Duty reduction would help Scottish craft distillers thrive

The success of the craft brewing industry in Scotland and throughout the rest of the UK over the last decade has been phenomenal.

There are now over 100 breweries in Scotland alone and, overall, the UK has more breweries per head of population than any country in the world. During this time UK beer consumption has also undergone a real sea change as consumers have increasingly moved away from mass brewer to craft brewer products.

Scotland’s craft whisky distilling industry is, in many ways following a similar path to that of the craft brewers. Consumers are becoming increasingly discerning about Scotch, seeking greater choice, more insight into providence and, of course, quality in their choice of brand.

However, if the craft distillers are to ensure their industry can reach its full potential they will need to secure the level of government support which is helping its micro-brewing cousin continue to grow. Just as craft brewers have enjoyed a reduced rate of beer duty for over 10 years now, it is vital that craft distillers are also granted a similarly favourable tax regime so existing businesses can thrive and further new entrants can be incentivised to enter the market.

At present distilled spirits in the UK are subject to excise tax at a rate of £27.66 per litre of pure alcohol which is also subject to 20 per cent VAT. The effect is that a 70cl bottle of spirit with an alcohol volume of 40 per cent pays £7.74 in excise tax plus VAT, a duty which applies irrespective of the size of distillery and length of time it has operated.

While there is an EU directive that currently provides a tax break for independent micro-distilleries that produce less than 1000 litres per annum, this threshold was initially set in the 1980s and does not reflect current market conditions where a higher volume is required for such a business to be commercially viable. The vast majority of Scottish distilleries (around 90 per cent of them) are owned by large groups and do not require reduced rates but raising the above threshold could provide a helping hand to the smaller craft distillery businesses which most need it.

The fact of the matter is that all businesses require cash and cash flow, both of which are always a major challenge for those operating a craft distillery. Unlike a brewery which can sell product within days of production, a Scotch distiller must wait three years until they produce a product which can be classified as whisky and then several more years until that whisky is matured and ready for sale.

This long gestation period has a significant impact on cash flow for early stage companies which have to fight hard for survival and often overcome the barrier of attracting investors who have deep pockets and a lot of patience in realising a return on their investment.

Good news may be at hand however as an ongoing review of the existing EU directive holds the prospect change in the existing tax regime which could benefit craft distillers. While the industry is pressing its case for this through bodies like the Scottish Craft Distillers Association, the initial step of liaising with the EU Commission officials is one where the Scottish and UK Governments must take a strong lead by lobbying MSPs and MPs to make representations for changes to European tax legislation.

Given the economic contribution the Scotch whisky industry makes to the UK Treasury and its importance in terms of job creation, helping enhance its future prospects should be a priority.

Let’s hope we can look back in 10 years on a decade of growth for the craft distillery industry which matches the success which is currently enjoying by its beer-making counterparts.

Adam Hardie is head of food and drink at accountancy firm Johnston Carmichael.