Cellar Door Relief Scheme: a proposal from WineGB to HMRC

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Wines of Great Britain Cellar Door Relief Scheme: a proposal from WineGB to HMRC Simon Robinson, Chairman - December 2018 1 - Executive Summary This paper is submitted by Wines of Great Britain

1 Wines of Great Britain Cellar Door Relief Scheme: a proposal from WineGB to HMRC Simon Robinson, Chairman - December Executive Summary This paper is submitted by Wines of Great Britain Limited, the trade association for the wine producers of the United Kingdom. The wine production industry is an exciting new industry (for the UK) which has considerable potential to: Provide significant exports and import substitution and at the same time increase revenues for government substantially. Deliver significant enhancements to the rural development, tourism and employment agenda. Be closely aligned with the Government s Industrial Strategy. Advance the environmental and public access agenda. However, WineGB believes that achieving these aims will require a scheme tailored to the UK wine industry. This paper focuses on a cellar door excise duty relief scheme to encourage investment in tourist facilities by vineyards and wineries, particularly the medium and smaller sized producers. Its conclusion is to recommend that a new cellar door relief be introduced which permits producers to sell up to 100Hl per year (roughly 13,500 bottles) to the public from their cellar door to individuals personally present for personal consumption (i.e. not for resale). Other priorities for the future of our industry are highlighted below: 1. Domestic and overseas marketing support for the end product (i.e. wine). 2. Support for Research and Development 3. A clear scheme for the appropriate protection of English and Welsh wine (akin to the EU PDO/PGI system currently in force). 4. Direct support to the organic vineyard sector. 5. A clear message from Government that this is an industry which it wishes to see advance; the introduction of clear, and permissive/encouraging planning guidelines. 6. Assistance in developing educational and training facilities for the industry. 7. A more tailored approach to the current assistance for investment in equipment and government encouragement of financial institutions, LEPs, and other organisations to provide funding for the sector. WineGB has submitted a separate response to the Government s Consultation on farming; this paper relates solely to the possible cellar door relief scheme. WineGB has no objection to this paper being published.

2 2 - Background 2.1 WineGB: Wines of Great Britain Limited ( WineGB ) is a trade association for producers of wine in the United Kingdom; it is the entity resulting from the merger in 2017 of English Wine Producers Limited and United Kingdom Vineyards Association. It has approximately 300 members encompassing vineyards, wine producers, and consultants serving the industry, predominantly in England and Wales. WineGB does not, generally speaking, represent retailers such as supermarkets or the hotel and restaurant trade. 2.2 Current levels of production: The English and Welsh wine industry produced approximately 5.9m bottles of wine in 2017, of which almost 70% was sparkling wine; annual production depends crucially on climatic conditions, and 2017 was a year in which considerable damage was incurred through frost in late April. The industry is currently experiencing rapid growth in terms of planted vines and wine sold and there has been substantial investment of capital and in professional management in the industry in recent years. Production of grapes and wine is also increasingly seen as a valuable diversification, particularly for fruit and vegetable growers and arable farmers. The Department should note that statistics on the industry in this paper are drawn from the results of the survey of our members and non-members carried out in March Our members also produce a small quantity of wine based spirits such as brandy, gin and eau-de-vie but these are not currently particularly significant volumes. 2.3 The export trade: English and Welsh wine is now exported to some 27 countries around the word; the principal markets are currently believed to be the United States of America, Japan, and Australia, with the Nordic countries being important smaller markets. Other markets include China and Hong Kong, Canada, the Netherlands, Switzerland, Belgium, Italy, Germany, France and India. It is not clear how many producers are involved in the export trade (probably at least around 20-30) but unsurprisingly it tends to be the larger producers; many of the latter see exports as a key part of their strategy. The key selling point for all producers is that the quality of the wine (particularly sparkling wine) is competitive with similar wine from other areas of the world. 2.4 Impact on the rural and wider economy: Vineyards and wine production are also potentially very important in the development of the rural economy and in the creation of rural employment, often in areas where the rural economy has lost diversity and become more mono-cultural (and/or commuter led) due to the changes in agriculture in past years. Ten hectares of vineyard provides employment for one person permanently employed whereas land employed in arable production requires only one person per 400 hectares or so. Thus, if 20,000 hectares of arable land were to be converted to production of vines, the 50 farmworkers previously employed would be replaced by approximately 2,000 permanent staff. That does not include additional seasonal labour also required nor other wine related jobs created by the industry (for example in the wineries and in sales and administration). As can be seen from the WineGB paper Looking to the Future (which is available on the WineGB web-site at - WineGB-Industry-Report-April-2018.pdf), a comparison with the US state of Oregon, a state which has developed its wine industry fairly recently but which was about the same size as the UK about 20 years, suggests that by 2040 there may be as many as 24,000 people working in the industry. The impact on rural employment does not stop at the vineyard or winery gate however: further downstream activities such as sales and marketing are also essential. Wine tourism is a well-known benefit for wine regions around the world: extensive research

3 2 - Background - cont. in a number of New World countries, such as Australia and New Zealand, shows that the average tourist spend of wine tourists has a monetary value which far exceeds the spend of the average tourist, benefiting not only the wineries and vineyards but local hotels, restaurants, petrol stations and other local businesses. However, local planning authorities need a clear signal from Central Government that this is an important rural industry that Central Government wishes to support as it will provide a significant uplift in rural employment and income for not only wineries, but local hotels, pubs, restaurants, petrol stations and other retailers and tourist sites. Research from New Zealand indicates that over half of the additional income from a wine tourist is spent in the local economy, outside the winery. Therefore, planning authorities must be conscious of the need for growth and to treat development plans with a supportive approach to encourage the investment needed to see this growth maintained. Vineyards also achieve significantly higher productivity per unit of land input: 10 hectares of vineyard will produce approximately 75 tonnes of fruit with a value in excess of 160,000, whereas 10 hectares of wheat have a value of approximately 40,000. (Both figures obviously being very dependent on market and climatic conditions). 2.5 The case for (overseas) investment: This is also one of the few areas where climate change may have a beneficial impact for the UK. There is evidence that the average summer temperature has increased by 1.5 degrees C over the last forty years and this is clearly beneficial for the UK wine industry. (That said, the average rainfall would appear to be unchanged which is less helpful). It is understood that producers in Champagne are concerned about the increase in temperature in Champagne (as this reduces the opportunity to grow grapes with the required degree of acidity for their product): this factor (coupled with the growth of the UK industry which poses a clear threat to their market) has led two large Champagne producers Taittinger and Pommery to invest in land in the UK and plant grapes. We are aware of interest from a number of other large producers from around the world as well, including producers from Italy, Spain, South Africa, Germany and the United States and we therefore anticipate considerable foreign investment in the industry. There is also considerable scope for import substitution and to expand the exports of the UK wine industry from its current fairly low base. As discussed in our paper Looking to the future we anticipate by a comparison with the Australian experience, exports by 2040 could reasonably be expected to be in the region of 350m per annum. ( April-2018.pdf) 3 - HMRC Considerations Taxation is inevitably a key factor in this industry. Excise duty and VAT provide very significant revenues for HM Treasury from both the domestic production sector and imported wines. There is a good argument that import substitution will improve the level of revenue earned by HM Government as other taxes such as income and corporation tax, NICS and capital gains tax receipts from producers should increase substantially and are clearly additional revenue : the impact on excise and VAT revenues alone may be less affected as obviously import substitution will not increase them unless the products being sold in lieu of imports are made are more premium (which generally is the case for English Sparkling wine). Overall, the positive impact on HM Government s Revenue base of expanded wine

4 3 - HMRC Considerations - cont production will be considerable due to the combined effects of excise duty, VAT and employment related taxes. However, we also believe that there needs to be three, and possibly four, particular changes to the current regime to maximise these effects: first, a cellar door duty relief scheme would greatly encourage investment in cellar door facilities and we have already raised this with HM Treasury; second, the current loophole whereby individuals are effectively able to import unlimited amounts of duty free alcohol from the EU, so long as they bring it across the Channel personally, needs to be closed. This booze cruise loophole costs HM Treasury and UK wine producers substantial revenues: almost every producer will probably be able to recount stories of sales for e.g. weddings not taking place because people can buy duty free across the Channel. This is not a level playing field and duty free imports from overseas should be the same whether from the EU or elsewhere. That should become easily corrected once we leave the EU. third, it is not possible to see the rationale for any difference between the levels of duty on still and sparkling wine and some of our members would wish to see the rates equalised. Economically it makes little sense. fourth, the structure of duty needs to be reviewed more generally: it is not clear to us why levels of duty should effectively be different between, for example, cider, beer and wine, still less that producers should be able to take products out of bond as fortified wine and then cut it with cheaper liquid (either water or grape juice) thereby achieving a lower rate of duty. We accept that some of this has roots deep in history but that does not make it right. The encouragement of vineyards and the production of wine is therefore closely aligned with the Government s Industrial Strategy as set out in the White Paper Building a Britain fit for the future. We believe that WineGB is best placed to represent the interests of the wine producers on the new Drinks Council and should therefore have its own seat on the council. 4 - The Issue and The Opportunity Many of our members have asked if it might be possible to ask HM Government to establish a cellar door relief scheme to reduce the burden of excise tax. The fundamental rationale for such a scheme is that it would enable producers to invest in their production, sales and marketing activities thereby increasing sales overall which is likely to be of considerable benefit to the UK and to considerably increase the revenue raised by HMRC; it could also compensate producers for the loss of effective capital allowances which are difficult for the industry to use during its early phase and even simply during an expansion phase. In our paper entitled Looking to the Future ( uploads/2018/06/winegb-industry-report-april-2018.pdf) we raised the prospect that over the next twenty years or so, the UK wine production industry could reasonably expect production to rise from the current 5.9m bottles per year to over 40m bottles. While some of that will represent an increase in overall consumption of wine, some will represent import substitution. As can be seen from that paper, exports of wine could reasonably also be expected to increase to some 350m (from a much smaller base today) while overall sales might reach as much as 1bn by 2040, with perhaps 24,000 people being employed in the industry. To the extent that UK produced wine substitutes for imports, there is probably little effect on the total level of excise duty receivable by HMRC but the additional income tax, NICS and corporation taxes payable could amount to some 179.5m per year (see below in Appendix 1 for a

5 4 - The Issue and The Opportunity - cont. more detailed calculation of this amount and the likely anticipated cost of the relief to HMRC). This tax, being generated inside, rather than outside, the UK is additional revenue almost in its entirety. It does not include any additional tax generated by virtue of the expansion of tourism in businesses which are not wine producers (such as hotels and restaurants). It is worth pointing out that the development of this industry should be very positive for rural employment and development; to the extent it enables rural employment to flourish it should also reduce unemployment payments. Such assistance is further justified because wine production is a very long term investment: it takes at least four years from planting a vine before a bottle of wine is available for sale, and twice as long (or more) if the wine is sparkling wine (which is where the UK excels). It is even longer before profitable trading is achieved, even by the best managed businesses. One result of this is that the usual method by which the tax system encourages industrial expansion, namely through capital allowances and lower taxes on profits when made, is generally of much lower value to the industry than usual as attaining profitability can be many years after commencement of trading. We would also point out that this is not a policy without precedent: government support for emerging industries is permitted (we understand) under WTO rules, and Australia is an obvious country where a recent A$50m package has been approved to support their wine industry, particularly in order to encourage wine tourism. There are other schemes in other parts of the world which support the industry. In the UK, the relaxation of the rules surrounding the grant of distillation licences has led to an explosion of craft gin distillation and the duty exemption for small beer producers has given rise to a significant increase in the craft beer sector. 5 - The Proposed Scheme What might such a scheme look like? The basic principles are that: A. We have the opportunity to grow wine tourism considerably by investing in our cellar door facilities: Wine tourism is a highly attractive offering as it attracts higher value tourists and provides revenue not only to wine producers but also related infrastructure such as hotels, restaurants and local towns generally. Currently such tourism is fairly undeveloped although there is some in Kent, Sussex, Surrey and Hampshire, and there are plans not only to develop these initiatives but, for example, to develop Winchester and Canterbury as wine capitals along the lines of Beaune, Bordeaux or Epernay/Rheims. Local authorities in these areas are believed to be supportive of such developments especially if they assist other targets (such as encouraging improvement in hotel accommodation outside London). This should not be considered a purely Southern England issue however: wine trails are being considered in the South West, Norfolk and Wales for example and WineGB is keen to encourage them. Cellar door facilities are a key component in attracting tourists to a wine producer/ vineyard. The aim in encouraging cellar door facilities is therefore to encourage the development of wine tourism. Wine production is also, in and of itself, a rapidly expanding industry in the UK producing higher value, higher productivity goods which are increasing substituting for similar imported products and also being exported. Increase in production is therefore in the interests of the UK as a whole.

6 5 - The Proposed Scheme - cont B. This scheme would be directed at wine sold on the premises of the wine estate: It is proposed that there should be some relief from excise duty payable on wine sold from the premises of the producer/vineyard so as to encourage such development. Claiming the relief would therefore be tied to invoices recording that the wine was sold directly from the premises to a purchaser physically present on the relevant premises and not for resale. A substantial number of vineyards do not have wine production facilities but subcontract production to a third party. Accordingly, we suggest that only wine which is either a) made at the premises of the producer where the wine is made or b) made from grapes grown on the vineyard would be eligible for the relief. In addition, only wine made from grapes grown in the UK would be eligible wine for this relief. Relief should not be available for any wine sold by anyone other than the relevant producer (or their connected persons) on their premises or vineyard. Some allowance might be made for consortia of producers selling their wares jointly as happens elsewhere. Relief should not be available for sales made by anyone over the internet without the purchaser being physically present at the winery/vineyard. This assistance is further justified because wine production is a very long term investment: it takes at least four years from planting a vine before a bottle of wine is available for sale, and twice as long (or more) if the wine is sparkling wine (which is where the UK excels). It is even longer before profitable trading is achieved, even by the best managed businesses. C. Our proposed scheme would give capped relief on duty relieved: We believe that there should be a cellar door relief permitting sales of up to 100 Hl (roughly 13,350 standard 75cl bottles) to cellar door purchasers of the type referred to above. The maximum relief for a producer would thus amount to 29,295; for sparkling producers, the maximum relief would be 37,395. Such a relief would greatly assist small producers in particular but we do not believe that it should be limited to small producers for two reasons: first, it would be damaging for medium and large producers to face significant local competition from small producers assisted by the relief (and it is worth recalling that one would normally expect a medium or large producer to be close to several small producers, not simply one). It is also worth bearing in mind that by world standards all UK producers are extremely small. Second, not allowing the relief to larger producers clearly would therefore act as a disincentive to the medium and larger producers to develop their tourist facilities thereby leading to only very small facilities being developed which would equally clearly not be in the interests of the development of tourism. By contrast, the existing relief for sales to owners and staff is capped at 37.5 hl per annum (approximately 5000 standard bottles) so we believe the proposition above is commensurate with this. Simon Robinson Chairman 1st December 2018

7 Appendix 1 Calculation of the benefits to HM Treasury of expanding wine production and the costs of a cellar door relief of the type contemplated: There are currently around 700 vineyards in the UK, most of which are very small, although new plantings are generally larger and the average size of vineyard would appear to be increasing. If the industry expands as anticipated so as to employ 24,000 people and if we assume that there are currently approximately 3,000 people employed in it (the latter may easily be an overestimate given that many of the existing vineyards are small owner operated affairs), it follows that there should be an increase of 21,000 employees in the industry by Using an average combined amount of NICS and income tax paid at present per employee per month of 712 (which reflects the actual experience of one producer but is believed to be reasonably comparable to others), it is easily calculated that the increase in NICS and income tax payable will be supposed to be 179.5m. The potential maximum cost of the scheme is also easily determined: if there are 700 vineyards/producers at present and they all sell the maximum 13,350 bottles of sparkling wine at the cellar door to retail customers, the maximum duty forgone amounts to 700 X 13,350 X 2.77 = 25.9m In practice, this is an extreme estimate as a) not all vineyards even make sparkling wine and the duty on still wine is less than that on sparkling b) it is frankly inconceivable that all 700 will reach the maximum sales figure if only because many vineyards do not produce that much wine (it would take around 5 acres of vines to achieve that volume of wine in a good year, whereas there are probably only which exceed that area). While it is difficult to be exact, therefore, we would expect the revenue foregone to be substantially less than the amount set out above. To the extent that the relief encourages production, that is likely to be larger vineyards which will also be producing above the 13,350 and thus either paying duty or exporting on additional production. It is not unreasonable to expect any reduction in duty to be very small in aggregate if indeed there is any loss at all.

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