Small Producer Relief changes: How to optimise discounts

The change: Duty rate determined at production

From August 2023, small producers applied the Small Producer Relief discount at the rate applicable when drinks passed the duty point.

However, as of 1 February, the discount must be applied at the rate applicable when drinks are produced. This rule applies even when drinks are produced in one year but pass the duty point in another.

A production year, for the purpose of the scheme, is 1 February to 31 January.

To illustrate, HMRC provides a useful example.

“Company A’s product is produced on 15 January and the SPR rate for that year (£10.00) is applied. It passes the duty point on 7 February, in the next production year, when Company A’s SPR rate has risen to £15.00. The SPR rate paid at the duty point for the product is the rate applied on 15 January (£10.00).”

The meaning of production

To decide the point of production, a producer needs a working definition of ‘produced’. The HMRC offers a general definition in its discussion of duty liability. However, this is not necessarily applicable following the changes to Small Producer Relief.

“In this (brand new) context, HMRC has confirmed that they are happy (and would, in fact, appreciate the clarity and consistency) of using the packaging date – so the date and time of the packaging action,” writes Max Andrew, Co-Founder of brewery management software company Breww.

“For situations where beer is packaged off-site, they have said that using either the date dispatched or the date packaged would be acceptable.”

Determining annual production

Following the updates, determining annual production is more complicated.

The producer must convert hectolitres made in the previous year (which, as mentioned, runs from 1 February – 31 January) into hectolitres of pure alcohol.

The producer must also estimate how many hectolitres are likely to be made in the coming production year.

If the total for each is less than 4,500 hectolitres, then the producer is eligible for Small Producer Relief.

Barry Watts of the Society of Independent Brewers explains the process for breweries: “They then use the total in a complex formula, and refer to a series of lookup tables to calculate their cash discount for different strengths and types of beer – before subtracting this from the headline rate of duty to determine their new rate.

“Fortunately, the Government has created an online calculator to make this a bit easier.”

Producers should also be aware that, to be eligible, products must be less than 8.5% ABV and not made under licence – and all products containing alcohol must be included.

If a producer makes more than 4,500 hectolitres in a year, then the full rate of duty applies to products made in the rest of that year – and the following year.

What about retrospectively updating the previous year’s production?

“A producer cannot retrospectively change their annual production, as this is a record of what they actually produced in the previous small producer year,” says Watts.

However, the scheme does offer some flexibility.

“This came out of the COVID pandemic, when some breweries paid a much higher duty rate on their beer because they had produced higher volumes in the previous year,” says Watts.

“However, with pubs forced to shut during COVID, their production collapsed.”

If a brewery’s production is affected by certain circumstances, such as a fire, then it might be possible to change the duty rate for the previous year.

The effect of licences and contracts

Products made under a licence are not eligible for relief, but those made under contract are.

‘Under a licence’ includes situations in which:

• A licence limits how products are produced and sold
• The producer sells the products under its name, but packaging declares the product is ‘produced under licence’
• The producer pays the brand owner royalties or a premium
• Another producer owns the product’s name and intellectual property rights

‘Under contract’ includes situations in which another producer makes the product (with or without a service charge) but is not involved in marketing the product.

Products made in these circumstances are eligible for relief at the other producer’s reduced rate.

What about Northern Ireland?

To be eligible for small producer relief, producers in Northern Ireland must meet the general criteria (including the annual limit of 4,500 hectolitres for pure alcohol), as well as the following thresholds for particular products:

• Beer: 200,000 hectolitres of finished product 
• Wine: 1,000 hectolitres of finished product
• Cider: 15,000 hectolitres of finished product
• Spirits: 10 hectolitres of pure alcohol

These thresholds are determined in the same way as the threshold for pure alcohol.

How to optimise Small Producer Relief

“Like all changes, there are winners and losers,” Watts says.

“[The scheme] encourages the production of lower strength beers, which benefit from the new lower rate of duty below 3.5%. It also penalises higher strength beer above 8.5%, such as imperial stouts and strong Double IPAs.”

Product changes may help breweries to avoid penalties.

“An important element worth highlighting to any accountants working with qualifying businesses is the two-fold effect producing products over 8.4% now has on the amount of duty payable,” Andrew says.

“In keeping with the Government’s objective to encourage the production of lower-strength products, not only do products over 8.4% not qualify for relief, but by producing higher strength products, [businesses] will reduce the amount of relief they’ll receive the following year.

“Reducing the average ABV across the product range will not only result in savings today, but also ensure the duty rate is kept lower next year.”

Producers might also think about making the most of the new Draught Relief.

“[This] copies the very successful Australian scheme by giving a discount on beer packaged into containers of 20 litres or larger, and is aimed at encouraging more people to drink in the pub rather than at home,” says Watts.

“This discount is currently at 9.2%

“Over time, we might see producers innovating, by producing draught sparkling wine or ready-made cocktails below 8.5% that can benefit from [both] Draught Relief and Small Producer Relief.”

IFA Tax Series 2024 starts Thursday 21 March, with a Spring Budget update, discussion of employment tax cases, advice on exiting a business and Basis Period Reform. Find out more or register.