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 Above this figure, the remission of duty is steadily withdrawn on a sliding scale, until it completely disappears once production exceeds 30,000 hectolitres (18,300 barrels).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.