Matt Curtis looks at the proposed tax reform that’s driving a wedge into the craft beer industry
Tuesday 29 September 2020
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In 2002 there were less than 800 breweries in the United Kingdom. Now, in 2020, there are around 2250. Data compiled by financial firm UHY Hacker Young and published in The Drinks Business suggests the number of breweries rose from 1352 in 2013, to a peak of 2274 in 2019.
This rapid growth in both the economy of, and general interest in the beer sector can be attributed to a handful of factors. The North American craft brewing boom that began at the turn of the millennium triggered a huge wave of excitement in beer. This inspired the founders of breweries like BrewDog and Beavertown, which in turn grew to become huge businesses themselves, with BrewDog growing to become the largest independently-owned brewery in the UK as of 2019, and Beavertown selling a 49% stake to Heineken for £40 million in 2018.
Another very important catalyst was the creation of Progressive Beer Duty, or PBD – also referred to as Small Brewers Relief (SBR). This legislation was introduced in 2002 by a then Labour government, led by Tony Blair, with the chancellor of the exchequer (and thus in charge of financial policy) of the time being one Gordon Brown. The chancellor – after much lobbying from organisations such as trade body the Society for Independent Brewers (SIBA) and consumer group the Campaign for Real Ale (CAMRA) – introduced the scheme to help stimulate growth in the brewing sector. The idea was to level the economies of scale (ie, larger breweries can make beer for less money). With a fair playing field this should, in theory, stimulate growth in the sector. And while this is true in some respects, it is not in others, as I’ll try to explain.
Under the current SBR scheme, breweries producing less than 5000 hectolitres (hL) – about 880,000 pints – per year receive a 50% discount on the duty paid on all beer sold. Meanwhile, breweries between 5000hL and 60,000hL (roughly 10.6 million pints) pay duty on a sliding scale, the amount of tax increasing as a brewery sells more beer, until it pays the full amount of duty at 60,000hL and above.
For perspective, around 1760 of the UK’s 2250 breweries make less than 5000hL of beer each year, and about 90% of those actually make less than 1000hL – or 176,000 pints – a year. The majority of the UK’s breweries are small and independent. Conversely, the majority of beer in the UK – 71.9% of it – is sold by just five breweries and their subsidiaries: AB-InBev, Heineken, Carlsberg, Asahi and Molson Coors.
This is where things get really interesting.
According to data firm Statista, in 2003 the amount of beer being produced in the UK peaked at a massive 58,016,000hL. In 2019 that figure had plummeted to 39,582,000hL. Since the introduction of PBD, while almost 1500 new breweries were established in the UK, the amount of beer being produced overall has decreased by a massive 31.8%. Blimey.
People are drinking less, but they are drinking better
There are many, nuanced reasons for this. People are drinking less, but they are drinking better. Binge drinking culture is not what it once was. Annual events like Stoptober and Dryanuary cut into alcohol sales. But, perhaps most importantly, a lot of pubs have closed in that time – more than 25%, or over 13,000 – since 2001, according to a report in The Guardian from 2018. Add to this that since 2018 more beer has been consumed “off premise” (ie at home) than it has in pubs, in terms of selling beer en masse, you have a recipe for disaster.
While it could be argued that the introduction of SBR in 2002 stimulated the brewing economy and gave us the vibrant craft beer scene we enjoy today, it did not have the same effect on breweries at the larger scale of the market. And this does not just include the big five mentioned above, but all breweries paying full duty – which includes almost every existing regional brewery that much of the UK’s great brewing tradition was built on. Institutions like Harvey’s, Timothy Taylor’s, and J.W. Lees.
SBR is no longer fit for purpose, that much should be obvious. It’s crucial to recognise that in the last 20 years, beer in the UK has changed, forever. That includes its market as much as it does the beer itself. Taxation needs to be addressed to build a fair market that works for the entire industry, not just a select few. The problem is that there are many organisations working within beer, and a lot of them have very different ideas of how they think this should look. Lines have been drawn in the sand, and while all around us the pandemic has brought the world to a halt, the brewing industry stands on the cusp of tearing itself apart.
Times they are a-changin’
You may be asking why this particular set of industry politics is relevant to you, the drinker, when all you really want to do is enjoy the tasty beer in your glass. I get it, I really do. But beer is political, just like everything else. And the truth is a change in duty could change the way the industry looks, for better or worse. It could mean the closure of your favourite small brewery, or an increase in the cost of your pint.
In July 2020 – amid a dramatic financial downturn caused by the pandemic – the current government released a short statement that said the taper at which the increase in duty begins would be reduced from 5000hL to 2100hL. This means that the 150-or-so breweries in this bracket would have to pay more tax.
A simplified example of how this could affect a brewery producing 5000hL annually would be to imagine they made 880,000 pints of beer a year at 4.3% ABV (as beer tax is paid in the UK according to a beer’s strength). If that brewery’s duty relief was reduced from 50% to 42% it would need to pay an additional £33,000 in tax a year. If that brewery had, for example, a gross annual revenue of £450,000 it would lose an extra 8% of its profits. This is after buying ingredients, equipment, packing materials, paying wages (a brewery of this size would have about 10 full-time employees) VAT and all other associated costs. While it might not sound like a great deal on paper, it’s enough to devastate a business. To survive, it would need to increase the cost of its beer – but if larger breweries with economies of scale on their side didn’t have to increase their prices also, then it could force additional pressure on the smaller brewery.
One of the biggest issues with SBR as it stands is what is known by many in the industry as the “cliff edge.” When a brewery surpasses 5000hL in volume it doesn’t see a steady increase in duty, but a rapid one, until around 20,000hL when the curve smooths dramatically. This is a key point in the argument that different parties are making in terms of duty reform.
Right now there are essentially three schools of thought on duty, and two primary groups campaigning for reform. First there are those who do not believe that the scheme needs changing, mostly small brewers, happy with their lot and with no desire to expand. Then there is SIBA, which currently counts 784 independently-owned breweries as members. SIBA wants to see duty reform changed to smooth the cliff edge, but is fighting to ensure its members under 5000hL per year do not lose the duty reduction they currently receive.
“We just don’t know how it will affect businesses at the moment,” SIBAs chief executive James Calder tells me. “But it could cause some breweries to go bust, some might shrink and we might see job losses, and a reduction in consumer choice.”
Steve Dunkley at Beer Nouveau in Manchester, which produces under 1000hL annually, is one of many breweries vocally against the proposed reform. “For drinkers it [means] less choice,” he tells me. “For smaller breweries, it’s a much tougher market leading to more going out of business.”
For drinkers it means less choice... For smaller breweries, it’s a tougher market
On the opposing side of the argument is the somewhat shadowy Small Brewers Duty Reform Coalition, featuring approximately 40-50 members of the UKs medium to large sized breweries including Harvey’s, J.W. Lees and Timothy Taylor’s, and chaired by the directors of Hogs Back and Theakston’s breweries. The SBDRC also wants to see the “cliff edge” smoothed and the reduction of duty threshold to be scaled up from 60,000hL to 200,000hL (that’s a massive 35.2 million pints). However, it wants to “balance the books” as it were, by increasing the duty paid by the smallest breweries. Its original manifesto called for an increase in duty for breweries as small as 1000hL, but it has chalked up the present decision to increase it for breweries of 2100hL and larger as a win.
“This is a very important step in saving the British pint as we know it,” an unnamed spokesperson for the SBDRC said in a press release, after the government announced the proposed changes to SBR in July 2020. “The reform will preserve a significant level of support for the sector during these challenging times but will also encourage sustainable growth for all small brewers, micro and mid-sized alike.”
This is a very important step in saving the British pint as we know it
Personally, I do believe that SBR needs reforming to smooth the cliff edge, but none of this should come at the detriment of the UKs smallest breweries when 71.9% of the market is still controlled by just five mega-breweries. I understand that volume is shrinking, which has spurred the desire for this review by the mid-to-large breweries. But if you also consider that some of the SBRDC members are owned by breweries in the 71.9% such as Carlsberg, and that many of these members also have pubs of their own, well, it doesn’t sit quite right.
It’s also worthwhile noting that not all breweries who would potentially stand to benefit from duty being increased for small breweries are supportive of the idea. BrewDog founder James Watt, who’s UK operation produces somewhere in the region of 400,000hL annually, came out in support of the smallest brewers. “Small Brewers Duty Relief was essential to BrewDog in our early years of growth,” he said via tweet. “The reduction of SBDR [sic] is a hammer blow to thousands of small breweries when they need it least.”
I also spoke to Jamie Delap, of Fyne Ales in Scotland. His brewery produces more than 5000hL of beer annually, so in a technical sense seeing his smaller competitors paying more tax would be advantageous, and while he believes in positive reform, he doesn’t see how the industry-at-large, as well as us drinkers, would benefit from increasing duty for smaller breweries.
“The current SBR scheme has proved invaluable in getting the industry to where it is today – with intelligent reform it can help all brewers deliver better beers for consumers in future,” he says. “For the craft beer industry to continue thriving, we believe it needs to be much more widely available to consumers.”
It’s worth remembering that the UK already pays the 3rd highest beer tax in Europe, with only Ireland and Finland paying more. We pay far, far more than countries such as Belgium, Germany and the US, and on top of beer duty, all breweries pay VAT at 20%, with no reduction. Beer duty in the UK is outdated based on the market as it presently stands, but should changes be to the detriment of its smallest and most vulnerable members? I’ll leave that for you to decide.
Consider if you’d rather have a vibrant market made up of 2000 plus small breweries, or a few hundred. Beer duty might be confusing, and definitely boring, but if you love beer and this affects what’s in your glass at the end of the day, it’s definitely something worth caring about.
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