April 3, 2013 3:49 pm

UK pub industry craves parity over tax

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a drink is poured at a pub©FT

George Osborne is rarely cheered when he enters a room. But one such exception occurred last week, when the chancellor turned up to a shindig held by the British Beer and Pub Association, following his decision to cut duty on beer.

“People spontaneously cheered when he walked in,” said Brigid Simmonds, chief executive of the lobby group. Mr Osborne then drank a pint of slightly-less-heavily-taxed-than-last-week Spitfire, and left after 20 minutes.

His Budget move to axe the “beer duty escalator”, which increased the tax on beer by 2 percentage points above inflation each year, had made him a popular man in the pub industry – no mean feat for a chancellor. His predecessor, Alistair Darling, faced a campaign to ban him from every pub in Britain when he first introduced the escalator policy.

Even though Mr Osborne’s reversal of the escalator only cut the duty on a pint by 1p, it has been welcomed by pub operators that were expecting an automatic 5 per cent rise.

“It’s not before time,” says Ted Tuppen, chief executive of Enterprise Inns, which owns 6,000 pubs across the UK. He points out that the tax on a pint has risen more than 40 per cent in the past five years.

Some industry watchers are critical, however. “It’s a gimmick,” says one analyst, pointing out that Mr Osborne also increased the duty on wine and spirits heavily – adding 10p and 38p respectively to the tax on 75cl bottles. “While the supermarkets keep selling cheap booze, the high street drinking emporium will struggle,” the analyst warns. A typical pint costs £3 in a pub – with around a third of this going on tax – compared to barely £1 in a supermarket.

But, gimmick or not, most analysts expect the industry to pass the duty saving straight to consumers – as some pubcos, such as Enterprise Inns, have already promised to – in an attempt to get them back into pubs.

Britain’s pub industry has floundered in the past decade, as people have drunk gradually less outside the home. The total volume of beer sold in pubs has fallen by a fifth since 2008. A combination of the smoking ban, the escalating price of beer outside of supermarkets, and people drinking less proved too much for many in the industry – putting nearly 10,000 pubs out of business over the past decade.

Punch Taverns and Enterprise Inns, the two largest pub groups in the UK, have both flirted with disaster since the onset of the financial crisis, because of their large debt piles. Many independent landlords, meanwhile, have been drowned in rising utility bills. Even national chains, such as JD Wetherspoon, have struggled to maintain margins in the face of rising costs.

The industry has not provided investors with much cheer either.

Shares in Marston’s, which has 2,000 pubs across the UK, are still priced at less than half their pre-crisis peak. Enterprise Inns’ share price quadrupled over 2012 but it still trades at around a third of its net asset value, suggesting investors are yet to be convinced by its potential for growth. Punch, meanwhile, is still embroiled in a tug of war with its bondholders as it tries to restructure its debt – with some bondholders spurning the company’s latest offer only last week.

A marginally cheaper pint appears unlikely to act as a cure. “It won’t in itself have a huge effect,” says Tim Martin, chairman of JD Wetherspoon. “Every little helps, as they say. But, in and of itself, a 1p reduction does not make much difference.”

Nevertheless, this minor breakthrough on the duty escalator has rekindled some hopes of turning a long-held industry pipe dream into a reality: tax parity with the supermarkets.

“It is certain to happen at some point,” insists Mr Martin. “Pubs employ so many more people per pint or meal than a supermarket. The economics will drive a chancellor and a government towards the job-creating option.”

Mike Tye, chief executive of Spirit Pub Company, which has 1,200 pubs across Britain, has also called on the government to equalise taxes on food.

“We are disadvantaged on food versus supermarkets, where there’s no VAT on ready meals. It penalises people who don’t have a lot of money and want to have a treat.”

Not everyone in the pub sector is hopeful of a breakthrough, though. Will pubs be on a level tax pegging with supermarkets any time soon? “Not a chance,” says the chief executive of one major pub chain.

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