An artisanally crafted blog curated by Cooking Lager for discerning readers of beer bloggery

Sunday, 1 November 2015

Beer Tax

One of the more interesting beer stories of the week was a chap called Tim Dewey (nope, me neither) of Timothy Taylor Landord bitter (Oh yeh, now I’ve heard of it, that’s that overpriced bitter you see in posh pubs that jenga the chips and charge £20 for a burger) saying “craft” had made beer prices “dangerously low”. Now this appeared to get much derision on Twitter because as we all know, craft is proper expensive innit? Its pricey grog drank by fools and snobs. That and the only “danger” in low beer prices is that you might end up behind the bins of a Wetherspoons with a lady larger than you usually consider attractive. Not me, though, I’m a good boy; I don’t do that sort of thing.

Meanwhile, behind the bins at Wetherpoons........

I made the mistake of reading the article, however, and you know what? I think the fella has a point. His point isn’t about retail prices, it’s about wholesale prices and specifically it’s about small brewery relief (SBR), the mechanism by which smaller breweries pay less duty on their produce.

SBR is something most beery geeks like. It’s a tax break on small producers which they tend to prefer. A lot of beer geekery is about preferring the small producer over the big producer and they tend to get upset when big brewers make things they like, are quality products, and encapsulate the history and tradition of a beer style more effectively than a bearded middle class man under a railway arch. Much of beer geekery is the middle class preference for “small”, from beer to the cheese in a farmers market. Big bad. Small good.

The ostensible reason for SBR, as far as I can make out, is that smaller brewers have fixed costs and barriers to market entry that make competing with large oligopoly brewing difficult. Or at least that was the reason when it started. Now there are more breweries than ever and from the retail prices round my way it’s clear that a micro-brewery can produce a cask of indifferent bitter cheaper than the local regional brewery can produce a cask of indifferent bitter, and the reason for that is tax. I can think of 2 northern regional brewers, Hydes and Robinsons that have reduced capacity. The former specifically to qualify for SBR. I know that because I heard a man from the brewery say so at a beard club talk.

So let’s get this straight, a tax system that encourages firms not to grow beyond a certain size and encourages firms above that size to shrink down?

In what other industry would we do this? What else do we manufacture that we would want the industry to be structured as thousands of cottage industry sized businesses? What industry would we actively discourage businesses to grow to a size where they export their produce? If British beer is a world beater why is the import beer of most countries likely to be a Dutch or German lager, and not a bottle of British Ale? Maybe a really big British brewer exporting beer isn’t a bad thing? Maybe that’s good for us? I quite like a bottle of Becks or Heineken, myself and I’ve never encountered a German complaining they have large corporations exporting to the world. They appear quite proud of it.

It seems to me there are currently 2 purposes of the tax system. The original being to raise money for the crown to spend on things. Your personal politics will make judgements on the relative importance of the defence of the realm, the NHS or even £300 trainers for poor London kids but revenue to do that was the original point. Of more recent times, “creating desirable outcomes” has become a function. Stopping you smoking, drinking or even restructuring a brewing industry that was uncompetitive & oligopolistic and forced Watneys Red Barrel down your unwilling throat. You may not like that, but tax can and does determine behaviour because we want to pay less of it. Does this tax break result in more or less revenue? I would guess at less as the costs of collection are higher over a distributed base, the duty is lower and beer volumes are declining even if number of producers are increasing.

Taxing a product like micro brewed beer, enjoyed by a primarily middle class consumer base, less than beers enjoyed by primarily working class consumers is even applying a regressive tax. Should the middle class pay less tax on their beer? Should the middle class pay less tax on the 4x4 they take little Toby and Clarissa to school in than the small car the old retired lady is going down the shops in? Should the middle class get a tax break on the artisanal crafted handmade bit of carpentry they put in their kitchen, whilst all those that go to IKEA for mass produced stuff pay full whack?

The idea of SBR, a tax break on small producers, looks ludicrous when applied to other industries.

I know you like SBR; it’s one of the reasons I would guess why the multi beer free houses charge 50p a pint less than the regional brewery tied houses for the indiscriminate brown bitter they all flog. I know beer geeks like their brown bitter to have a different name for each pint, despite it all tasting and smelling the same. I know you like having lots of small producers and think they deserve a tax break.

But what if a more efficient brewing industry with fewer cottage industry shed and railways arch producers resulted in more tax in treasury coffers and that resulted in less personal tax on you or a few more schools and hospitals? Maybe beardy shed man should be asked to cough up more by way of tax? Just saying.


Curmudgeon said...

It's fair to say that, if a tax encourages businesses to limit their expansion, it's being done wrong.

Similarly, in some situations, if workers increase their hours, most of it is wiped out by a cut in tax credits, so it's not worthwhile.

Pivní Filosof said...

That system also exists here in CZ and Germany. Here is set in four brackets >10,000 hl/y, 10-50,000, 50-200,000 and <200,000. As far as I can tell, it hasn't prevented anyone from growing if they see it will benefit their business. And there've been several examples of breweries jumping to a higher bracket.

Basically, what the extra bit they pay in taxes will be more than compensated by the improvement in the economies of scale. Then again, taxes here (and in Germany) are ridiculously low. I wonder what the cost is to go up brackets in the UK.

Cooking Lager said...

The German example is interesting. My experience of German brew pubs is that the beer is a little more distinctive but the retail prices not that different. If cheaper, it's more the location. Those businesses didn't appear to want to become brands available elsewhere, whilst the big industrial brands are known and drank here in England where if I want a weissbier, the brand I am most likely to encounter is Erdinger. It's likely to be better than a railway arch attempt at a weissbier.

Maybe Germany is better at an industrial policy that assists start ups whilst not hitting medium sized business. Its's the medium ones that can become large, just as the small can become medium.

I know America may like Newcastle brown ale and I have seen Fullers on shelves in Germany but overall Britain appears to have exported recipe, technique, technology rather than product. I for one am proud Britain has some global brands and would see it as no bad thing if a British beer had the global brand value of Heineken or Becks. Something unlikely if our industrial & tax policy is geared to a cottage industry.

It's annoying to see tax breaks that help Starbucks pay less than an independent coffee shop, but does the independent actually need lower tax than Starbucks or should it be a level playing field, and we punters decide?

StringersBeer said...

"if a tax encourages businesses to limit their expansion" is, perhaps, an interesting question. There's no real evidence that anything of the sort is happening. Of course, that would just leave leave volume available to another business, so no actual problem there. And indeed, what would be the problem if all brewers were small enough to qualify for lower excise rates? They'd certainly be paying so much more in employment and other taxes.

Pivní Filosof said...

There's one thing to bear in mind, though. At least here, in Germany and quite likely also in Belgium, that tax relief applies only to the duty tax on beer, all the other taxes remain the same.

If that is the case in the UK, I fail to see how that could a barrier for growth in any way, at least in the mid to long term. If you increase your output by, say, 20%, your overall costs per pint will go down--you'll be more energy efficient, you will not need to employ 20% more people and you may even get better deals with ingredients. All that should more than make up for the bit more you will have to pay in beer tax.

Cooking Lager said...

I guess an example of how I'm wrong, Stringy, is Brewdog, building a UK Stone inspired outfit from scratch. Wouldn't surprise me if Punk IPA became an international brand in bar and hotel fridges the world over. We'll see.

I think 80% of the UK beer market is still an oligopoly but the 20% beer geeks like to think is all is pretty fragmented. Few strong brands, the illusion of choice between near identical products, new brewery start up that can compete on price only because they get a tax break established operators don't.

If all UK brewers were small, as you postulate, then UK brewing is a dead cottage industry and the market is given up to the big international brands. Funny that some think that a good thing.

Stonch Beer said...

Stringers said:

" "if a tax encourages businesses to limit their expansion" is, perhaps, an interesting question. There's no real evidence that anything of the sort is happening. "

The Batemans just scrapped brewing capacity to bring themselves within PBR.

StringersBeer said...

There's all kinds of reasons for downsizing. If, as an additional benefit, this qualifies someone for reduced excise rates, it still doesn't mean that PBD (SBR, whatever) is distorting the market in any undesirable way.

StringersBeer said...

@cookie - yes the pooches are an excellent counter-example. Strikes me that Brewers complaining usually have other issues - they've lost sales into the free trade cos of increased competition, perhaps, but their big problem is likely to be reduced sales into their own estates cos of declining demand. Or they invested speculatively in big shiny plants. Me, I don't care if there's a Big British Beer Brand or not. The big brands are all owned by international institutional investors anyhow, only a sap would value their "Britishness".

Cooking Lager said...

We don't tend to do that here, over products. I think British people take their pride in things like sport, The Queen and the Armed forces. For obvious historical reasons my German friends think that strange. But they are proud of Adidas, Car Brands & Beer brands. International brands respected the world over. My Munich lawyer friend drives a BMW. He things it funny it is a premium mark in Britain and America. He drives it because he is Bayern and the car is too.

In most economies, people get richer by figuring out how to produce more with less. More grain per acre with less farmers. More cars per hour with fewer man hours. Machines and energy replacing manual effort. I am intrigued by the idea that turning the beer industry backwards by producing less beer with more manual effort and more people is in anyway an actual economic benefit.

If it is then the output really has to be of higher value? That we are not measuring number of gallons but value of gallons. In that case why would it need a take break? Why would they need the tax break to produce a cask of indifferent bitter cheaper than an established brewer?

StringersBeer said...

There's a school of thought that holds that growth and efficiency are not necessarily what we need at this stage in our economic development. It's certainly not clear that the naive pursuit of these things is axiomatically good. The various economic revolutions we've had have, at times, delivered great improvements in wellbeing, at other times, not. This isn't a backward looking pov, but rather a post-industrial one. Also, we read Schumacher.

The reduced rate of duty, and the banding / sliding scale, helps smaller producers to compete with larger brewers in spite of the enormous, market distorting advantages the big fish enjoy.

Curmudgeon said...

In recent years, as well as Batemans, both McMullens and Hydes have also cut brewing output to bring themselves within the scope of SBR.

Yvan said...

I don't know about Hydes - but Bateman's and McMullen's also suffer from the simple problem that nobody seems to want to drink their beer. They're being out-competed on product, not on price. (And I don't mean crafty hipster types... I mostly drink in pretty normal places with pretty normal beer drinkers. Whilst a cask of Wherry will pretty much vapourise in a night McMullen and Bateman's stuff around here will sit, and sit, and sit...) One publican I know buys Bateman's "because they do some interesting guests ales nice and cheap" (as in other folks beer).

Other regional breweries seem to be bumping along pretty well, and some in rude health. Bateman's whinges about things like £45 quid casks of ale - if they're seriously competing at that end of the cask ale spectrum then they're doing it wrong. (Who's selling to pubs for that sort of price - Cottage, and similar high quality product...?) Batemans tried their whole "craft" thing too... those kegged beers, also in bottle in supermarkets. They all tasted like flavour syrups. Floundering and thrashing about like a beached fish much?

Meanwhile folk like Oakham are selling direct to pubs at prices higher than stuff I sell with a middle-man mark-up on it... Oakham must be well over the PBD threshold and going strong? Folk like their beer, it sells fast, it is good, reliable, consistent - and they get a premium as a result.

And a few new breweries seem to be on steep upward trajectories - BrewDog obviously, but Beavertown could be over the threshold too? In a very short time. (What is their production, I'm not currently sure.) Others must be there or headed that way pretty soon too - Magic Rock?

StringersBeer said...

@mudgie, I suggest we don't really know why Batemans, McMullens and Hydes have cut output, much as we love to appear omniscient on the Interwebs. We know what they say, but I suspect Yvan's closer to the mark.

Cooking Lager said...

I'd ask the following question, for those premium products commanding a higher wholesale and retail price, why do you need a tax break?

For those small breweries just seeking to sell cheap bitter, why should that price be a result of a tax break? if they can make it cheaper, great, but if it's only cheaper because it's taxed less?

As for the capacity reductions of established brewers, I cited Robinsons and Hydes as they were the only times I've listened to what they said about their new breweries. All credit to the beard club for putting that on. Am an not surprised there are other examples mentioned in the comments if the tax system is favouring a particular industry structure.

Robinsons said they wanted flexibility to produce a wider range of product rather than lots of bitter. Hydes said it was to take advantage of SBR. Contract brewing was being busy fools and they were better off producing less, paying less tax and buying in beer from other SBR producers.

You are correct to comment that what is said isn't always why they may actually do something but at the time I thought them genuine and convincing.

StringersBeer said...

It seems pretty clear that some small brewers are using SBR to fund discounted sales. But how significant a problem is this? It's certainly bad news for other small brewers who are trying to compete with them while funding other aspects of their business. It will have affected bigger brewers who (with easy profitable sales to their own estates) were wont to dump beer (with minimal marginal cost) onto the free trade. Sure, there are some small breweries who can sell at above average prices and some who have to sell below. That's not the point. The point is that the market had been distorted by and for the benefit of the established players. The market had failed in that it wasn't delivering what we, the people, wanted from it - this seems to include variety and real choice. New entrants needed.

To argue convincingly against PBD (or SBR, whatever) you'd have to show - at a minimum - that the overall tax take from the brewing industry had been reduced because of it and that, in spite of it, the market was failing to deliver that other stuff: employment, safeguarding tradition, the range of products that consumers want to see, lots of small dynamic businesses, etc.

Pivní Filosof said...

I think this can be safely bundled together the many other policies implemented in various countries to help and promote SMEs. Something I'm quite OK with.

StringersBeer said...

What Mr Philosopher said.