In recent weeks, you may have noticed the campaigns such as Drop the Duty to make your spirits, wine and beers cheaper this Christmas which will help consumers, prop up economic growth, boost sales for small pubs, thousands of which have closed down in the UK in recent years due to increasingly expensive alcohol duties.
The Craft Gin Club started a similar campaign calling for a decrease in the duties that small, independent distillers pay in order to level the playing field and make them more competitive with the large, multinational corporations that dominate the drinks industry. The trade publication, the Spirits Business looked into our campaign and published an article summarizing the campaign. Below are the questions that Spirits Business’ journalists asked us accompanied by our response in full.
Have a read and find out how to make your craft spirits cheaper while helping the small, entrepreneurial businesses that produce them.
Banner image: the stills at the East London Liquor Company whose Batch 1 is the Craft Gin Club's December Gin of the Month.
Is the Craft Gin Club campaigning for a progressive excise duty based on production volume?
The Craft Gin Club, as a supporter of independent distilleries, is campaigning for a means to level the playing field of a drinks industry dominated by and slanted in favour of large, multinational corporations. A progressive excise duty is just such a means, one that is logical, fair, and easy to understand and implement.
Currently, excise duties are uniform across the spirits industry. A 70cl bottle of a 40% ABV spirit carries the same £7.90 excise tax regardless of its producer. That means a startup distillery with small revenues and no profit in its first years of operation must add the same excise tax to the price of its bottle as a multinational corporation such as Diageo whose turnover surpassed £10 billion pounds with a 22% profit margin in its 2013-2014 fiscal year.
A progressive duty based on production volume will help small distillers to grow their sales in the face of huge competitors and, as those small distillers grow, automatically increase the amount of duty they pay.
We would like to be clear that this is not a proposal meant to attack large drinks companies. Small-volume distillers within a large drinks company’s portfolio would be subject to the same progressive tax.
About Craft Gin Club findings
When we learned that the Scotch Whisky Association found that up to 80% of the purchase price of a bottle of Scotch whisky is composed of excise duties and VAT, we conducted a similar survey for gin distillers. We found that 61% of the price of a bottle of gin is composed of excise and VAT.
Following its findings, the SWA has called for a reduction across the board in UK excise duties as they are the fourth highest in Europe and hurting an industry that employs 475,000 people. In a similar vein, we would like to introduce the proposed progressive excise duty to allow the drinks industry to grow from the bottom up by making entrance into this market more attractive for entrepreneurs currently dissuaded by high excise duties and taxes.
Action we would like the government to take:
We would like the government to work together with industry bodies to find a solution such as a progressive excise tax in order to level the playing field of the drinks industry for the benefit of entrepreneurial distillers and brewers.
As a benchmark, we encourage the government to look to the United States where the craft spirits and beer movements have created thousands of small businesses and tens of thousands of jobs. State governments in the United States legally recognize micro-breweries and micro-distilleries as distinct from large breweries and distillers and tax them differently. With similar recognition and taxation in the UK, similar economic growth will occur.
Effects of high tax rates on independent distilleries:
The immediate effect of high tax and duty rates on independent distillers is that it adds to their retail price making them less competitive with large drinks companies. Competitiveness is crucial in the early years of small, entrepreneurial drinks producers. A progressive excise duty implemented by the government would champion small businesses and give them a fighting chance in an industry dominated by big players.
There is already solid evidence as to how government action can help entrepreneurs in the drinks industry. The recent proliferation of independent distillers is due to a modification in the way that HMRC approached requests for new distilleries. Whereas several years ago HMRC would only consider new distillery requests for stills with a production capacity of at least 1,800 litres, it loosened the requirements and began to grant licenses to those wanting to install stills of much smaller sizes. This made the market more attractive to entrepreneurs to the extent that one of the UK’s most successful distilleries makes its product in the kitchen of its owner.
Government action in reducing the tax and duty burden on these entrepreneurs will further advance an industry that promises to be a boon for the UK economy.
How lowering the tax will help independent distilleries and the gin industry as a whole:
The obvious answer as to why lowering the duty for independent distilleries will help them is that it will bring down the retail price of their products, thus making them more attractive to a wider breadth of consumers. The less obvious answer is that an initial retail price reduction will allow smaller distilleries a fair chance to grow organically.
Price is a powerful tool for small distillers, arguably their most powerful next to the high quality and uniqueness of their products. It is very difficult for them to compete with big players in other areas. Independent distillers have higher fixed and variable costs as a percentage of revenues than large corporations, they have very small marketing budgets as opposed to the hundreds of millions of pounds spent on marketing by large corporations, and they have limited access to financing unlike large corporations that have credit lines in the tens of millions.
A lower retail price will help smaller distillers to increase sales volumes and gain market share during their early years. A lower price due to a reduced excise duty means that small distillers maintain the same income per bottle sold, thus increasing their overall income thanks to the sales volume increase. This increased income can then be invested in their businesses, helping them to grow organically.
The progressive nature of the excise tax that we propose means that as a small distiller grows and produces more volume, the excise duty on their product will rise accordingly.
A progressive duty is good for the gin and spirits industry as a whole because it boosts competition as well as product diversity. The craft movement has begun to affect large drinks companies, primarily in the beer market to date, in that they have responded to it with new product lines as well as the buyouts of independent breweries.
This diversity is great for consumers who are increasingly conscious of the origin, ingredients and quality of what they consume and who are seeking new, exciting and natural flavours in their drinks tasting experiences.