IUF logo.

Beerworkers Archive


Post date: 04/13/2011 - 00:46

Interesting Read About How Duty Effects UK Beer

Written evidence submitted by the British Beer and Pub Association
To the UK Parliament Treasury

EXECUTIVE SUMMARY

1. The continuation of the beer duty escalator and what was a huge 7.2% increase in beer duty in the Budget will have a devastating effect on the beer and pub sector. We do not believe this level of increase can be justified in a Budget designed to promote growth, particularly following the recent VAT increase which has hit beer and pubs particularly hard.

Written evidence submitted by the British Beer and Pub Association
To the UK Parliament Treasury

EXECUTIVE SUMMARY

1. The continuation of the beer duty escalator and what was a huge 7.2% increase in beer duty in the Budget will have a devastating effect on the beer and pub sector. We do not believe this level of increase can be justified in a Budget designed to promote growth, particularly following the recent VAT increase which has hit beer and pubs particularly hard.

2. A study undertaken by Oxford Economics prior to the Budget showed that the beer and pub sector supports almost one million jobs across every region, town and community in the UK. Around 85% of beer sold in the UK is produced in the UK with a predominantly UK supply-chain, and most is sold through pubs and clubs. Given a fair policy environment the sector has the potential to sustain and create thousands more jobs across the UK, generate economic activity and help lead the country out of recession.

3. Instead we have a situation where thousands of jobs will be lost, pubs continue to close and any small increase in duty revenue more than offset by losses in other taxes and higher social security payments. Recent research from Oxford Economics and PricewaterhouseCoopers has highlighted the diminishing returns from beer duty rises. The Treasury has over-estimated revenue from beer duty increases by hundreds of millions of pounds in the last few years. Current modeling assumptions will continue to do so, whilst ignoring the wider impact on related employment and pubs. Beer duty has now risen by a staggering 52% since 2004 whereas beer duty revenues have only risen by 8%. During this period, 30% of the on-trade beer market has disappeared and 20% of the total beer market.

4. Oxford Economics calculated that a beer duty freeze in the March Budget would have saved over 10,000 jobs in 2011-12 alone. These will now be lost with the inevitable closure of many more community pubs. A freeze could also have generated up to £40 million in additional tax revenues (plus reduced social security payments) as beer sales and employment in pubs and elsewhere were boosted.

5. Whilst measures on corporation tax, fuel duty and further assistance for small businesses are welcome these currently have a much smaller cumulative impact than beer duty for the sector. For many brewers, beer duty accounts for around half of the total cost of sales so a 7.2% increase represents a very significant overall cost increase. The combined UK operating profit for the four largest brewers (accounting for 75% of sales) has been negative since 2006 and for the brewing sector as a whole a mere penny per pint sold. This is not sustainable for investment and innovation in an important UK manufacturing sector.

6. Beer accounts for over 60% of drink sales in pubs. The VAT and duty rises have added over 10p a pint in tax in less than three months, taking duty+VAT on a typical pint to around £1.00 and pushing the average price over £3.00. This is driving consumers out of pubs towards drinking at home with a detrimental impact on employment, government revenues and communities. The Budget measures in relation to beer duty do not support a growth agenda

THE BEER AND PUB MARKET

7. The beer and pub market continues to suffer with beer sales in pubs down 7.5% in 2010 and down by over 30% in the last six years (or 5 million pints per day). Off-trade sales were flat in 2010 and remain well below the levels of four years ago. One-fifth of the total UK beer market has disappeared in just six years. Unfavourable demographics, changing tastes, wider leisure alternatives, the smoking ban, increasing regulatory costs and the macro-economic climate are all factors. However, these have been compounded by a crippling tax policy.

8. Pubs closed at a rate of around 30 per week in 2010, with the independent sector hit particularly hard (accounting for around half of all closures). Rising commodity prices and other input costs combined with cuts in public spending and jobs, mean another difficult year for Britain's brewers and pubs compounded by the VAT rise (around 6p per pint in the on-trade and 2p in the off-trade). In 2009, the four major UK brewers made a combined operating loss on beer sales for the third year in succession.

PUBS AND BEER ARE GOOD FOR THE ECONOMY

9. Britain's beer and pub sector is a significant tax and GDP contributor. Beer sales generate over £7 billion in tax revenues and 400,000 jobs, including almost 20,000 in agriculture. This compares with 45,000 jobs in total generated by the Scotch Whisky industry.

10. Pubs are at the centre of hospitality and tourism in the UK. Hospitality is the UK's fifth biggest employer, ahead of other broad sectors such as financial services, transport & communications and construction. Eight-five per cent of pubs are SMEs and the average pub injects over £80,000 into the local economy.

11. A recent Oxford Economics study found that the beer and pub sector supports almost one million jobs throughout the UK, many of which are in small towns and villages, including vital part-time and flexible employment.

12. The Exchequer receives ever-diminishing returns from beer duty increases. Overall tax revenues have fallen following recent beer duty increases as sales and jobs are lost. The Treasury "ready reckoner" has consistently over-estimated revenue from increasing beer duty and under-estimated the impact on sales - particularly in pubs. Studies by Oxford Economics (2004, 2007), PricewaterhouseCoopers(2009), and the Centre for Business Research (2009) have all calculated that the on-trade price elasticity for beer is considerably higher (by around a factor of 3) than used in the Treasury/HM Revenue & Customs (HMRC) econometric model. The HMRC model was updated in 2010 which has led to an upwards revision of the on-trade price elasticity for beer (and revenue forecasts downwards) but it remains considerably lower than found in other recent studies.

13. In the on-trade, duty increases usually lead to retail prices rising by more than the duty increase itself. As noted, 85% of pubs are SMEs, and the pub business model is predicated on a gross profit percentage basis. This is vital in relation to cash flow projections, ensuring sufficient working capital and ultimately a sustainable business.

14. For example, a 50% gross profit margin will mean a 1p per pint duty increase resulting in a price increase of 2-3p. However the huge increases in duty in recent years will inevitably mean reduced margins. In the off-trade, the opposite impact has occurred in recent years with duty increases not being fully passed-through as supermarkets have maintained low prices for beer and used beer as a key traffic driver for wider sales.

15. The rates of duty pass-through for beer were calculated in the Oxford Economics and PricewaterhouseCoopers(PwC) studies of the UK beer market which both found (using different datasets) that, on average, a 1p rise in duty led to a price increase of approximately 3p-3.5p in the on-trade but less than 1p (c.0.6p) in the off-trade. Whilst the recent Treasury review acknowledged this issue, it is not considered in the updated HMRC econometric model which will therefore continue to over-estimate revenue from the on-trade where the majority of beer is still sold and under-estimate impact on sales, jobs and related taxes.

16. The Treasury "ready-reckoner" has over-estimated beer duty revenue by hundreds of millions pounds in recent years. Indeed since 2004, beer duty rates have increased by 52%, beer duty revenue by just 8% (a significant fall in real terms) while beer consumption has fallen by over 20%.

17. The 2009 PwC study concluded that considering overall tax revenues from beer:

"..the current duty rate is almost at the revenue-maximising level and that any further significant increase will result in a reduction in the tax revenues obtained by the Government from the brewing industry".

18. It is important to consider that around 85% of beer is UK produced, the majority is still sold through (labour-intensive and high value-added) pubs and club and beer has a predominantly UK supply chain. Any substitution, for example, to off-trade consumption and to imported products would not generate replacement UK jobs. As the 2009 PwC study concluded:

"These findings highlight the importance of considering the wider consequences of beer excise tax changes on the UK economy and on overall tax revenues. The structure of the industry, its links with the on-trade sector and the wider economy, and on how excise changes ultimately impact on demand, mean that changes to excise rates will have an effect well beyond the change in total excise revenue".

THE IMPACT OF A FREEZE IN BEER DUTY IN THE 2011 BUDGET

19. Oxford Economics have consistently forecast revenue from beer duty increases in line with actual receipts.

20. The results show that a duty freeze could have saved over 10,000 jobs in 2011/12 alone. The decline in duty revenue (£61 million) would have been more than offset by increases in other tax revenues. Beer sales would decline by nearly 775,000 barrels less than will now be the case. Scrapping the beer duty escalator and freezing beer duty over the next three years would save over 27,000 jobs.

21. The current alcohol duty regime is unbalanced. The system does not sufficiently allow for the different industry structures, production methods and consumption patterns. The result being that in the UK, high strength ciders and distilled spirits are the cheapest available and lower-strength products like beer the most expensive available. Beer, which is primarily UK produced and a pub-based drink generates significantly more jobs and associated revenues than other drinks

22. Indeed, based just on the relative costs of delivering alcohol to the consumer in the form of beer and spirits, we believe beer duty should be around half the rate of spirits duty as is the case in Ireland. We also now have a bizarre situation where 13% abv imported wines pay significantly less tax than UK-produced vintage ales and imported speciality beers of around 8% abv.

23. Whilst high duty rates are a blunt instrument for tackling alcohol misuse that disproportionately impacts responsible drinkers and those on low incomes, we believe taxation policy should "nudge" people towards lower-strength, pub-based drinks such as beer. Unfortunately this was the opposite to the policy of the previous administration that froze spirits duty for a decade whilst continuing to increase beer duty, ensuring vodka and other spirits became relatively cheaper compared to beer and boosting sales (particularly among young adults). Beer drinkers have effectively subsidised distillers profits by over £1 billion since 1997.

24. We therefore welcomed the Government's plans to reduce tax on lower-strength beers to help tackle binge drinking following the Alcohol Taxation Review. However, the decision to offset this with a separate additional tax on higher-strength beer is not consistent with the fact that the drink of choice of young people on "big nights out" is spirits. Whilst higher-strength beers account for 0.4% of the alcohol market, spirits account for over 20% with vodka almost one-third of this.

March 2011

Link to entire article
http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/897/...