Written evidence submitted by the British Beer and Pub Association
The British Beer and Pub Association (BBPA) represents companies which between them own 20,000 pubs and brew over 90% of beer sold in the UK. Our members have many different ownership structures, including UK PLCs, privately-owned companies, independent family-owned brewers and international brewers. The Association actively campaigns for measures to support a thriving brewing and pub industry in the UK. We all want to have vibrant pubs playing a key role in their local community, and supporting the 900,000 brewing and pub jobs in the UK. There are a range of pub ownership models that support our varied communities across the UK. Please find below our response to this important inquiry.
What are the major long-term pressures on the tax system in the UK, including those arising from changes in working practices, demographics, the environment and other factors? How are these affecting the efficiency of the tax base and the overall level of demand for public services?
Inevitably the COVID-19 pandemic and the ensuing lockdown has had a massive impact on the UK economy, not least on the hospitality sector which remains among the hardest and longest hit. Naturally trade in pubs, and therefore trade for the breweries that supply them, will take a very long time to recover. A survey of our members recently indicated that more than a third of pubs (37%) are currently unable to break even due to severely reduced capacities and the extra cost of measures put in place to adhere to COVID-secure guidance. Since reopening footfall in pubs has varied between managed (65% of the footfall they saw in the same period in 2019) and leased/tenanted (74%), equally turnover varies (66% and 79% for managed and leased/tenanted respectively), but either way both turnover and footfall are down drastically. This of course has a direct impact on the tax-take from those businesses which will be down sharply, and a knock-on impact on sales of beer. Typically tax from beer (duty + VAT) sold in pubs provides c.£3bn to the Treasury per year and we would expect this to be down markedly in 2020.
The severely restricted climate in which they operate will undoubtedly mean that sadly some pubs are unable to survive this period, either unable to re-open or unable to survive with reduced income and increased costs. Many pubs were already marginal in terms of profitability due to the burdensome tax and rates regime they face, and the post-COVID world will see some of them disappear for good unless action is taken swiftly. Pubs provide vital employment (around 600,000 people are employed directly in pubs, with over 40% of them under the age of 25) and therefore vast sums of Treasury revenue in terms of employment taxes. Breweries and the beer supply chain support a further 300,000 jobs in the economy. The long-term impacts of losing pubs, and the key role they play in local communities, should not be underestimated. Of course the impact on taxes will be profound, but the social impact will be greater still. Government must take the following actions to enable the recovery of our sector:
What more can the UK do to protect its tax base from erosion as a result of globalisation and technological change, and what further impacts will the coronavirus pandemic have on our tax base?
An extremely efficient way in which to protect the UK tax base would be to ensure enduring presence and investment in homegrown manufacturing industries. Brewing is one such industry and one in which the UK has an almost unique heritage and expertise, renowned across the world. There are over 2,000 active breweries in the UK producing thousands of different styles and variations of beer. Over 80% of the beer brewed in the UK is consumed here and the beer supply chain is largely self-sufficient when it comes to things like malting barley. The vast majority of brewing in the UK is undertaken by large global businesses. The UK operation, whether it be centered in Manchester, Burton-upon Trent, Northampton or South Wales must compete hard with other markets around the world for further investment. This is dependent on that return on investment and, with an eye-watering tax burden – up to a half of turnover is excise duty alone - in a very competitive market, the justification to brew in the UK presents a very significant challenge.
However, despite being a “traditional” manufacturing industry it should not be forgotten that there is a huge amount of innovation in the sector. The number and variety of low and no alcohol beers has exploded in recent years as brewers have responded to an increasing demand for such products. Beer was already on average the lowest-alcohol product available on the bar and now our sector is leading innovation in this area. The extent of the investment required to perfect such beers should not be underestimated and is at the very forefront of food and drink innovation.
Brewing is not just a strong homegrown manufacturing sector, but it is also one that is uniquely evenly distributed throughout the country. If the Government is to achieve its ambition of “levelling up” the economy it needs to recognise that there are certain sectors that are prevalent in many of the regions that have in the past been under-invested. The health of the brewing sector is also intrinsically linked to pubs. The shutdown of pubs and wider the hospitality sector cut off 70% of the UK beer market by value. Whilst sales through supermarkets increased during this period, this could by no means compensate for the loss of sales through pubs which has hit overall beer sales hit hard.
Moreover, pubs are of course present in every region, in their hundreds and thousands, and are a vital source of jobs, and therefore tax, in those places. Just as an example, there are 2,200 pubs and 72 breweries in the 10 most deprived local authority areas in the UK (based on rank), generating 52,000 crucial jobs and contributing £1.3bn to those economies. The brewing and pub sector can play a vital role in getting the post-COVID economy back on its feet – but only if it is properly supported by the Government. This is why we believe action on beer duty and business rates should be seen as an investment in the future of communities rather than a direct cost to the Treasury. Even before the pandemic, almost one in every three pounds spent in the pub was going to the tax man. This was not sustainable, even then.
Beer is also a remarkably strong export product, which again speaks to British tradition, heritage and world-renowned expertise, the extent to which this is in demand from overseas markets. Exports of beer are worth around £500m to the economy every year, to traditional markets like the United States and the EU but also to emerging markets like China and India. For these sales to continue and grow, it will be vital to ensure that future trade deals do not create new barriers and therefore reduce the tax derived from exports.
Do these pressures need to be met with tax reform, and if so, is this the right time for reform?
Insofar as the level of taxation of the brewing and pub sector is too high, yes it is in need of reform and specifically lowered substantially to bring us more into line with our major European brewing neighbours. Reform in this sense is long overdue – the years of the beer duty escalator (in place between 2008 and 2013), increasing duty by 42%, and causing beer sales to drop by almost 20%. During this period 3,700 pubs closed with over 44,000 jobs lost. This did an enormous amount of damage to the beer and pub sector. Although in recent years we have seen a number of cuts and freezes, we are still nowhere close to undoing the damage of the increases during the escalator years. Our sector was over-burdened before the COVID-19 pandemic and is in need of further action now, more than ever before. For that reason significant corrective action is required and would be a massive boost to both pubs and the brewers that supply them at a time when they sorely need it. A significant cut for British brewers would also act as a turbo-charge for export activity, further adding to the UK bottom line.
What overall level of taxation can the economy bear without undesirable or counterproductive harm to economic growth?
The years of the escalator and the ensuing sharp drop in beer sales, the number of pubs and pub jobs are an indicator that the brewing and pub sector was well beyond the point at which it could bear the taxation burden sustainably. The following years of cuts and freezes (aside from the disappointing 3.9% increase in the 2017 Spring Budget) have gone some way to redress the balance – beer sales have stopped falling and even began increasing in 2018. However, that should not be taken as an indicator that duty increases can resume again – quite the opposite. To truly allow brewing and pubs to recover from the economic shock of COVID-19 a sharp and permanent reduction in beer duty is called for.
It is also worth noting that the level of taxation on beer in the UK is among the highest in Europe and significantly out-of-kilter with our larger European brewing neighbours. The level of duty in the UK is, for example, eleven times higher than that in Germany and Spain. It is also notable that some European countries, like Italy and Spain, have also allowed a VAT reduction on beer sales on the hospitality sector while the UK Government has not included this in the recent VAT reductions – further exacerbating the disparity.
Which areas of the tax system are most in need of reform, and which are best left alone?
We were pleased when the Government committed to reforming the Small Brewers Relief scheme, which had operated unamended for 15 years at that point. In that time the industry has undergone massive change – going from around 400 breweries to over 2,000. The explosion in brewers is a positive thing for both beer as a category and for consumers in terms of choice, but that does not mean that SBR should continue unamended. The BBPA welcomed the introduction of Small Brewers Relief in 2002 and strongly supports the scheme, and believes that it should be continued, building on current successes. However, we believe the Government’s intention to reduce distortions in the current structure, “smooth the curve” and remove the cliff edge that acted as a barrier to growth is the right one. It is encouraging that the Government has re-committed to a £65-75m package of support for smaller brewers.
A fair and sustainable business rates system is critical to support business investment and growth, and no more so in our sector. Pubs already pay a disproportionate share of the rates burden and a fundamental rethink to the functioning of the business rates system is vital. Over 80% of Britain’s 47,000 pubs are run as individual SMEs and, even prior to the current pandemic, they were facing some major challenges with one in three pounds spent in pubs going to the tax man.
Pre-revaluation pubs were paying 2.8% of the total rates bill yet contributed only 0.5% of rate-paying businesses turnover, an overpayment relative to turnover of £500 million, and more than any other sector as a share of turnover.
A legacy of very different times, there can be no justification for such an inherent unfairness in today’s increasingly digital economy. Indeed, the 2017 revaluation compounded this issue. The sector’s rateable value increased by 14.6% compared to an average of 9.1%.
We are therefore hugely supportive of the government’s announcement to fundamentally review business rates. The tax rate is on an unsustainable path for our sector and must be reduced for pubs to survive and thrive. We are also grateful that the unique position of pubs has been recognised with specific relief in recent years and it is crucial this continues. Indeed, the current rates holiday during the pandemic has been critical and must continue for a further 12 months.
What reforms should be considered in response to the pressures on the tax system?
As set out above now is the time for bold, counter-cyclical action to cut beer duty. The years of the beer duty escalator that saw duty increase by 42% was so damaging that the corresponding increase in duty receipts was nowhere near as high. The Government didn’t see anything like the expected benefit it expected in terms of receipts, and the knock-on impact on jobs lost (and therefore employment taxes lost) would have further widened this gap. This is before you even consider the social impact of losing thousands of community hubs. As one of the hardest and longest hit sectors in the COVID-19 lockdown, brewers and pubs should be targeted for long-term support, in the form of a 25% duty cut and business rates reform to enable their recovery.
What is the role of tax reliefs in rebuilding the economy and promoting economic growth and efficiency? Does the current regime of tax reliefs perform this role well?
We have set out our position concerning the Small Brewers Relief (SBR) above. We believe that SBR played an important role in transforming the brewing sector but over time has produced some severe unintended consequences that the Government sought to address in their review. We await the further technical consultation in this area but we support the broad thrust of the existing proposals.
What are the areas for simplification?
Again, we support the Government’s action in amending the SBR scheme to support growth.
Reform of business rates should ultimately lead to a simpler and more coherent system for rate payers.
Is there a role for windfall taxes in the post coronavirus world?
The BBPA does not have a view on this question.
What is the right balance between taxation of work, savings/pensions and wealth?
The BBPA does not have a view on this question.
What is the best way to tackle tax reform, including what changes might be needed at HMRC to support implementation, and how should the Government consult with stakeholders and parliament?
We have had a positive and collaborative relationship with HMRC in recent months in particular but we believe it is important that this continues in the medium and long term. We are ready to work with Treasury and HMRC to create a fairer and more sustainable tax regime for our sector.
The operation of the alcohol duty regime has been badly in need of modernisation and simplification for a number of years. We are pleased that this work has recommenced, although this has started and stalled many times in recent years.
 Ministry of Housing, Communities and Local Government – The English Indices of Deprivation 2019 (IoD2019)
Oxford Economics – The Local Impact of the UK Beer and Pub Sector