Good Beer Hunting

Static Resistance — UK Beer Industry Divided by Tax Reform Proposals

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THE GIST
The Society of Independent Brewers (SIBA)—the UK trade association representing small, independent brewers—has outlined its proposed changes to Small Brewers Duty Relief (SBR). Introduced in 2002 as a way of encouraging growth in the small brewery sector, SBR allows breweries producing less than 5,000hl (4,260bbl) annually a 50% reduction in beer taxation. The cut is then decreased incrementally until a cap of 60,000hl (51,000bbl) per year is reached, at which point the brewery is required to pay its full rate.

Under SIBA’s new proposals, the relief curve for breweries pushing over the 5,000hl threshold would be softened, essentially lowering tax paid by breweries producing between 5,000 to 60,000hl. This would remove what many breweries describe as a “cliff edge”  from the sliding rate, currently preventing what they describe as “steady growth” within the sector. SIBA also proposes the relief be extended to breweries producing up to 200,000hl annually, and that exports not be included in a breweries UK tax calculation. Finally, it proposes that any alterations to SBR are reviewed every five years. Breweries producing under 5,000hl would see no change to their rate under SIBA’s new proposals.

The proposals for tax reform outlined by SIBA have been designed to continue the positive stimulation SBR has had on the UK beer industry since its introduction 15 years ago. It’s hope is that by straightening the tax curve, it incentivizes a greater number of small breweries to push for growth above the 5,000hl threshold. Although on the face of it it would appear that this would reduce the amount of tax paid by UK breweries, the growth it may stimulate could increase overall tax revenue.

However, a counter proposal has been filed by a group known as the Small Brewers Duty Relief Coalition (SBDRC). The SBDRC believes that breweries producing under 5,000hl have an “unfair advantage” and suggests that in order to smooth the growth curve, the rate of relief should be reduced for breweries producing 1,000 to 5,000hl annually. SIBA currently represents around 800 brewer-members, while the SBDRC is made up of approximately 70 breweries. Although, after the announcement of its proposals for reform, five of its members—Beavertown, Harbour, Magic Rock, Siren and The Wild Beer Co.—abandoned the coalition, disagreeing with its proposals to reduce relief for breweries producing under 5,000hl per year.

A reduction in beer duty could also have a positive benefit for consumers. The UK currently pays the second highest rate of beer tax in Europe, behind Norway. Balancing the economies of scale for smaller brewers could mean that the benefits are felt in the pockets of drinkers, as well as producers.

WHY IT MATTERS
In the 15 years since its inception, Small Brewers Duty Relief has been instrumental in creating the UK’s vibrant modern beer market. It’s currently home to over 2,000 breweries, up from a reported 1,218 in 2012, and still growing. According to SIBA, 88% of its membership is made up of breweries producing less than 5,000hl of beer annually (53% of its membership produce less than 1,000hl/year). This evidence seems to suggest that SBR, in its current form, may potentially prevent breweries from pushing through that 5,000hl threshold, and stifling industry growth at its entry level as a result.

“Our proposals for reform are rooted in a deep understanding of how breweries work,” recently elected SIBA Chair, and co-owner of Yorkshire’s Rooster’s brewery, Ian Fozard said in a press statement. “Their costs, their motivations and their experiences of growth that we’ve derived from our wide and diverse membership base. We have a model of reform that works, and that we think HM (Her Majesty’s) Treasury will adopt.” (HM Treasury is the UK Government’s department that manages taxation.)

However, the greatest hurdle SIBA will have to overcome if it is to push for reform will be resistance from the Duty Relief Coalition, which maintains that brewers hovering at the 5,000hl mark have an “unfair advantage” that creates what it calls “market distortion.” The coalition now believes that a “call for evidence” from HM Treasury—which would involve each organization submitting its proposals to the government for independent review—is the only way forward.

“The Coalition now accepts that there are certain fundamentally important issues within SIBA’s latest proposals which we will not all be able to agree,” a SBDRC spokesperson said in a statement produced in retort to SIBA’s proposals. “All industry bodies are calling for cut in beer duty and there should be commercial alignment so all brewers benefit if it is achieved.”

SIBA appears to be dedicated toward protecting the existing benefits received by 88% of its membership. It must do this however, while balancing its desire to stimulate further category growth. They say that smoothing out the tax rate curve for breweries aiming to push production over 5,000hl annually appears be the most logical step. The association also fears that the proposal for reform laid out by the SBDRC could have a damaging effect on a large amount of its members.

“We know if SBDRC policy were to be adopted by Government, just over a third (37%) of SIBA members would see an immediate, and potentially devastating cash hit to their business as the coalition want to remove relief for small brewers,” James Calder, SIBA Head of Public Affairs said in a press statement. “SIBA's policy fixes the “cliff edge” as SBR is tapered above 5k, whilst defending the relief the smallest brewers receive.”

However, a small group of SIBA’s smallest members fear that any change to SBR in its current form could be damaging to business. This subset of breweries worries that if the “cliff edge” of duty was softened for breweries pushing over 5,000hl annually, and the maximum threshold was raised from 60,000hl to 200,000hl, it would create undue downward pressure on the UK’s smallest breweries—including themselves.

This same group also voted against a proposal at the most recent SIBA annual general meeting (AGM) that sought to raise the association’s threshold for membership from 200,000hl, to 1% of annual UK beer production (437,340hl). [Editor's Note: SIBA is due to introduce an upper tier of membership that will potentially allow independent breweries producing up to 437,340hl to join.] Had this been passed, it would have allowed two of the UK’s larger regional brewers—Fuller’s and St. Austell—back into SIBA, who lost their associate member status when this was scrapped at the 2017 AGM.

“SIBA wants to extend the upper limit of SBR...giving what is essentially a tax break (not a relief) to brewers who are already selling beer at margins that small brewers can nowhere near compete with,” Doug Macpherson of Cwrw Ial Brewery in North Wales tells GBH. “SBR is small brewers relief and is there so small brewers can compete against the efficiency and scale of larger brewers.”

However, some brewers producing under 5,000hl per year welcome—in part—the proposals outlined by SIBA. The founder of Bristol’s Left Handed Giant Brewing Co., Bruce Gray, sees the association’s plans as a “balanced approach to a complicated situation.” Although Left Handed Giant isn’t currently a member of SIBA, Gray stated that he sees its duty reform proposal as a positive step. He also said that would consider rejoining the association as a result—despite not currently planning on pushing past the 5,000hl threshold himself. This could prove to be a timely win for the association, which currently counts less than half of the UK’s independent breweries as members.

Gray went on to say that he views the SBDRC stance on reducing the available tax relief for breweries producing between 1,000 to 5,000hl annually as “utterly disgusting.”

“You’ve got to recognize that any policy that stifles growth is bad for the industry,” Gray tells GBH. “This is about the fundamentals of why craft beer exists in the UK. I find it hard to look at a brewery producing over 60,000hl a year that needs [tax] relief to be profitable.”

Ultimately, the decision to adjust SBR rests with the UK Government, and it will only consider a review if clear evidence is presented, proposing how the changes would be beneficial to the UK economy. With SIBA and the SBDRC unable to align their proposals, its likely compromise will have to be made before the Government pays it any heed. In the meantime, the UK’s brewers must settle for the existing 15-year old legislation, as the evolution and expansion of the market continues around it.

—Matthew Curtis