The biggest shake up in the recent Alcohol Duty Changes and the introduction of the Small Producers Relief is how it will affect cider.
Previously cider makers producing under 70hL (7,000 litres) a year didn’t need to register with HMRC for either a cider makers licence, or a made wine licence if it was fruited ciders they made, and they were also exempt from the Alcohol Wholesalers Registration Scheme. They should, however, have been registering with Environmental Health at their local council to make sure that their production premises were fit for use, and with their local Trading Standards to make sure that their measurements were accurate and that drinkers were getting what was listed on the label. This made it incredibly easy to set up a small cidery.
That has now all changed with the introduction of Small Producers Relief, and at first the new system may seem incredibly complicated to those who have not had to deal with Duty returns before, it’s even complicated for brewers who have been dealing with it due to some new changes. Hopefully this article will go through the new scheme with a focus on cider producers and provide the necessary answers and guidance needed to be compliant with the new laws.
Pure Alcohol Production
Previously a cidery could make 6,999 litres of Cider a year and not have to pay any Duty on it through the historic Farm Gate Allowance.
It didn’t matter if that was 6,999 litres of 3.5% keeved perry or 7% dry cider.
It did matter if it was Made Wine as that wasn’t eligible at all and therefore was liable to Duty from the first litre made.
This has now all completely changed; the Farm Gate Allowance is no more. It’s been brought into the new Small Producers Relief (SPR) as Band 1, which we’ll come to shortly. So it’s still there, just called something else. And with different amounts.
It’s very vital at this point to understand a very fundamental change on measuring production volumes. Production is no longer measured in litres of cider, but litres of pure alcohol.
The amount of Duty that a producer will be liable for will depend on how many litres of pure alcohol that they make a year.
If you produce a 3.5% keeved perry, you are producing less alcohol per litre than if you were producing a 7% dry cider. 1 litre of 3.5% perry = 0.035 litres of pure alcohol. 1 litre of 7% dry cider = 0.07 litres of pure alcohol.
It is very vital that we understand this different way to measure and monitor production volumes, as everything else is now based on that.
Using these two examples with the current production limit of 6,999 litres of cider; 6,999 litres of 3.5% keeved perry = 244.95 litres of pure alcohol (6,999*3.5%), 6,999 litres of 7% dry cider = 489.95 litres of pure alcohol (6,999*7%)
So, while previously they we both producing 6,999 litres, the amount of pure alcohol produced is vastly different. And the new Small Producers Relief scheme takes this into account.
Banding and Thresholds
Previously the rate of Duty liable on the cider was banded. All still ciders between 3.5% and 8.5% were liable to £9.67 per litre of cider for example. But now it’s the producers who are banded to find out their own specific Duty rate, based on their previous year’s production of pure alcohol.
The lowest band for cider is between 0 and 500 litres of pure alcohol. This is Band 1 and producers within this band qualify for a full 100% Duty relief. Band 1 is the new Farm Gate Allowance, but as explained before, it’s nothing to do with the amount of cider produced, but the amount of alcohol produced. I may seem to keep mentioning this, but the point needs drilling home until it’s second nature given how important it is in how alcohol Duty is now worked out.
Working backwards from our previous examples of a 7% dry cider and a 3.5% keeved perry; 499 litres of pure alcohol at 7% (499/7%) actually allows for 7,128 litres to be produced within the Band 1 threshold. Even better for the keeved perry, with 499 litres of pure alcohol at 3.5% (499/3.5%) allowing for 14,257 litres within Band 1.
It now really matters how strong your cider is as to how much you can produce within the Band 1 100% Duty relief threshold.
There is a very real possibility that we may see some producers starting to “liquor back” their ciders to take advantage of these production levels. Liquoring back is a lovely brewing term meaning “water down in the brewery,” so it is now more vital than ever that there is a better definition of cider which includes higher juice content to stop this happening and keep quality high.
To work out the actual Duty rate your cidery is liable for, you first need to work out your previous years pure alcohol production. Across all alcoholic products. All your still cider, all your sparkling cider, and all your made wine now count towards your annual production. As do any spirits you might make.
This doesn’t just apply to the one site, but to any associated sites or connected companies. This is something that has been in the rest of the alcohol industry and cider has been able to avoid until now due to not needing to register. But when you register with HMRC any associated company is taken into account for your production volumes. If you have a cidery in Hereford, and a cidery in Essex, that is one producer as far as HMRC are concerned and all your Three Counties style ciders and all your East Anglian style ciders will count together towards your annual alcohol production volumes. HMRC work this out using Corporation Tax Rules, so it’s no use having a husband own one cidery and a wife own the other, that’s classed as connected and still one producer. You can thank the Family Brewers of the mid 1900’s for coming up with all the little dodges around this; and making HMRC aware of them; and clamping down on them.
Once you have worked out your previous year’s pure alcohol production you can then use the government provided lookup tables to find out which Band you’re in for each category of alcoholic drink, what its Starting Threshold, Marginal Discount and Cumulative Discount is.
I mentioned that all alcohol production is counted together to work out the annual production of pure alcohol, this is because every category of alcohol less than 8.5% is eligible to Small Producers Relief. Still Cider, Sparkling Cider and Made Wine can all now benefit from SPR. And all have different rates of Duty. On top of that, there are now also different rates of Duty for Packaged and Draught drinks.
Initially there was mixed guidelines about what classed as a draught container, but it’s been pretty much simplified to all containers of 20 litres or more are Draught. There are a few exceptions but none anyone is likely to come across in their daily lives. And along with this, anything less than 20 litres is Packaged.
Once you have your Pure Alcohol production, your category and band Starting Threshold, Marginal Discount and Cumulative Discount from the lookup tables, you can then use this simple formula to work out what your specific Discount is for that category:
Discount = (( Cumulative Discount + ( Marginal Discount * ( Pure alcohol production – Starting Threshold))) / Pure alcohol Production.
D = (( C + ( M * ( P-S))) / P
Yeah. It’s easier to just download this spreadsheet, fill in your production volumes, and let it do it for you.
But let’s look at that formula with some real-world figures from a cidery last year:
We’ve had to use an average abv % for these production amounts because that’s what we’ve got. The cidery in question does keep full records, but there’s a lot of them to go through and I wasn’t wanting to push the favour, and it doesn’t really matter so much for this.
From these figures though we can see that the cidery had an annual production of 21.34 hectolitres of pure alcohol (hLpa).
The look up table for packaged cider is this:
We can see at 21.3 hLpa this cidery fits into Band 2, so have a Start threshold of 5, a Marginal Discount of £2.42 and a Cumulative Discount of £48.35
We can put these into the Duty Rate formula like this:
(( £48.35 + ( £2.42 * ( 21.34 – 5 ) )) / 21.34 = £4.12
So this cidery has a Small Producers Relief of £4.12 per litre of pure alcohol on Packaged Cider.
The new base rate for Packaged Cider is £9.67, so after the relief this cidery now pays £5.55 per litre of pure alcohol on Packaged Cider.
If we use that formula for the other categories, we can see all their Duty rates:
Let’s now look at a smaller cidery who produced Cider just under the previous 7,000 litre threshold along with 1,000 litres of Made Wine:
This cidery is producing 4.42 hLpa of pure alcohol, and if we look at the Draught Cider lookup table, we can see that they are in Band 1, the old Farm Gate Allowance:
This means that they will be eligible for the full 100% relief that Band 1 affords.
What’s also worth paying attention to here is the lookup table for Made Wine:
Again, this cidery is in Band 1 here, meaning that their 1,000 litres of Made Wine is also eligible for a 100% Duty relief.
So whereas before they would have been paying 126.08 pence per litre of Made Wine, totalling £1,260.80, they now pay £0.
But what happens when you go over the new 500 litres of pure alcohol threshold and leave Band 1? Previously you had to pay the full Duty amount on all 7,000 litres of cider that you produced. With the new system you still have to pay Duty on all the cider that you produce, but it’s at a discounted rate.
If we look at this producer who has upped their production from 6,999 litres to 10,000 litres:
Producing between 5 and 50 hectolitres of pure alcohol a year we can see that this producer is just into Band 2:
Like our previous example in Band 2 we can use the look up table to see a Start threshold of 5, a Marginal Discount of £2.42 and a Cumulative Discount of £48.35, but this producer has a Previous Annual hLpa of 6.4
We can put these into the Duty Rate formula like this:
(( £48.35 + ( £2.42 * ( 6.4 – 5 ) )) / 6.4 = £8.08
So this cidery has a Small Producers Relief of £8.08 compared to the previous Band 2 example who had £4.12 discount per litre of pure alcohol on Packaged Cider.
With the base rate for Packaged Cider being £9.67, this producer pays £1.59 per litre of pure alcohol on Packaged Cider compared to the previous one paying £5.55.
This is important to note as it shows that just because two cideries share a Band, it doesn’t mean they pay the same Duty. The previous year’s production of pure alcohol makes a huge difference.
Previously this producer would be paying 40.38 pence per litre on the Dry Cider, the Keeved Cider and the Perry, and 61.04 pence per litre on the Strong Cider:
Under the old Duty system, growing from 7,000 litres to 10,000 litres would have seen this producer liable for £5,170.16 in Duty, but under the new system this producer would be paying only £1,017.60 Duty on their 100hL of cider (640 hLpa * £1.59), helped in part by the increase in strength to include up to 8.5% in Small Producers Relief, but also by only paying Duty on the alcohol content, not the full liquid.
What we’ve seen from these hypothetical producers is that the new Alcohol Duty Reform and the Small Producers Relief is very good for cider producers.
If you produce under 7,000hl a year nothing changes for you. With the change to paying Duty on the amount of pure alcohol rather than the amount of cider, you can produce more cider and still get 100% Duty relief. If you produce Made Wines, you can now get Duty relief on them. If you grow over the previous threshold, you won’t be paying as much Duty as before.
The one potential downside to all this is the classification of Cider by HMRC. Currently cider or perry must contain a minimum of 35% juice. There is no minimum of juice for Made Wine. Manufacturers can take advantage of this and produce low quality products with sugars and flavourings and benefit from the Small Producers Relief designed to help cider makers. The Government have said that later this year they will be running a consultation on what classes as Cider and Made Wine, and it is imperative that all cider producers get together and get organised to get a minimum juice content applied to Made Wine, and get the minimum juice content raised to prevent the market being flooded with cheap drinks. Again.