Friday, 29 October 2021

Pin money

In his budget earlier this week, Chancellor Rishi Sunak announced the most comprehensive review of alcohol duties for many years, and indeed probably the first root-and-branch overhaul of the system since duties were first imposed. One feature that immediately caught the headlines was the introduction of a new lower rate of duty for draught beer, something that CAMRA and the pub industry had been lobbying for. It’s a very straightforward and targeted means of directing financial support to the on-trade.

However, as I wrote earlier this year, it’s important not to get carried away over this. It’s only a cut of 5%, equating to about 3p per pint, and so the likelihood is that it will be used to support the margins of hard-pressed pubs rather than being passed on to the drinker. But something is better than nothing , and we shouldn’t look a gift horse in the mouth. I’ve also always been somewhat sceptical of attempts to favour one sector over another via the tax system.

There was a major fly in the ointment, though, when it became evident that the benefit would only apply to containers of 40 litres or more. This excludes a huge swathe of draught products, overwhelmingly produced by smaller brewers. More and more cask ales are now being made available in 4½-gallon pins (just over 20 litres) to maintain quality in the face of declining sales. Ed Wray reports here in his tour of Palmer’s brewery (pictured above) how they are using more and more pins for both their own pubs and the free trade. Added to this, the normal size for craft kegs is 30 litres, as opposed to 50 or 100 for mainstream products.

Given this, it seemed distinctly hypocritical for Sunak and Johnson to be pictured promoting this policy pouring beers that wouldn’t benefit from it.

The charitable assumption is that this is an oversight rather than a deliberate policy, and it seems counter-productive to exclude most smaller brewers from the benefit. Plus the tax loss from reducing the threshold to 20 litres would be minimal. CAMRA and SIBA have urged their members to lobby the government to make this change, and it would be hoped they are pushing at an open door. There’s a template you can use to write to your MP here. This morning, there have been reports that the government may be heeding this pressure.

This, of course, is only a small part of a radical reform of the entire alcohol duty system. The current structure has grown up piecemeal over the years and is riddled with anomalies and inconsistencies, in particular the fact that some categories are taxed by alcohol content, whereas others are simply taxed by volume. It is, however, very rare nowadays to see the government take a clean-sheet approach to anything as opposed to just tinkering at the edges. As it states on Page 88 of the official Budget document:

The government will radically simplify the duty system, reducing the number of main rates from 15 to 6, and taxing all products in proportion to their alcohol content, enabling businesses to bring new products to market with fewer tax complications. All tax categories (e.g. beer, wine) will move to a standardised set of bands, with rates for products between 1.2-3.4% alcohol by volume (ABV), 3.5-8.4% ABV, 8.5-22% ABV, and above 22% ABV. Above 8.5% ABV, all products across all categories will pay the same rate of duty if they have the same proportion of alcohol content.
There will also be a small producers’ relief scheme for makers of products under 8.5% ABV, covering all categories, not just beer. The whole package would not have been possible had we still been members of the European Union.

It’s sometimes argued that it would be fairer if there was a single rate of duty per unit of alcohol that applied to all categories of drinks. However, the problem with this is that stronger drinks, especially spirits, are cheaper to make and distribute per unit than weaker ones such as beer, and thus the system would effectively discriminate in favour of them. As I wrote a few years ago:

A fair system would be one that, broadly speaking, ensured a relatively level unit price to the drinker at the point of sale for mainstream products. And, while there are perils in the excessive consumption of all kinds of alcoholic drinks, you can do yourself serious harm more swiftly and easily drinking spirits than beer or wine. A tax regime loaded in favour of spirits would not be a good idea. It could also be argued that brewing and winemaking provide much more employment and general economic stimulation than distilling.

Yes, there is a strong case for making alcohol duties simpler and more consistent. But there are good public policy reasons for stronger drinks bearing a heavier rate of duty per unit. Remember Hogarth’s comparison of Gin Lane and Beer Street?

It is interesting that the threshold for the lowest rate of beer duty is being increased from 2.8% ABV to 3.4%. The lower rate was introduced a few years ago, but has never gained much traction. It is difficult to make beers with much flavour and character at such a low strength and, as most beer in pubs is drunk in rounds, the attractions of saving a few pence per pint by choosing one product over another are limited. The only draught beers I regularly see in this category are Sam Smith’s light and dark milds and Alpine lager.

However, there is much more scope for making tasty beers at 3.4%, and indeed many existing milds and light bitters fall into this bracket. But there might be a temptation to lower the strength of existing products to take them below the cut-off. It would surely be a no-brainer for Hydes to reduce 1863 and Dark Ruby from 3.5% to 3.4% and, if the drinkers of John Smith’s Smooth accepted a cut from 3.8% to 3.6%, then they might not be too bothered about losing another couple of points. It will be interesting to see how this plays out, although I wouldn’t really expect a stampede of new products to take advantage of it.

The various inconsistencies of the current duty system give plenty of opportunity to sow division between the different sections of the alcohol industry. Someone else always seems to be getting a better deal than the producers of your favourite product. So we had the wine trade complaining that beer was taxed more lightly per unit, while in turn the brewers felt that cider got off very lightly. Sometimes that has been exploited by the government to favour one sector at the expense of others, which in recent years has actually tended to benefit beer. This week, Labour politicians have been quick to accuse the government of cutting the duty on champagne while screwing the poor, conveniently overlooking that prosecco, which comes under the same sparkling wine category, is now a staple of Wetherspoon’s. Placing all products under the same duty regime would eliminate all this pointless infighting and hopefully allow the alcohol industry to speak with one voice on taxation.

Inevitably any attempt to rationalise taxation will produce losers as well as winners, and the losers will tend to be more vocal. This is why governments have shied away from any wholesale reform of council tax. Once the dust had settled, it became clear that these plans would lead to duty increases for most cider and table wine. In 2010, the then Labour government attempt to raise cider duty by 10%, which provoked vocal opposition in the West Country, and ended up being abandoned by the incoming Coalition.

And the chattering classes have now started to realise what the effect on wine is likely to be. Overall, in value terms, wine now overshadows beer in the alcohol market and is very much the drink of choice at North London dinner parties. So it’s likely that these changes will not go through as smoothly as the Treasury might have hoped, and there must be a distinct possibility that opposition from various quarters will result in them running into the sand.

Edit: Here are the full details of the government proposals. In fact, they do include a lower rate of duty for cider as compared to beer below 8.5% ABV, as it was felt that equalising the duty would deal a severe blow to a historic industry that is already in decline. This was not made clear in their initial top-level statement. However, taxing cider by alcohol content rather than volume will result in an increase in duty for ciders above 4.8% ABV, which includes the vast majority of premium ciders sold in the off-trade.

13 comments:

  1. I think the 40L tax threshold is due to avoiding the tax benefit leaking out to the home market.

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    1. I can't see that there would be much leakage - those minikegs that you see being sold are only 5 litres. And it's only a 5% reduction, so the effect would be trivial.

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    2. You're right but that was how the Treasury paper on the consultation discussion justified it.

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  2. I was told by the manager of one of my local pubs that a nine gallon barrel (72 pints=41 litres) is treated as holding 39.5 litres for the purpose of assessing duty. I haven't seen this reported anywhere else, but if true it would mean not only that the pins that you mention (36 pints) and the 30 litre kegs used by smaller brewers, but also the most common firkin will be excluded. Not many pubs use the next size up; the Neepsend Brewery pubs in Sheffield, for example, have 18 gallon kilderkins (144 pints=82 litres) of their biggest selling real ale but firkins for the rest, and I think Sam Smiths OBB is also delivered in the larger barrel.

    Perhaps clarification of this point will emerge. In the meantime, this looks less like a triumph for Camra than for the lobbyists employed by the bigger brewers.

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    1. A firkin is 72 pints for duty unless the brewery is arsed to measure the dregs and keep tedious records on measurements.

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    2. The 39.5 litre arrangement for duty purposes has been in place for years and there’s no need to keep records. All that happens is that the product is sold as 39.5L volume so duty isn’t paid on the excess to account for the undrinkable contents.

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  3. HMRC excice notice 226 IIRC has ALL the details how it was, a good bedtime read, it has everything a brewery needs to know to navigate, no guesswork needed. Now it's changing obviously.

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  4. its worth stating despite the Chancellors flourish in his speech about giving people 3p off beer,this 5% duty cut on draught sales of beer,cider & wine in containers of at least 40litres,is purely a proposal at this stage,which is now in an official consultation phase with industry till the end of January 2022.Do check out the official Alcohol Duty Reform consultation document on the governments website as it includes this 5% on trade cut & new proposed rates & even small brewers relief scheme,& gives alot of background info on why they are proposing these changes.

    We might lament the fact the policy proposal on the 5% on trade cut,came as the result of the previous consultation on alcohol duty reform which was announced in the 2020 budget which only received 106 written responses,those who responded are listed in the consultation document for info,but I guess most people in the industry had other things to worry about at the time,but they now all have a chance to offer their feedback though most still seem blissfully unaware of this aspect,though at least the likes of Roger Protz have started to push that out to wider audiences,so maybe some will start to take more notice.

    But unfortunately most of the beer industry,online version anyway, which invariably means the craft segment,has chosen to go into apoplexy & outrage & is spinning off half-cocked into demanding all kinds of instant changes & claiming its anti-competitive,discriminatory of the government to do this,whilst always claiming its big brewery business setting these limits. Which seems odd as I know several “micro” brewers who deal exclusively in 40litre sized casks,& actually the 30litre thing isnt really a sizing issue for any scale of brewery,its back to that old thorny question of choice,& number of beers on sale,the feel the width of beers you have available,not the quality argument,that befuggles many CAMRA debate about a pubs quality.

    If the parts of the beer industry who feel disadvantaged engaged with the consultation process properly & maybe got it above 106 responses this time,theres every chance the scheme could be revised to 30 litres at least quite easily anyway, the purpose of the change was to encourage on trade sales,its really nothing to do with volume of the container except to discourage it being diverted to the off trade too easily. Though I note the ABV limit is 8.4% abv,so lots of the craft brewers might be worrying less about the size of their key kegs & lowering the abv of the double IPA'd beers to qualify instead

    One thing I did read in the document that I do wholly agree with & sometimes feel this point is lost when people just demand tax breaks,the tax duty system should never be used as a tool to subsidise or offset production costs,in other words if you cant make your beer,cider,wine,spirits for some profit,without relying on the tax system to subsidise you doing it,you probably need to rethink what you are doing.

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    1. Some good points there, Stono.

      The rate of duty above 8.4% will be 35% higher, as opposed to 25% over 7.5% under the current system of HSBD, so not necessarily that dramatic an increase. I can't see that craft brewers moaning about higher duty on QIPAs will attract much sympathy, tbh. But it would seem daft for Robinsons's not to cut the strength of Old Tom from 8.5% to 8.4%.

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  5. Marchington Mick30 October 2021 at 12:08

    Best take on the situation seen yet Stono.

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    1. I agree, especially with Stono's last paragraph.

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  6. Couldn't agree more with Stono's last paragraph. I can see no reason why the tax system should subsidise someone's hobby.

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    1. And small brewers get a 50% discount on duty, which seems pretty generous to me.

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