New alcohol duties and tax overview — a guide for sole trader and limited company breweries

UK Prime Minister Rishi Sunak calls it “the most radical simplification of alcohol duties for over 140 years” — but how will the new rates of alcohol duty affect the taxes payable by our breweries and their shareholders?

Here, senior associate and lead of our specialist breweries and beverages team Daniel Finn sets out the new rates and what sole traders and limited companies need to know.

Tax on the product — alcohol duty, excise duty and VAT

The longstanding ‘freeze’ on alcohol duty came to an end in August. Alcohol duty is now expected to rise with inflation (running at about 10% per annum at the time of writing).

To soften the effects of these increases — and as part of a new ‘Brexit pubs guarantee’ — the Draught Relief scheme will theoretically increase the profitability of alcoholic drinks sold in pubs. However, whether this will cancel out the duty increases is a different story.

Beer is liable for duty as soon as it is ‘produced’ or fit for consumption — yet the amount of duty paid depends on the alcohol’s strength and the quantity of beer being produced.

The new rate of duty applicable to beer produced with an ABV of 1.3% to 3.4% is £9.27 per litre of pure alcohol. For beers at 3.5% to 8.4%, this rises to £21.01. Beers with an ABV of 1.2% and below attract no duty, which may encourage some brewers to turn their hands to micro IPAs and non-alcoholic options. Furthermore, small brewers (those independently producing no more than 4,500 hectolitres of pure alcohol) will qualify for ‘small producer’ relief, which will reduce the rate of duty.

Excise duty is also payable on alcoholic beverages being exported to EU countries. Since Brexit, breweries may also need to register for VAT in the EU member state they supply beverages to (being mindful that VAT rates differ across member states). Extra care should be taken to ensure that the taxation rules of each member state exported to are followed and that the tax for each member state is paid correctly.

Tax on profits — treatment of sole traders and brewery companies

As a brewery, the tax you pay on profits made from beverage sales depends on the structure of your business (for example, whether you operate as a sole tradership or limited company). Sole traders are personally required to pay tax on profits earned, while companies are taxed as separate legal entities.

In practice, many breweries start life in sole tradership form and later incorporate when the business has started to generate revenue and perhaps needs to take on new liabilities such as employees, property leases and third-party loans.

Since there is no separation between owner and business, sole traders pay income tax and National Insurance Contributions (NICs) on profits.

In contrast, a company structure means that the business pays corporation tax (currently at 19%) on profits. However, income tax is then payable on the salaries received by founders and employees. Shareholders of the business are also eligible to receive dividends (which could be paid as a top-up or in lieu of salary) in respect of their shareholding — which attract slightly lower tax rates than income tax and are also NIC-free for both the employer and employees.

Tax on gifting or issuing shares

Being able to incentivise employees by granting shares and/or share options can be a significant benefit of running the business through a limited company structure, rather than operating as a sole tradership — but it’s worth noting that tax charges can arise on the issuance of shares to employees.

To the extent that any shares (but not options) are gifted or issued for less than the market value, that discount will be taxed as a benefit in kind and the employee would pay an income tax charge on the difference between the market value and the price (if any) that they have paid for their shares. However, there are likely to be options available — such as an EMI scheme — that can minimise the tax charges for both the brewery and relevant staff receiving the shares. In some cases, this might also provide an associated corporation tax relief on profits.

Tax on exit

Tax charges will arise on the sale of your brewery business or its assets, assuming that the brewery or assets are being sold for a profit.

Sole traders will pay capital gains tax (CGT) on the profits made from selling the brewery or assets. Similarly, shareholders will pay CGT on the sale of their shares in the brewery.

However, Business Asset Disposal Relief (BADR) can be claimed in either of those scenarios — subject to certain conditions — to reduce the rate of CGT payable from 20% (for a higher rate tax-payer) to 10%, subject to life time limits (currently set at £1m).

Talk to us

Whatever the structure of your business, it’s crucial to ensure that you properly account for all tax payable. Failure to do so may expose you to a wide range of penalties — both financial and criminal.

If you need expert advice and guidance, talk to us.