Heritage & Imagination

Small Producers Relief

PLEASE NOTE: This article has been updated since it was first published to take into account the finalised details of the changes to the Alcohol Duty System, and some of the comments and replies may therefore seem out of place. They were very valid at the time.

The new Alcohol Duty System is bringing in a lot of fundamental changes to the way that alcohol Duty is paid, but in general it seems to be a better system overall. In fact if there hadn’t also been a rise in the amount of Duty on alcohol in the latest Budget, the only people paying more would have been the bigger producers.

The first thing to understand with the new Alcohol Duty System is that production volumes are now measured in litres of pure alcohol. This is the biggest and most important change to understand.

Previously breweries could make up to 60,000 hectolitres (hl) of beer a year and still qualify for a discount, and cider makers could produce up to 70hl and not have to pay any Duty or even register with HMRC. Whether that was 60,000 hectolitres of 3.5% beer, or 60,000 hectolitres of 7% beer didn’t matter. Same with the cider, it could have been 70hl of 4.5% or 70hl of 7% cider.

Now with the new system the alcohol content very much matters as we’re now paying Duty on the alcohol itself, not the beer or cider.

The second important thing is that all products made by a company or associated companies count towards the new threshold for relief. This means that all beers a brewery produces count towards their production volumes, even if those beers themselves don’t qualify for relief (that’ll be the high strength ones which I’ll come to late). For cider makers this means that their fruited ciders – which HMRC class as Made Wine will now qualify for Duty relief. Previously if a cider maker added some fresh locally grown rhubarb to their ciders, or infused it with hops, the cider became a Made Wine and was liable for full Made Wine Duty. Now with the new system it’s still classed as a Made Wine, but Made Wine is eligible for Small Producers Relief.

Shared premises and associated companies are set to be the same as before.
Mostly.

A brewery (not the premises, but the company) can be registered and record its own alcohol production, filling in and paying Duty at it’s own rate.

A premises can be registered (this is part of opening a brewery at a particular site) and can have 4,500hLpa produced on it in a year by any number of breweries.

In short, you can share a premises as long as you don’t jointly make over 4,500hLpa. And you can claim your own SPR as long as you’re not connected companies.

The “connected companies” bit though is going to hurt some small producers. I know of at least two small breweries who are also involved with cideries, and for these their cider and beer production levels are going to be combined for their overall alcohol production.  On the flipside of this I also know of one person who owns three separate cideries all unregistered and all producing 7,000 litres Duty exempt.

At the moment the test for connectedness is based on corporation tax laws, but simplified a lot for breweries and covered in Excise Notice 226, point 8.5. Basically, if you’re immediate family (husband, wife, partner, child, parent) of the oweners of another brewery, you’re connected. If a shareholder at either place owns a control of both places, you’re connected. So it might well be that a brewer who owns their brewery outright can hold a 49% non-controlling share in a cidery, but I’d check with a qualified corporation tax lawyer, or HMRC before going down that route.

Elsewhere in the changes are some others things its well worth noting.

The upper limit for low strength beer has been risen. Previously if a beer was between 1.2% to 2.8% it qualified for Low Strength Duty at a lower rate, now it’s between 1.2% and 3.4%. So expect a lot of beers that were around the 3.5% to 3.6% to drop to 3.4%. The alcohol in these low strength beers will still count towards the overall SPR production volumes.

The limit for high strength beer has also risen. Previously if a beer was 7.5% or above it was liable for High Strength Beer Duty, which is a lot more than Standard Rate being an additional £5.69 per hectolitre of alcohol on top of the Standard rate. With the new system the threshold for High Strength Beer is now 8.4%, so those beers around the 7.4% mark and up might start to become more prevalent.

Unfortunately any beer at 8.5% abv and above is liable to full High Strength Beer Duty.

Previously small breweries only paid the full amount of Duty on the alcohol above the 7.4% threshold, and were able to claim Small Brewers Relief on the 7.4% amount. This has now been removed and a small brewery in a garage producing 24 bottles a week will now pay the same Duty on High Strength Beer as a multinational corporation like Heineken.

This new scheme is really hard on higher strength drinks, and I fear we’ll see breweries that specialise in them closing or being forced to adapt. An interesting nugget from history, the last time a British Government forced breweries to limit their alcohol consumption was due to rationing in the First World War and did not go well for the Government. I can only hope that this current one sees sense and changes this.

Cider makers are going to see the majority of the changes to day-to-day operation though. As mentioned previously cider makers producing less than 70hl (7,000 litres) didn’t have to register with HMRC to make cider, or with AWRS (the Alcohol Wholesaler Registration Scheme) to sell it. Now they do. They will have to go through the same steps are breweries, with a HMRC registration and visit for a producers license and an AWRS license, and they will have to fill in monthly Duty Return forms. This is a lot more paperwork for them, but they are also set to gain the most from the new system – because of the production volumes now being based on pure alcohol alone.

Previously all small cider makers could produce up to 7,000 litres of cider a year and not be liable for Duty due to the Farm Gate Allowance system. This is now replaced as part of the Small Producers Relief.

With the SPR producers who make up to 500 litres of pure alcohol a year qualify for the new Band 1 of Duty Relief which is a full 100% relief – i.e., no Duty.

If a cidery produced 6,999 litres at an average 6% volume, that would be 420 litres of pure alcohol (6999*6% = 419.94) , the limit now is 500 litres, which means that cidery can produce 8,316 litres (499/6% = 8316.6) of the same cider and still remain under the threshold – i.e., and additional 1,316 litres of cider before they then have to pay Duty.

One really great thing about this Farm Gate Allowance now being part of the new Small Producers Relief, is that SPR is replacing the old Small Brewers Relief, and all the new Duty Bands and allowances from SPR apply to breweries too. So, the smallest of breweries will also qualify for the new Band 1, but unlike cider it’s a 90% relief. Which is still a lot better than the 50% relief previously.

A nano-brewery in the back of a pub for instance can produce 13,131 litres of a 3.8% (499/3.8% = 13131.57) beer each year andonly have to pay 10% of the Duty rate. That’s 328 40l casks or 437 30l kegs of beer. That’s 6 casks or 8 kegs a week. For a small community pub, that could provide all the beer they need.

There is also an additional benefit for all small producers in the new system and the way that individual breweries Duty rates are worked out. By using a Cumulative Discount on each band along with the brewery’s previous year’s alcohol production, the 500l of pure alcohol at a much reduced rate is passed on up the scale. This makes expanding beyond the current threshold a much easier and economically viable process..

And now we come to the mess of the new system, the new Draught and Packaging rates.

The idea was laudable: that pubs got a discount on draught beer to help them compete against the supermarkets, the implementation is somewhat daft thanks to the influence of some larger breweries. What was previously the Standard Rate of Duty for each category is now the Packaged Rate. There is also then the Draught Rate, which is set at a determined percentage less than the Packaged Rate. Draught Rate can only be applied to containers of 20 litres or more designed or capable of connecting to a draught system. So 20l polybags of cider are fine, 10l ones aren’t. 20l kegs are fine, 10l ones aren’t. 5l mini-kegs may have a tap, but they don’t qualify for Draught Duty because they’re not designed to be used to serve beer in a pub. And they’re too small. Cornie kegs likewise, at 19 litres they may be designed to be hooked up to a keg dispense system, but they’re too small. So breweries and cideries now have to track and pay Duty differently on Packaged (bottles, cans, etc) drinks and Draught (cask and keg) drinks. This isn’t too much of an issue until we get to take-outs…

There’s a lot of hoo-hah at moment with people thinking that take-outs in flagons and growlers from pubs and festival is now banned. It’s not. What is banned is that venues can not repackage Draught Duty paid drinks. This was brought in to stop companies selling 1,000l or larger containers of beer or cider at Draught Duty rates, and a third party then bottling or canning it. But it does hit the bottle shops and bars with their growler fillers and plastic flagons.

The way to be able to continue to do this is for the venue to purchase Packaged Duty Paid beer and cider. Venues are allowed to repackage Package Duty Paid drinks. So when ordering a cask or keg, a pub can ask the brewery to pay the full Packaged Duty on it, which then gets passed on to the bar, and eventually to the drinker. Yes, small pack (bottles and cans) are going up in price, and so are takeouts alongside them. This means that the entire keg or cask must have the higher Duty rate applied to it, regardless of whether 30 litres or just 1 litre of it are sold for take out.

This system is also completely open to abuse, and I foresee a lot of bars just ignoring it completely.

However, this does present an opportunity for the smallest of producers though. Those on Band 1 get a 90% Duty relief, and that applies to Packaged as well as Draught Duty. So the smallest producers can declare everything as Packaged Duty Paid and sell on to the pubs at a lower rate, and pubs can sell those for takeouts.

There is also a lot of noise from the wine and spirits industry about them not qualifying for Small Producers Relief. They do. All alcoholic drinks are included, and all alcoholic drinks lower than 8.5% qualify for some Duty relief. There just really aren’t that many wines or spirits below 8.5%. The prepackaged mixers though will qualify, and whilst some cans of gin and tonic and cocktails are currently at 10% or 12%, I really wouldn’t be surprised to see them slip to 8.4%

Resources:

Alcohol Duty Review Consultation Response (PDF)

Alcohol Duty Changes Draft Legislation (PDF)

Alcohol Duty Rates Changes

Excise Notice 226: Beer Duty – Small Brewer

Alcohol Duty Review Final Consultation Response (PDF)

Finance Bill with final Alcohol Duty Rates and Lookup Tables (p337) (PDF)

11 Comments

  1. Paul Mellor

    Re: takeouts, it seems that the venue has to be licensed to repackage draught beer into Package Duty paid, so that will put off a lot of people. Also, I can’t envisage many venues wanting to pay more for their beer on the off chance that someone may want a growler filled, unless we’re talking bottle shops with a few keg lines.
    Great article though, very interesting read
    cheers

    • Steve

      I was actually talking with my local bottle shop/tap last night about this and they think they will either limit the availability of take outs to a couple of lines from the smallest of producers who can label everything up as Packaged Duty Paid, or will stop it all together.

      But ultimately it’ll come down to the cost of the beer at PDP compared to DDP and if they can make a profit selling it for takeouts.

  2. Oliver Dowding

    Having googles and searched I can’t find anything official where the changes are mentioned. This https://www.gov.uk/guidance/the-alcohol-wholesaler-registration-scheme-awrs was last updated in August 2019!

  3. Mr fraser withers

    Excellent work as usual ☺️

  4. Sean

    Are we likely to see high strength beers being imported into UK..if there becomes a gap in the market?.. I assume that they would pay the same duty, and pay duty in the country of origin?

    • Steve

      As far as I’m aware with the UK now being outside the EU, any imports into the UK will need to pay the UK Duty rate, and not the rate of the country of origin.
      So there’d be no real advantage Duty wise to anyone importing high strength beers into the UK.

      I can only think that breweries who only produce high strength beer will have to adapt, charge a premium that hopefully people can pay, or will close.

      • Sean

        That is a grim prospect. Have we seen the death of Impy Stouts, TIPAs and Barley Wines?.. Does that mean that a 330ml bottle will include around £6.50 (£19.60 / 3) in Stamp duty?

        • Steve

          The new Duty rate for drinks of 8.5% up is £28.50 per litre of pure alcohol.

          That’s £2.43 per litre for an 8.5% beer. ((1 * 8.5)*£28.50)

          Or about 81p per 330ml bottle.

  5. Alan

    Does Rishi Sunak’s announcement that pubs can continue to sell pints for takeaway after 30th September have any bearing on this matter?

    • Steve

      Absolutely none whatsoever. The recent announcement is purely about a continuation of temporary legislation brought in during Covid lockdowns to allow pubs without an off licence (very few) to be able to sell take outs, and to allow all venues to sell take outs in open containers.

      The pubs still have to buy in full duty paid beer if they wish to sell take outs.

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