Progressive Beer Duty (PBD) – Time for a Review?

This article was published recently in the SIBA (Society of Independent Brewers Journal) with the aim of highlighting an important discussion around the way beer is taxed in this country:

Raising the topic of PBD within a SIBA journal is not something to undertake lightly. After all, PBD is seen by many as one of SIBA’s greatest achievements and as an employee of a brewery too large to receive PBD I could easily be accused of sour grapes. In this regard I’d like to make two important points.

Firstly, the issue that I wish to raise is not whether or not we ought to have PBD. PBD has created many successes. It has accelerated the growth of small microbrewers, it has boosted innovation, it has created fresh local brands and it has helped to stimulate interest and growth in cask ale. My question is whether PBD is correctly structured in the long-term interests of our industry – are the rates and thresholds appropriately set?

Secondly, my case is in no way a criticism of PBD recipients, with which group Adnams has many strong and active relationships. It is a criticism of the way in which the UK government implemented PBD.

How PBD is structured in the UK

PBD exists in many EU countries and the EU has set two limits: PBD cannot exceed 50% of normal duty rates and cannot be given to those producing above 200,000hl. In the UK the relief is unusually complex. 50% relief is available for those brewing up to 5,000hl per annum. At 5,000hl, duty relief is capped at a value of about £160,000 (assuming 4% abv beer). Between 30,000hl and 60,000hl the relief is phased out.

Implication of the UK Structure

This structure has some important implications.

1. The UK has particularly high duty rates relative to the EU norm. This is a vital point as it means that 50% relief in the UK can be up to ten times as valuable as 50% relief in some other EU countries. UK relief equates to about £55 a barrel, which for many breweries is more than the non-duty costs of brewing.

2. There is a large cost to success. The per hectolitre duty relief at 10,000hl is only half that at 5,000hl. Between 5,000hl and 30,000hl PBD gives a lump sum benefit per brewer. Where two brewers each produce 5,000hl, both receive duty relief of £160,000. Where one brewer produces 10,000hl, only one £160,000 benefit is received. This gives a powerful incentive for production to be concentrated within smaller organisations.

3. Sales and mergers of small breweries may be penalised by sharp reductions or total loss of relief.

4. Annual duty increases grow the value of PBD. The very sharp duty increases in the last two years have increased PBD from about £45 to £55 a barrel.

What has happened?

The impact of PBD has been almost exclusively confined to the cask ale market, as cask (and bottled) ales are the products of choice for the overwhelming majority of small brewers. Since 2002 there has been a net increase in brewery numbers of towards 300.

I fully accept that PBD has brought benefits, but a couple of observations should be made from the viewpoint of a non-recipient:

· It would be very surprising if duty relief reaching £160,000 per annum had not been successful. If pubs were given this level of subsidy it is fairly safe to predict that we would not be seeing the current 39 closures per week.

· SIBA has shown that microbrewers invest a substantial part of their PBD. However, from the viewpoint of others, PBD represents competition subsidised to the tune of £55 a barrel. This is true whatever use is made of the duty relief.

Summary of Concerns

The crux of the problem with the current structure is that PBD at £55 a barrel is too high and too focussed on those brewing less than 5,000hl. The incentive this creates is for the cask industry to become fragmented. Adnams, which produces about 80,000 barrels of beer per annum, pays about £8.5m in beer duty. If this production was all done by microbrewers the duty saving would be £4.25m – more than we have ever earned in profit. I hasten to add that we have absolutely no intention of ceasing brewing, but it is not right that such an incentive should be created.

Some may applaud a position in which we move towards all beer being very local, and there’s no doubt that there are strong consumer trends towards localism. However, we have to accept that the taxpayer pays for PBD (or foregoes money that they otherwise would have had) and we need to justify the value that we return.

I think that we should be asking how we see the end game if the current UK PBD structure remains in place. There cannot be an indefinite growth in brewery numbers and a continuing flow of new entrants will increase competition for all, particularly for the more successful that have grown beyond 5,000hl. My question to the cask industry is: are we happy with a PBD structure that creates such strong incentives to remain small? I suspect that some at least will feel that they should not be penalised if they grow or merge and that a different structure to PBD would create better and fairer incentives than does today’s.

The Government’s objectives

The government states that it had three objectives in implementing PBD:

1. Allowing for the economies of scale enjoyed by larger producers

In microbrewing, basic capital equipment is modestly priced and the additional cost of raw materials for smaller producers is very low compared to the £55 per barrel duty difference. The issue is with labour. If you are struggling with sales volumes and you are trying to cover one or more full time wages from the sales of the brewery, then costs per barrel can be very high. It will always be open to those who find business conditions tough to say that £55 a barrel is fully justified or indeed that it is not enough, but taken to its logical conclusion this argument says that PBD should rise indefinitely to accommodate the costs of even the least efficient business. In reality the existence of 440 UK microbrewers in 2002, before PBD was introduced, does not imply that there is much of a case for PBD at £55 a barrel.

2. Market access

Market access has many aspects, and there probably isn’t a brewer in the country that wouldn’t appreciate access to some market to which they are yet to gain entry. One aspect is access to large pubco estates and SIBA’s DDS has done much to improve this since PBD started. Another is use of the tie by vertically integrated brewers, but this is something that exists at all levels of the market from brewpubs upwards and many larger brewers are mainly free trade orientated.

3. Diversity

Clearly the addition of 300 brewers to the market has indeed added to the diversity available to the cask ale drinker. However, unlike the strongly brand-led lager sector, cask ale has always offered considerable consumer choice.

My conclusion is that the government’s objectives were in part ill conceived but even ignoring that, the current structure of PBD is not an effective way of dealing with those aims.

Suggestions for Change

CAMRA has made two suggestions:

1. The withdrawal taper for PBD should be extended from 60,000hl to the EU maximum of 200,000hl. Or alternatively:

2. All brewers should enjoy PBD on their first tranche of production.

The graph shows the current PBD structure and the above options. It also illustrates the inequalities of the UK PBD system and the fact that the CAMRA proposals do very little to level the playing field for larger producers.

Under option 1 the £160,000 PBD benefit is being spread across a much bigger volume, leaving the fundamental problem unaddressed. For instance, a 50,000hl producer would receive £160,000, whereas ten 5,000hl producers would collectively receive £1.6 million.

Option “2” suffers from the same problem. A 200,000hl producer would receive £160,000 (rather than zero under option 1, where relief would have been fully phased out), but the same volume produced by brewers brewing no more than 5,000hl would have led to duty relief of £6.4 million.

Conclusions and Recommendations

My view is that there are only two ways in which the underlying problem can be addressed. One is to reduce the rate of relief from £55 a barrel. The other is to introduce a “sunset clause” under which no brewer receives PBD for more than say three years.

In parallel to the above, a case can be made for extending PBD’s upper limit to try to turn the “cliff edge” (see graph) at 5,000hl into a more gradual decline. This would help to reduce the disincentives to growth or merger.

It is clear that the Government will be seeking additional income. An alcohol relief that rises in proportion to the strength of the beer being brewed may be particularly tempting. SIBA members should ask themselves whether failure to engage and debate the case might lead to a less palatable solution.

Whilst I fully understand that proposals such as these will mean less duty relief for many small brewers, I hope that we all have the best interests of cask ale brewing at heart and we should be asking whether the current structure of PBD is leading to an improved future for our industry. As a first step I think that HM Treasury should initiate a formal and public reappraisal of the structure of PBD. All views can then be heard. I hope that many fellow SIBA members will support me in this. Please let me know what you think: stephen.pugh@adnams.co.uk