Overhaul progressive beer duty, don't scrap it

The UK's structure for PBD is damaging the cask industry, argues Adnams' finance director, who believes a shake-up of the system will help small brewers and reduce inequalities.

Beer writer and MA columnist Roger Protz has named Adnams as leading the charge against progressive beer duty (PBD) and being its biggest critic. He extolled the merits of PBD in offsetting the economies of scale of larger brewers and so allowing micros to compete and grow their numbers to more than 700.

As an employee of a larger brewer I always have to preface any comments on PBD with the same words. We are not arguing for the abolition of PBD, we are arguing for a substantial restructuring of it to align it with the PBD systems widely used elsewhere in Europe.

The debate is about the structure of PBD, not about its existence. More important still, we have never set out to disadvantage smaller brewers; Adnams has excellent relationships with many such brewers.

Our argument is an argument about Government policy, not a fight with other brewers. We supported the principle of PBD ahead of its implementation — in other words, we supported giving an advantage to small brewers.

However, having seen the structure adopted in the UK in 2002, we pointed out the damage this structure would cause. If the Government had listened at the time, small brewers would have enjoyed a helpful but much smaller subsidy, as is the norm elsewhere in Europe.

Unfortunately, the Government was not willing to listen and so we are now faced with a much more challenging task to re-level the playing field after almost nine years of tax distortion.

Another sad fact of the PBD debate is the way in which it is sometimes characterised, as "regionals v micros". In fact, the real divide is between those brewing above or below 5,000hl (a long way from a typical "regional").

PBD structure​

The easiest way to understand PBD's structure is to think of it as being of two types. Those brewing up to 5,000hl receive duty relief of 50%, which is worth £57/barrel at 4% ABV. Those brewing over 5,000hl receive a lump sum of about £170,000pa (again assuming 4% beer). The £170,000 of relief is phased out between 30,000hl and 60,000hl of production.

To illustrate the distortion, consider a 30,000hl brewer, who will be receiving the maximum PBD of £170,000pa. In comparison, consider this brewer's microbrewer competitors. Each brews less than 5,000hl, but in total they brew the same 30,000hl. These brewers will receive over £1m per annum. This is a fairly powerful incentive to stay small and it means that the biggest losers will tend to be the well-established successful brewers that grew beyond 5,000hl before PBD started.

Last October, Roger wrote about the opposition to the effects of PBD from Hogs Back Brewery — I'm not surprised at all.

This brings us to the 'flavour of the month' debate — to what extent is PBD justified by real cost differences created by economies of scale? There are a number of serious problems with this argument.

Firstly, there is the practical problem of comparing costs across diverse businesses. Even amongst similar sizes of brewer, costs can vary hugely. It can be a big advantage to be able to tap into existing labour in a farm or brewpub, rather than having to employ dedicated labour, and costs per barrel can decline very rapidly as sales rise, until the next production constraint is reached.

Secondly, and more fundamentally, competition is not just about having the lowest cost. In all types of business there are different ways to compete. A microbrewer's opportunity to drink regularly on the other side of the bar in target pubs is a powerful sales weapon. If the aim is a level playing field then it is not enough to equalise just costs, we need to equalise all competitive angles — but how can we ever allow for the benefit of something like proximity to the customer?

Thirdly, PBD has brought new companies into the market. As marginal entrants they will tend to have higher costs. If we use the costs of these firms to justify the level of PBD, then PBD will have become self-justifying.

Cost debate​

Two facts are quite telling in the cost debate. Firstly, there were over 400 microbrewers in this country in 2002 with no duty subsidy at all. How could this have been so if survival depends on receiving a £57/barrel subsidy?

I've no doubt that many in 2002 were in the "barely surviving" category, but it is a sad fact of life that most small

businesses exist in this category and the influx of new brewers since 2002 has moved many more back to this position.

Secondly, German PBD is worth roughly a 10th of UK PBD (about £6/barrel), but that system also led to a sharp growth in brewer numbers, so why is £57/barrel necessary here?

PBD has indeed brought benefits, notably innovation and fresh local brands, but so it should have done — it is costing taxpayers £25m per annum. However, we are not arguing against PBD, but against the structure adopted in the UK.

The UK's PBD system is restricting the growth of successful smaller brewers; it is making it very difficult to sell a small brewery; and it is creating substantial inequalities between those on either side of the 5,000hl divide.

A restructuring is long overdue.