Written evidence submitted by the British
Beer and Pub Association
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.
Chart 1
BEER SALES IN THE ON AND OFF TRADES, 1997-2010
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.
Table 1
EMPLOYMENT GENERATED BY THE BEER AND PUB
SECTOR
| Direct jobs | Indirect jobs
| Induced jobs | Total
|
| South East | 85.088 | 26,229
| 17,154 | 128,472 |
| London | 61,636 | 22,254
| 13,521 | 97,410 |
| East | 54,226 | 20,983
| 11,645 | 86,854 |
| South West | 63,615 | 19,627
| 12,788 | 96,030 |
| West Midlands | 62,320 | 25,472
| 13,262 | 101,054 |
| East Midlands | 51,630 | 15,024
| 9,277 | 75,932 |
| Yorkshire & The Humber | 60,087
| 19,891 | 10,759 | 90,737
|
| North West | 82,398 | 20,744
| 14,941 | 118,082 |
| North East | 29,583 | 8,307
| 5,084 | 42,974 |
| Wales | 33,997 | 10.768
| 6,253 | 51,018 |
| Scotland | 49,960 | 12,833
| 8,301 | 71,093 |
| Northern Ireland | 16,301 |
4,081 | 2,486 | 22,868
|
| UK | 650,839 |
206,213 | 125,471
| 982,523 |
Source: Oxford Economics
NEGATIVE RETURNS
FROM DUTY
INCREASES
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%.
Chart 2
CONSUMPTION OF BEER, BEER DUTY RATE AND BEER DUTY REVENUE
SINCE 1997
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.
Table 2
IMPACT OF A DUTY FREEZE ON BEER (RELATIVE TO RPI +2% INCREASE)
| Indicator | Units
| Year 2011-12 | Year 2012-13
| Year 2013-14 |
| On-trade sales | 000 barrels
| 549 | 1035 | 1,477
|
| Off-trade sales | 000 barrels
| 226 | 510 | 839
|
| All sales | 000 barrels |
775 | 1,546 | 2,315
|
| Employment | People | 10,545
| 20,044 | 28,775 |
| Duty | £m | -£61
| -£110 | -£166 |
| VAT | £m | £17
| £43 | £69 |
| Corporation tax | £m |
£49 | £92 | £131
|
| Employment tax | £m |
£33 | £64 | £92
|
| Total tax | £m
| £39 | £89
| £126 |
| Social Security saving | £m
| £91 | £82 | £75
|
Source: Oxford Economics (Dec10)
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.
AN UNBALANCED
AND UNHEALTHY
DUTY REGIME
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.
Chart 3
COST OF PRODUCING A LITRE OF PURE ALCOHOL IN BEER AND
SPIRITS: UK 2007
Source: PriceWaterhouseCoopers
Chart 4
UK EMPLOYMENT RELIANT ON ALCOHOLIC DRINKS, 2008/9
Source: Oxford Economics
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
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