HM Insights

What is a craft distiller and are they due a tax break?

Is there a case for reduced rates of spirit duty for craft distillers? As Scotland’s craft distilling industry grows, Scott Kerr, head of Harper Macleod’s Food & Drink group, considers whether a new category of “small distillery” should be created to help the fledgling artisans establishing their brands, and whether we need a Campaign for Craft Spirits.

Distilling Food And Drink

How do you define a craft spirit?

With the recent surge in popularity of craft spirits, there has been much debate in the industry and among commentators as to who can be classed as a craft distiller and what makes a spirit “craft”.

With that in mind, at a recent event hosted by Harper Macleod we pulled together a wide range of those active in the sector - not only distillers themselves, but brokers, funders, academics and suppliers - to debate this very question.

While it seemed easy, at first, to decide if any particular distiller fitted into the category, a variety of views emerged when an attempt was made to define a “craft distiller”.

You could define it by volume, either size of batch or overall production – but what happens when a small distiller grows its share of the market and increases production? Is that alone enough to change their status?

You could define it as requiring the distilling process being “by hand”, with each stage in the process judged by the individual distiller – but once that distinctive and elusive blend of ingredients and processes is found, is there a problem with using automation to ensure consistency? And for whisky, the majority of flavour and distinctive characteristics arise from the maturation process, not the distillation itself when individual skills come into play. And for blended products, the skill of the master blender is paramount.

One theme, however, was constant: the ethos of the distiller to create a wonderful product and the passion for their craft. Or perhaps to avoid further debate on the question, the passion for their art.

So maybe that’s the answer – ethos and passion - but how do you define that? We all knew what we meant, but … perhaps it’s best just to leave it to the ultimate test, the end consumer.

A taxing question

But all in the sector agreed that for one purpose volume was the appropriate measure. Beer and spirits duty is a huge source of income for the Government and, it is also argued, can be used as part of the Government’s health policy – as is currently being discussed in proposals to impose a minimum price per unit of alcohol.

Anyone wishing to produce spirits in the UK whether by distillation or any other process requires:

  • a distiller’s licence;
  • approval for their plant and process; and
  • to account for and pay spirits duty to HMRC.

The current rate of spirits duty is £27.66 per litre of pure alcohol. To put this in context, the total tax burden, including VAT, has been said to represent 77% of the average price of a bottle of Scotch, taking account of a recent 2% reduction in the rate of duty.
Similar duties apply to other alcoholic drinks, but at different rates. And for beer there are special reduced rates of beer duty which apply to “small brewery beer”, which while there are detailed regulations require, as a minimum, that:

  • the brewery produces no more than 60,000 hectolitres of beer annually; and
  • less than half that produced is produced for a third party.

Supporting the growth of craft distillers

The growth in craft beers has its roots in the Campaign for Real Ale, which has clearly achieved its initial aim. With the current trend towards craft spirits, a similar pattern is emerging. And like a small brewery, craft distillers are, in the main, a single distiller with a single still and not connected with any other distillery. They are small businesses looking to grow, but like any other are in need of support in the early stages.

So is there not a case for a reduction in duty for “small distillery spirits” in the same way as for “small brewery beer”?

While we could perhaps not agree on one definition of a “craft distiller”, many in the sector would be very happy with an HMRC definition of a “small distillery” determined only by size. Size isn’t always everything, but for the fledgling craft distilling sector creating a definition of a “small distillery” for duty purposes could prove very important indeed.

Get in touch

Scott Kerr is Head of Harper Macleod LLP’s Food and Drink Group. If you wish to discuss any of the issues raised in this article, please get in touch.