Good Beer Hunting

Kicked While They’re Down — Controversial Tax Hike Hits Small U.K. Brewers While Regional Breweries Claim Victory

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THE GIST

Britain’s brewing industry has been blindsided by a government decision to increase tax rates for hundreds of small breweries in the midst of the greatest financial crisis the sector has faced in modern times.

Small Brewer’s Relief (SBR) is designed to encourage growth in the brewing sector. It gives a 50% discount on beer duty to breweries making under 5,000 hectoliters (4,260 U.S. barrels) a year, and offers tapered relief up to 60,000 hl (51,130 BBLs). On Tuesday, the government announced it would lower the 50% threshold to 2,100 hl (1,790 BBLs) in 2022, increasing duty rates for at least 150 breweries—including the likes of Burning Sky Brewery in Sussex, Hackney Brewery in London, and RedWillow Brewery in Macclesfield—while reducing the incentive to grow for the thousands that sit below it.

The 50% relief can save a brewer at 5,000 hl around £200,000 ($255,000) a year, and the timing of the announcement translates to a severe challenge for many. Breweries were given little support during COVID-19, as they were ineligible for a business rates holiday and cash grants aimed at retailers. The lack of financial assistance came at a time when beer sales dropped by 82%, owing to the loss of on-trade routes. With a no-deal Brexit at the end of the year looking plausible, most breweries are already fighting for survival before the prospect of increased taxation the following year comes into play.

The announcement was met with shock and anger from many in the sector, with the Society of Independent Brewers (SIBA) chief executive James Calder calling it “a dark day for the industry” that will make many businesses “unviable.” Shane Swindells, founder of the Cheshire Brewhouse and north west director for SIBA, says it is effectively “robbing the poor to feed the rich”—forcing new taxes on small businesses and skewing benefits further toward large producers. Swindells took to Twitter with a plea to the chancellor of the exchequer, Rishi Sunak, asking for him to intervene.

Large brewers, however, like Timothy Taylor’s and Marston’s Brewery, have something to celebrate. Many campaigned for the change under the umbrella of the Small Brewers Duty Reform Coalition (SBDRC), which argued that the steep curve after 5,000 hl created a “cliff edge” that stopped brewers scaling up. It also meant that any rise in duty unfairly penalized those receiving less relief, campaigners said.

WHY IT MATTERS

Small Brewer’s Relief, which was campaigned for by SIBA and many of the breweries now seeking to undo it, was introduced in 2002 and is widely credited with enabling the U.K. craft beer revolution that took place over the following two decades. 

The debate around its reform has been bubbling for years, however, and has erupted on several occasions—usually at SIBA meetings—as small brewers questioned the motives of regional businesses who stuck doggedly to the line of being the squeezed middle.

Those questions are legitimate because there is still no hard evidence that moving the “cliff edge” lower would encourage growth. With over 80% of the U.K.’s breweries sitting below the new threshold, all it does is bring it closer.

Meanwhile, a small percentage rise in duty would result in £10,000s more in costs for the 150 breweries sitting just below 5,000hl—businesses already seeing record lows in demand and price thanks to COVID-19. Experts say closures are inevitable, and that those businesses that survive will have to do so by increasing direct sales, further hurting pubs and bottle shops. Another option is to increase exports to countries with lower duty rates, but that presents new logistical challenges with Brexit looming and budgets spread thin.

With only a handful of SBDRC members standing to benefit from the threshold change—for example, Timothy Taylor’s and Marston’s are too big to receive relief, but still put their names to the reform—and some members already backtracking, it’s unclear how the industry even got in this situation.

SIBA members voted against any reform to the Small Brewers Relief seven years ago, but changed their minds at the 2019 AGM in voting to campaign for a gentler curve from 5,000 hl to help breweries scale up. SIBA was hoping to keep the 5,000-hl threshold, but flatten the curve above it to help its members scale up. Yet in attracting the government’s time and energy it opened the door to the SBDRC, whose membership includes large regional brewers such as Marston’s, Timothy Taylor’s, St Austell Brewery, and JW Lees. They seized the opportunity to lobby the government themselves, asking for the lower threshold to be reduced to just 1,000 hl and the upper limit to move to 200,000 hl. Their argument was that the 50% relief gave small brewers an unfair competitive advantage that overestimated the benefits of economies of scale—effectively arguing that despite their size, pub estates, and access to market, large breweries faced untold hardship. 

Rupert Thompson, owner of Hogs Back Brewery and founder of the SBDRC, calls it a “market distortive element” and claims growth will be encouraged by the lowering of the threshold and any flattening of the curve.

Thompson adds that the new ruling was “evidence-based,” but doubts remain. Calder says financial secretary Kemi Badenoch chose the figure of 2,100 hl partly because it equates to 1,000 pints a day—an easy figure to work with and explain to the industry and public. 

The real question, however, is why removing the cliff edge necessitates lowering the 5,000 hl threshold at all. SIBA has calculated that simply straightening the curve would only cost the government £9 million—or 0.025% of the £3.6 billion it raises through beer duty annually—and would likely be paid for by tax revenue from volume growth and employment at the breweries as they expand.

Thompson’s assertion that higher taxation on smaller businesses will encourage their growth has also been questioned by small breweries, SIBA, and even some of the SBDRC members themselves. Oakham Ales stands by many of the coalition’s aims, but called the government’s decision to lower the threshold “unwarranted, punitive and unnecessary.” Another member, Black Sheep Brewery, tried to distance itself by saying it had “always” maintained that no small brewer should pay more tax—despite that being the core tenet of the SBDRC.

Swindells says the reform will simply “pen breweries in” below 2,100 hl, because they won’t be able to afford to go onto the duty curve. “There will still be a cliff edge, it will just be where the coalition wants it,” he says.

How tall that cliff edge will be won’t be known until the autumn, after a period of what the government calls “technical consultation,” but the SBDRC has called for a scale running from 47% at 2,100 hl to 42% at 5,000 hl. Tim Dewey, chief executive of Timothy Taylor’s, called this reduction “hardly draconian,” perhaps forgetting that such an increase would equate to roughly 10% of the turnover of a brewery at that size. With margins already tight, particularly in cask beer, such a change would result in closures.

The move looks more punitive when examined in the context of the other changes the SBDRC campaigned for via Tendo Limited, a lobbying firm it hired. Raising the upper relief limit to 200,000 hl would bring in breweries as large as Robinsons Brewery, Adnams, and St Austell, and plans to give breweries bought out by larger businesses a grace period on duty would allow them to sell beer at a lower duty rate and better economy of scale. Both would give huge tax breaks to larger breweries while increasing costs and creating downward pricing pressure for those below 5,000 hl. Swindells sees the move as just another example of large companies exerting control over industries and the government.

“This smacks of market control by large companies,” says Swindells. “These national and international breweries have been trying it on for years via taxation and bodies like the Portman Group under the guise of public health, and the voice of small business is never represented.”

SIBA, which is the only unified voice for the craft beer market in the U.K., was as surprised as anyone by the announcement, despite consulting with the government during the review on multiple occasions. Calder spoke to the financial secretary, Jesse Norman, shortly after the document was published to express his concerns. Following that call, an audibly shaken Calder told GBH he could not understand how the review had ended with this decision.

“I thought this Tory government was on the side of small businesses,” he says. “What the government has effectively done is redefine what a craft brewery is. Below 2,100 [hl] is small and independent, above it is something else—and hundreds of them will no longer be viable.”

One brewery that will bear the brunt of the change is Burning Sky Brewery in Sussex.

It produced 4,800 hl of beer in 2019, putting it most at risk of significant tax bill increases under the new scheme. Founder Mark Tranter says that before COVID-19, he was projecting to do a similar amount in 2020 and intended to stay at that level for the foreseeable future. He was “gobsmacked” by the SBR announcement, but says he intends to stay at the same production level under the new system despite the coalition’s claims that it will encourage growth.

“There’s no extra incentive there,” he says. “All it means is the small guys will remain small and those in the middle like us take a hit.”

Tranter says breweries that are determined to grow will most likely look to export instead, where they will pay the significantly lower duty in mainland Europe. Under the SBDRC’s recommendations, export beer would also not count towards a brewery’s total volumes when calculating its duty rate, making the prospect even more inviting—if businesses can navigate the complexities of export after Brexit. Swindells believes it will also force breweries to focus on direct sales—feeding a trend accelerated by the COVID-19 lockdown—as they attempt to claw back the margin lost by paying higher duty.

One issue not spoken much about publicly but implicit in the SBDRC’s frequent calls for “closer scrutiny” of breweries by Her Majesty’s Revenue & Customs (HMRC) is use of Small Brewer’s Relief to sell beer at huge discounts. The price of beer has been a source of fierce debate over the last decade, stoked by both larger and smaller breweries using either vast economies of scale or their duty relief to fund extremely low wholesale pricing. Taking massive hits on margin has allowed these breweries to sell to budget chains like Wetherspoon at around £60 per cask, despite full duty being at least two-thirds of that. 

Swindells believes that the current reform will simply drive more of those deals, especially as the fight for lines heats up after COVID-19. There have already been several examples of larger breweries making huge free stock offers—Anheuser-Busch InBev-owned Camden Town Brewery is giving away around 1,500 hl of beer, Budweiser is selling gift cards for pubs and matching the income itself, and Molson Coors is offering eight free, 50-liter kegs of its key brands to any pub that takes all other 4% Lagers off the bar.

Most small brewers are lucky to operate at a 20% profit margin, so offering discounts or deals is the kind of sacrifice few can make in the current climate. Swindells worries that more small breweries will consider “illicit deals” such as buy-one-get-one free offers where neither buyer nor seller declares the free beer and thus avoids duty and VAT.

Whatever happens, and however steep the curve, it’s clear that SBR reform will have wide-ranging consequences throughout the supply chain, and will drive up the price of small breweries’ beer while larger companies’ costs go down. 

Someone in government sees this as a positive for the industry, but with 88% of the U.K.’s breweries stuck under 5,000 hl, it’s bad news for the craft beer segment, whose members see this as a land grab by well-connected breweries that want to reduce their tax bills at any cost.

Words by Jonny Garrett