VAT’s All That About?

There’s a lot of talk around at the moment of the need to reduce VAT to help save hospitality businesses from going under. There’s also a lot of talk about increasing the Draught Duty Relief to help pubs.

Only one of these is likely to have any effect whatsoever, and it’s not the one that the government are focussed on.

Draught Duty Relief was recently brought in so the government could crow that they were championing pubs, were giving them a tool in their arsenal against the supermarkets. But the thing is, it doesn’t work. The amount of duty relief was set at 9%, which is coincidentally the same amount that the government put beer duty up by, effectively meaning that draught duty stayed still, while everything else went up. Still, 9% seems like a lot right? Not really.

An average beer is around 4.2%, and the full rate of Duty now is £21.01 per litre of pure alcohol. That means that for a 4.2% beer, the rate of Duty is 88p per litre (£21.01 * 4.2%), or 50p per pint (88p * .568).

The Draught Relief is applied to all beers, not just those from smaller producers, so even the multinationals get this. And the Draught Relief rate is £19.08 per litre of pure alcohol, or 80p per litre or 46p per pint.

The Draught Relief works out around 4 pence per pint. This is a saving that hasn’t been passed on to the pubs, to then pass on to the drinkers like the government has claimed. The smaller breweries are using this tiny saving to offset the hugely rising costs elsewhere. And while 4p a pint doesn’t seem much, but Carling (owned by Molson Coors) sold 2,121,157 hectolitres in 2022 according to a report in the Morning Advertiser (https://www.morningadvertiser.co.uk/Article/2022/12/01/What-is-the-best-selling-lager-in-2022).

Hectolitres are a weird measurement that only seem to be used in brewing, and are equivalent to 100 litres. So Carling sold 212,115,700 litres over the bars in 2022. 

Carling is a 4% lager, so we can do the maths on this.

Full Duty of £21.01*4% = 84p per litre
Draught Relief Duty of £19.08*4% = 76p per litre. 

The introduction of Draught Relief has ‘saved’ Molson Coors 8 pence per litre on just Carling alone. And with 212,115,700 litres, that works out at £16,969,256 saved Duty a year. Almost £17 million that the Treasury isn’t getting. 

And yet we’re still not seeing the price of a pint coming down over the bar, because everyone is seeing rising costs. Although some are better placed to handle those than others.

In short though, Draught Duty Relief doesn’t work. It took a good idea, reducing the price of a pint over the bar, and completely misjudged how to do it. It’s costing the Treasury potentially hundreds of millions of pounds each year and is having no effect on either breweries stability, pubs competitiveness against supermarkets, or the drinkers pocket. And I’ve not even mentioned the debacle on take-outs.

So let’s now look at VAT. Value Added Tax. It’s a tax on the value of a given product, the clue is in the name. And yet, it’s not. It’s a tax on the cost of a product.

As an example, let’s look at the current cost of a bottle of Timothy Taylor’s Landlord in both my local bottle shop of Keg, Cask & Bottle in Prestwich, and in the local Sainsbury’s.

My local independent sells the bottles for £3.25, the supermarket sells them for £2.25.

Sainsburys can sell them much cheaper because they’ll be buying in a lot more of them, and therefore getting a much better price on them.

This also means that the VAT paid on £2.25 is 37p, whereas the VAT paid on £3.25 is 54p.

The ‘value’ of these two bottles is identical, yet the value added tax is different. The semantics of value and cost aside, the smaller independent is paying 68% more VAT per bottle than the larger corporation.

Currently there is a call to reduce VAT for hospitality from 20% to 10%, which in this example would see the bottle shop paying 27p VAT compared to the supermarket’s 37p. This would still see the bottles sold at £2.25 in the supermarket, but the bottle shop would see the price dropped to £3.00 if the saving was passed on in full. But it would be the choice of the shop or bar to pass that saving on by dropping prices or paying bills, rather than the saving not making its way out of the brewery.

It’s also worth remembering that Draught Duty Relief sees a cost reduction of 4 pence per pint, whereas a reduction of VAT to 10% would see a reduction of 37 pence per pint.

It’s also worth considering that if this plan was introduced, that could end up seeing the Treasury lose a lot more than the Draught Duty Relief. So whilst its intentions are good, and something definitely needs to be done, I don’t believe this is the way, as it is. But there is, I believe, a solution to this that would be cost neutral to the Treasury, and would help hospitality.

In 2002 the government introduced Small Brewers Relief which set out to level the playing field for the smaller brewers, by giving them a tax relief to help offset the purchasing power and economies of scale that was enjoyed by the larger breweries, and it worked. It saw a huge rise in the number of smaller breweries opening, an explosion of choice for the drinker, and a more competitive market.

In 2023 Small Brewers Relief was widened to include all alcohol producers and renamed as Small Producers Relief to bring the system in line across all aspects of alcohol production, and to give that same saving and benefit to other parts of the sector.

What is needed in 2024 is the introduction of a Small Retailers Relief.

The smallest alcohol producers get either a 100% or a 90% duty relief, then the relief gradually tapers off as the producers get larger based on the amount of alcohol they make each year. A similar system could easily be introduced for hospitality retailers, whether they’re bars, pubs, restaurants, cafes, delis, sandwich shops or any of the other parts of our industry. Based on annual turnover, giving the smallest independent single site venues a 90% reduction in VAT (which would take it to 2%) through to the small to medium operators having a 50% reduction, up to the larger companies who pay full VAT. 

And to offset this, like with the Small Producers Relief, have a negative relief for the largest outlets. If VAT was increased for supermarkets to 21% there would be little to no change in shelf prices, even the shareholders wouldn’t notice much difference, but given the turnover of these companies it would almost certainly not just offset any VAT reduction elsewhere, but would likely be cost positive for the Treasury.