think is particularly healthy once it goes above 100 pubs or so. We need more export brands like Trooper, but it's something that in general doesn't come naturally or easy to our regional breweries.

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    1. I never said "all", but most of those 1,800 *are* producing fairly undifferentiated cask ales that basically sell as a commodity product, hence the oversupply and cut-throat price competition.

      And complaining about brewers owning 100 tied houses - a mere 0.2% of the market - seems a bit extreme. What about Wetherspoon's with nearly 1,000? And it shouldn't be forgotten that, in the 1970s, it was effectively the family brewers with their tied estates who saved cask beer as a volume product.

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    2. Only 'fairly undifferentiated' if you're not a ticker, mind.

      And given the unspeakably dull nature of a lot of the beers made by much larger brewers, tickability is often the *only* worthwhile differentiation on the bar.

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    3. Ah right, government subsidies for tickers. You know it makes sense!

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    4. Why are some people excited about drinking largely identical beers that you could not distinguish in a blind tasting but with different names and made in different railway arches, all of which are okay, average but none exceptional?

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  5. Dave Bailey (Hardknott) recently published a graph which showed that profitability continued to rise albeit at a slower rate once the 5000 HL limit had been passed. It appears that the taper relief above this level is necessary to encourage expansion and the success of entrants to the industry such as Brewdog,Beavertown and Tiny Rebel shows that the current scheme is not a major disincentive to expansion. Many small brewing businesses are established as lifestyle businesses and will never expand beyond a level at which their founders are comfortable,however,such businesses help the economy in other ways by employing otherspaying business rates and providing additional choice for retailers and the consumer. The overall benefit of such businesses far exceeds the small subsidy available to them by reduced duty and it is wrong to belittle their efforts by expressions such as 'brewers on benefits'

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    1. But clearly a lot of brewers do feel that the taper *is* a major disincentive to expansion, otherwise they wouldn't be complaining about it. This is particularly the case if you don't want to expand that much above 5,000 hl - the marginal benefit may not really seem worthwhile. Given that plenty of other brewers do seem to be making a success of their business, Dave Bailey frankly comes across as someone who is very keen to blame the system rather than looking at himself.

      And, unless they have some kind of heritage or landscape value, I really don't see that any societal value results from subsidising small, inefficient businesses.

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    2. Or indeed "hobby brewers", as I've referred to them in the past.

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    3. The other Mudgie !3 April 2018 at 10:36

      Ah, but if the Government subsidises those whose hobby is brewing beer then surely a case can be made for them subsidising those of us who could claim that we drink beer as a hobby.

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    4. But, 'mudge, is it fair to characterise a small brewer as 'inefficient' because he is unable to take advantage of economies of scale?

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    5. The other Mudgie !3 April 2018 at 16:21

      Not sure which ‘Mudge’ but any disadvantage of not having economies of scale might be countered by the advantages of lower transport costs and not needing a marketing budget, legal team, etc.

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    6. Lower transport costs for smaller brewers are a myth - it costs disproportionately more per pint/container for a brewer with a transit van or two than it does for, say, Coors to efficiently shift beer around via Kuehne + Nagel. And when they need services like marketing and legal, they still have to pay for them.

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    7. The other Mudgie !3 April 2018 at 17:43

      Ah, right so it costs a railway arch brewer more to get its beer a couple of miles to their new micropub than it does Molson Coors to get their Doom Bar distributed all over Britain !

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    8. It probably does on a per pint basis provided the railway arch brewer cost up their own time, van depreciation etc. properly.

      Small breweries hit a big wall of costs once they start spending sufficient time on things like transport, sales and credit control that they have to start accounting for them.

      On the other hand, the actual economies of scale in production aren't that great when compared with many other products - the process is easily scalable.

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    9. The railway arch brewer doesn't just shunt their beer a couple of miles top their new micropub though, do they? To get volume they have to enter the oversaturated market which means flying inefficiently all over the place with a couple of 9's here and there and paying pallet rates to send Ekegs and Ecasks all over the country.

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    10. The other Mudgie !3 April 2018 at 21:00

      So if we have an “oversaturated market” we don’t need yet another “railway arch brewer” who is “flying inefficiently all over the place”.

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    11. Absolutely. You can't buck the market though and I imagine everything will settle down after a few years once the bubble bursts.

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  6. The other Mudgie !3 April 2018 at 21:11

    And of course it’s because there’s no money in “flying inefficiently all over the place with a couple of 9's here and there and paying pallet rates to send Ekegs and Ecasks all over the country” while 1999 others microbrewers are doing precisely the same thing that the railway arch brewer opens a micropub a couple of miles away as an easier way to sell their beer.

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  7. Yeah, that Hardknott Dave seemed a proper moany-arsed twat.

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  8. The other Mudgie !4 April 2018 at 08:57

    Kevin,
    I think that's a tad unfair on Hardnott Dave but I don't have much patience with microbrewers who feel hard done to because there's no profit in taking a firkin fifty miles to a free house who will only pay £70 for it or with CAMRA members who think that us paying £5 a pint for real ale would solve the problem.

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  9. The inefficiency lies in the high unit cost per pint of small scale brewing. Manufacture & distribution. If you can design a button operated self cleaning mash tun, why waste man hours manually shovelling one out? Is this action creating any value ?

    The only point is that the output have higher value. The only point in accepting the inefficiency of fewer tons of grain per acre of land is if the grain is of a higher value. If a farmer switches to organic he may grow fewer tons but more pound notes depending on the relative tonnage & prices.

    Some craft brewers do make high value beer. Those churning out murkey cans for £6. There are customers willing to pay this even if you are not. Do they need a tax break? Really? how so?

    Those making a mediocre cask bitter slightly cheaper may be popular among those that like mediocre cheap bitter, and without the tax break it wouldn't be cheaper, but why should they get a tax break beyond special pleading because that's what you may like?

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  10. I don't dispute that there are now probably too many breweries chasing too few pubs/drinkers thus pushing prices/profit margins down, or that small brewer's relief has a lot to do with that, but large sectors of the economy - pubs, restaurants, hotels, fast food, cleaning, elderly care, farming, fishing, the civil service and local government - now depend heavily on Government handouts in the form of the Working Tax Credits which enable low-paid workers to survive on the wages from their jobs, and without which they would probably have not been able to move from claiming benefit into them. I suspect quite a few small brewers claim them too, at least at the start of their self-employment.

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  11. The other Mudgie !6 April 2018 at 04:21

    Matt,
    Yes, I would probably agree that Small Brewers’ Relief is a Government handout for the brewing industry that’s equivalent to Working Tax Credits putting the unemployed into low-paid jobs, and all very different from when an ordinary working man could support his family from his manual job in a proper old brewery.

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