Progressive Beer Duty - time for a change?

Progressive Beer Duty - time for a change?

In 2002, here in the UK, the then-Labour government introduced Progressive Beer Duty to encourage the creation of small brewing interests in the country. Eight years on, however, and this incentive could be on the verge of eating itself. In this month's beer feature, Larry Nelson looks at the problem and considers the possible solutions.

In the beginning it was bright, shiny, and, as it said on the label, progressive. Today, eight years following its introduction, generous beer duty relief for the UK's smaller brewers is creating market distortions unintended by its framers, presenting difficulties for brewers both large and small.

At the beginning of June 2002, thanks to the largesse of then-Chancellor Gordon Brown, brewers producing less than 5,000 hectolitres of beer became eligible for a flat 50% reduction in beer duty. (Expressed as imperial units, the equivalent is a shade over 3,000 barrels.)

In addition, progressive duty was available for producers between 5,000 and 30,000hl (18,330 barrels) from the outset; in June 2004, the taper was extended to 60,000hl - but brew an additional drop beyond this ceiling and all tax relief was eliminated.

For the Labour government of the day, here was tangible proof that it was supporting, nay, veritably encouraging smaller brewers to survive the travails any start-up business must endure. Yet, from the outset there were complaints, especially from smaller brewers just above the threshold who found themselves squeezed between larger brewers with access to economies of scale and smaller brewers brandishing hefty duty discounts.

Progressive Beer Duty (PDB) not only afforded existing producers protection but became a veritable magnet for genuine entrepreneurs, brewing enthusiasts and people who once had a beer they didn’t like and thought they could do better. It was understood at the outset that the tax break would encourage new entrants –  but to this extent?

Research undertaken by The Brewery Manual 2010 found that every year from 2003 onwards has witnessed more brewing start-ups than in any year prior to PBD’s 2002 introduction. Since 2002, the number of brewers has more than doubled, this against the backdrop of an overall declining beer market and an economic recession that has tightened access to capital.

While the entrants have been a boon for consumer interest, with new products and interesting brewing techniques – although it says here that far too many are focusing on cask ale at the expense of other beer styles –  herein is the problem: a rough calculation, based on Brewery Manual self-reported production figures, finds that 85% of all brewers eligible for PBD remain under the 5,000hl figure, meaning that all beer they produce is taxed at half the rate of larger competitors.

That’s a lot of money, equivalent to GBP170,000 (US$253,350), to surrender to move up from 5,000hl to 30,001hl. And, to the dismay of larger, established brewers, continued beer duty increases have improved the initial advantage. PBD was originally worth GBP40 a barrel of 4% abv beer; today the gap has widened, to between GBP55 and GBP60 per barrel. That, notes Suffolk brewer Adnams, is an advantage that in some instances exceeds the entire cost of production for some brewers.

Clearly, there is an incentive to enter the brewing industry but equally there is a disincentive to expand. This could be overstated: given so many recent entrants, you’d expect a preponderance of smaller producers still finding their way in the world.

And the data is unclear to what extent start-ups are dropping out of the market. This highlights another concern about the generosity of PBD: to what extent are inefficient producers being subsidised to stay in business, to the detriment of better performing peers?

There’s a further question relating to whether the financial joy of PBD is being retained by producers. While there’s ample evidence of the tax break being reinvested in recipients’ businesses, there are also instances where pub groups and off-trade outlets are asking for bigger discounts. The fruits of PBD weren’t intended to pass from producer to retailer, yet it’d be an asleep-at-the-wheel beer buyer who didn’t seek better margins on behalf of his employer.

Larger brewers have by-and-large to date been tongue-tied on PBD’s flaws, not wanting to be seen as picking on smaller fraternal competitors. Yet, the situation has deteriorated to the point where regional brewers such as Adnams and Fullers are willing to propose solutions.

Interestingly, there is also support on the other side of the PBD equation for reform. The majority of the UK’s microbrewers are members of the Society of Independent Brewers (SIBA), headed by chief executive Julian Grocock.

While noting that SIBA supports PBD and that brewers commit to it when they sign the organisation’s members’ charter, Grocock told just-drinks: “We are aware of growing dissent around the issue from some of the larger regional brewers, including SIBA members. We can certainly see that some revision of PBD could be supported, if it removed a barrier to further growth for our members.”

There are a handful of remedies being discussed in the industry:

  • Extending PBD to 200,000 hectolitres, spreading the benefit across a much broader production scale, thereby easing the pain of being weaned from the tax break. The 200,000hl figure is the maximum production allowed in the European Union - as is a 50% duty reduction.
  • Offering the tax break to all producers on their first 30,000hl, irrespective of production levels. While this might not mean much to brewers with national and international scale, it would be of value to smaller regionals, those referred to above as just above the threshold, such as Hook Norton and Batemans.
  • Reducing the maximum duty advantage from 50% to a lower percentage. This is an idea being kicked around by, amongst others, Fullers Beer Company's managing director John Roberts, who suggested a GBP20 a barrel figure (half the 2002 starting point) earlier this month at Fuller’s year-end financial results. Noting that PBD in Germany offers GBP7 to GBP8 a barrel advantage, he said: “There’s no reason why it should be GBP60 a barrel. As a working model it is not sustainable for the future.”
  • As recently suggested by Adnam’s financial director Stephen Pugh in an article in SIBA’s members’ magazine, add a “sunset clause” to PBD, with the tax break eliminated, for example, three years after commencing production.

Personally, the best solution entails a mix of these remedies: reduce the maximum beer duty percentage allowed; extend the tax break to the EU maximum of 200,000hl, and offer the benefit to all producers on their initial output, irrespective of size. It’s an attempt to retain competitive advantages for start-up brewers yet at the same time, crucially, to eliminate barriers to expansion.

There are 1,001 ways to combine these remedies and reaching a consensus will be difficult. What is clear, however, is that a solution needs to be agreed by all stakeholders – and soon: this problem isn’t going away and, as tax increases continue, it will only worsen.