Due Diligence

This is mainly aimed at brewers, it's a long post, sorry. If you are interested about beer pricing as a drinker, you might also be interested, but it is a long and weighty read. If you are a brewer, and you are not worried about the subject of due diligence and how it applies to your own business risks I suggest you read this carefully.

Beer is taxed quite heavily. This will not be news to the reader, at least I hope not. Around 40% of the gross money we collect for the beer we sell goes off in VAT and duty. On top of that we have such things as PAYE, NI contribution, both employee and employer¹, business rates, insurance tax² and more.

If we dare make a profit we'd be taxed on that too, not that there is much left in the pot for profit, such are the narrow margins on beer. You see, we haven't put up our wholesale list price in six years. To make more sales we are finding we have to discount harder despite our beer getting better and better and better.

I would estimate, and without checking my accounts properly, that close to 50% of the gross monies we collect go right back to the Government.

This is all good in many ways. We live in a civilised and caring society. The politicians want to try and tell us that everything is broken. Personally I think we live in a great country where we all have the right to vote, our children get free schooling, you are not charged to go to see a doctor, they don't check your medical insurance when you are admitted to hospital. You can call the cop shop and a person in a uniform will generally take you seriously without you having to bribe him.  We can drive down our roads without having to pay tolls in the most part and deaths have been reduced significantly due to spending on all sorts of road safety measures.

We, the brewers help pay for a lot of that, and I'm proud that our industry helps keep public services going. We run an honest and above board business and have had the ethos that if we try to pay our taxes, within the lawful constraints that exist, then we will stay out of trouble with HMRC. Our accountant advises us on the best way of ensuring we only pay what we should, and ensure we have the correct business structure to do so.

When we first started brewing we had two visits from HMRC within a fairly short period of time. Both were fairly thorough, but the outcomes showed that we were doing things right. The inspectors made comments about how we should tighten up on one or two things, but due to our careful and above board record keeping we got a clean bill of health.

The most important thing that we gained was a line of communications to HMRC should we have any questions. The officer was very helpful and seemed to welcome communication regarding various matters. Then, all of a sudden, the banking crisis and subsequent deficit hit hard. One day we decided to throw a whole tank full of beer away. I tried to contact the officer in HMRC and was told he had been moved out of the beer duty department and in fact HMRC wasn't chasing the likes of us anyway. Funding to the officers was slashed and there was no one left to help us. We were almost told that we could do what we liked.

Since then a huge number of new breweries have sprung up. Many are very enthusiastic, some even make good beer, but with little gap in that market in our corner of the world there is very definitely oversupply of fair-to-middling cask beer. We are told we are expensive. We know we are expensive and there is two very good reasons for us to be so; we make good beer, and we pay all our taxes and duty. We know that some businesses do not, and in particular some micro-breweries cannot be doing so at the wholesale prices they are charging.

We have unsubstantiated reports of newer breweries delivering beer without paperwork, for cash, no questions asked. The prices can only be viable if VAT and duty are being evaded. There is also significant evidence further down the supply chain of businesses avoiding paying VAT, corporation tax and worse still, limited companies that seem to deliberately set up to run up debts and then become dissolved by a mechanism called compulsory strike-off. This last one is very important, so take notice of this.

From 1st November 2014 it became a condition of approval to produce alcohol, or run any sort of alcohol warehouse, that we apply "due diligence" to our business. We are, if I were honest, still trying to work out the full implications of this, but we are considering the fact that it might mean looking very carefully at all our business transaction.

I take the following from the Excise Notice 226: Beer Duty;

35.1  What is due diligence?

Due diligence is the appropriate reasonable care a company exercises when entering into business relations or contracts with other companies, and how it responds in a deliberate reflexive manner to trading risks identified. 

It does go on to say specifically about duty evasion and fraud.

35.3  What am I expected to do?

From 1 November 2014 it becomes a condition of your approval as a registered producer or packager of beer that you must:

(a) objectively assess the risks of alcohol duty fraud within the supply chains in which you operate

(b) put in place reasonable and proportionate checks, in your day to day trading, to identify transactions that may lead to fraud or involve goods on which duty may have been evaded

(c) have procedures in place to take timely and effective mitigating action where a risk of fraud is identified

(d) document the checks you intend to carry out and have appropriate management governance in place to ensure that these are, and continue to be, carried out as intended

From this, talking to other brewers, it seems that the interpretation is that we only have a responsibility to monitor for duty evasion. Little breweries don't send out beer under "duty suspense" and all duty is paid by them, so why do they need to worry?

Well, if you think HMRC are only interested in beer duty, and don't care about VAT evasion or unpaid PAYE and NI, or other evasion then I think you are wrong. Equally, you have a responsibility to your own business to manage your risks and exposure to bad debts. We have a hard line on this and upset some customers as a result. But frankly, when we see a risk approaching, and we have our well respected maltsters and hop merchants rightly putting us on stop, and the cash hasn't come in from a customer yet again we believe we have a right to get a little hissy. We are happy to risk losing a customer who isn't paying fast enough anyway.

When a business is looking a bit dodgy and payment is repeatedly, consistently and grossly overdue we start to view continued trading with them a problem. At the very least, remember that around 50% of what they owe us is tax, which in all likelihood we have already paid. If we continue to trade with them they are risking our business.

Bad payers have offered on many occasions cash on delivery solution for future deliveries. I feel that is a great idea, provided they pay down first what they owe. However, this is not their meaning, what they intend is to keep the debt just where it is, and future payments will be cash for just the beer delivered. I feel that once a business has got into this situation it is so much in trouble that there is a real risk of the situation being compounded. We always say no, even if they are trying hard to "trade out" of their predicament.

Is that too hardball? Perhaps, and to say I don't feel a pang of guilt about it would be lying. However, to load the van, pay a driver, put miles on that van, and then to find the cash isn't there when the van gets there is too much of a risk for me. If they cannot at least put some money in our account first we just will not deliver.

"But we need the trade" says one brewer. "OK, but what about due diligence?" is my reply. "That only applies to beer sent in duty suspense, surely?"³

I do not think so. I don't know for sure, but it appears that HMRC have identified that there is significant risk in the alcohol supply chain of tax evasion and even tax and company fraud. I think they are putting the onus on brewers to start to rattle this out. If as an HMRC registered alcohol producers we supply a company that becomes insolvent or we have not verified that they are VAT registered, or are otherwise evading taxation then we may well be liable for a lot more than we bargain for. I do not believe HMRC are limiting our responsibility to just beer duty. Even if they are, if we cannot pay our beer duty because we have traded irresponsibly they will have no sympathy for us.

SIBA members are offered due diligence support. As is the case with SIBA it isn't always easy to find all the information you need, but it is there. If you are a brewing member go to http://siba.co.uk and then click on "members toolbox" - enter your username and password. If you do not have this then ring 01765 640441 and there should be a helpful person there who will assist. If you are not a member of SIBA I strongly recommend you join up, they are the best solution to ensuring compliance with due diligence.⁴

Once in your toolbox find the My Toolbox drop down and select My Tools, Due Diligence Tool. There is full instruction on what you can do. It is not compulsory to use this method, but it is a template that SIBA have developed that might help. The bit that is most helpful in my mind is the ability to run a due diligence company search. This should bring back any concerns about a company. My advice is if there are any concerns about the health of a company, whatever risk you feel is appropriate for your own trading situation, consider that there is the extra risk that HMRC might prosecute you if there is any evidence of tax evasion of any sort in your supply chain. If your company fails because of bad decisions on your part then it seems clear HMRC will blame you for not being diligent.

I would also advise checking companies house, if the business you are trading with is a limited company. Check they exist and that their filing is up to date. This is an easy check to do. I strongly recommend this as a free check that anyone can do, even if you are not a member of SIBA. Also check out the directors, and search as if they might be trying to hide something, because some do. Directors can have different personas on companies house by entering a different addresses, or using nicknames or shortened version of their names, or by missing out middle names etc.

Oh, and check they are VAT registered. It's easy to do for any EU company.

For me there is a further responsibility to your own company. Yes, I know, when you go into business, as an entrepreneur. you take risks. You want your baby to work, you've dreamed of setting up a microbrewery for ever. Trading is hard, you need to make that sale, that beer needs to be shifted. You might not get paid for that beer. If your business ends up not working because you made bad choices, you might lose your business, perhaps you owe you family because they supported your mad-capped dream. Perhaps you have a charge on your house, you might lose that too.

But if you trade without doing the checks, or worse, you are aware that there is a risk and you carry on trading anyway, not only might you lose your business, and your house, and the respect of your family and friends, you might also end up in prison. Yes, I think it is that serious. HMRC know there are problems, and they are coming after everyone that is evading taxation and those that aide and abet it.


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¹We pay more for the privilege of employing people than the people pay themselves with respect to NI.

²Public and employee liability insurance is mandatory when in business, quite rightly so. It does seem wrong to me that something that is essential and correct to spend money on when in business is then taxed too.

³It concerns me that some brewers are happy to continue to supply businesses that are clearly so far adrift that the debt to the whole industry is so large that they cannot clearly be sustainable. Long term I do not believe it is helpful to the industry and is propagating an ever increasing debt issue in the brewing industry. I am concerned that the situation is not sustainable.

⁴I've just run a check, it came back within an hour. I'm pleased to say that the particular company came back with extremely good results, so they can have beer.

Being Above Board

It's an interesting time in brewing. With Craft Beer seemingly going from strength to strength the appearance to the outside world is that it has to be a great thing to get into. In many ways it is, and living he dream can be very rewarding, but not without it's troubles.

It is true that the price of a pint in those contemporary craft beer bars is going up. The disparity between that and some more traditional pubs is disconcerting to some. Equally the fact that often keg beer is more expensive than cask also causes some angst.

This article is inspired by the news that Jarrow Brewery has recently had over 20,000 litres of beer seized by HMRC. It seems unclear exactly why. HMRC seem to state that they were brewing, and hinting that they were selling beer without a licence. The brewery simply state that beer has gone out of date because they can't sell it without a licence. Either way, it seems a drastic step to seize beer if there isn't a concern that underhand stuff is going on.

It continues to be a problem for brewers to get their beer to market. With an ever increasing number of breweries inevitably there is significant competition. At times that competition can manifest itself as eye-watering price cutting at wholesale. Off course, in a competitive capitalist economic system this is what we expect.

The unfortunate side effect of this is that there are going to be casualties. Equally, in desperate attempts to stay afloat, some might be tempted to moving a little to he wrong side of the law. I do hear reports from publicans about sales of beer "without paperwork" I am told that the way this is handled for the beer duty return is that the beer is officially not sold, but instead has been "destroyed".

To compound this situation HMRC have been somewhat silent for several years. When we first started brewing we got two visits from HMRC. Both went reasonably well and we were signed off as compliant. It was slightly nerve wracking, but I found the inspectors all very helpful. In discussing the destruction of beer I had some helpful tips from one very nice officer which basically run a long the lines that if it was the occasional cask then we should just get along and do it. If it was a whole gyle, a good number of casks, or a regular thing, we ought to let him know, just so as he could come along if he wished and witness the destruction.

We did that, on an odd occasion, when we were unhappy with a beer, and tipped a whole tank down the drain. Back then, around 2010, we were still only around 350 litres, 3.5hl, 8 firkins or 2 brewery barrels per brew. He was grateful I got in touch and said it was OK to just get on with the job of tipping it down the drain. Provided of course that United Utilities was happy that we had the correct discharge authorisation.

Since then this particular gent has moved on. Indeed, the last communication was that officers were being thinned out as a result of cutbacks caused by the economic situation. We even had one officer telling us that really, us little guys were not much of a concern as there were much bigger fish to fry. We were told we should just record all the beer we destroy and not worry about it.

So, you can see that this is a clear signal to go ahead and pretend that beer is being destroyed, when in fact it is being sold "without paperwork" for cash, no questions asked. Beer duty and VAT no doubt being evaded. I know quite a few business friends that think this is not only OK, but the only thing that can keep a business alive in a tough competitive time. After all, it'd be doing the beer drinker a service by getting the cost of their pint down.

But I do worry about it. In fact, the fear of HMRC coming and finding something is amiss and we'd get a great big tax bill we can't pay is something that fears me most in this business. We do not sell beer "for cash, without paperwork" Obviously we take cash, it is handy to avoid bank charges, and is perfectly legal, but we record it and issue an invoice. For a start, I want a new brewhouse. Hiding turnover and profit from the tax man also hides it from the bank manager. The banks want to see legal economic performance if they are going to lend for new shiny stainless steel.

Evading the tax man is something that I particularly find offensive. Yes, I think we pay too much tax, but we are all a liberty to vote for the politicians that decide what is going to be taxed, and how much tax is to be charged. We are also all at liberty to lobby who ever we like, demonstrate legally or complain about taxation on our blogs. However, once the taxation system is set, we all have a duty to put into the coffers what is due.

Now, as there are more and more breweries, there is more and more cut throat competition and more and more breweries desperate to make their dream work. Many of us in the industry are worried that this is going too far, and that the price of cask beer at wholesale is becoming increasingly unsustainably cheap.

What I do know is that as the economic situation continues to improve HMRC are again being funded a little better. With the increasing number of breweries, and evidence becoming clear that micro-breweries are in fact now contributing to the avoidance of duty, make no doubt about it HMRC will again be knocking on our doors.

HMRC are also looking at the whole supply chain. Since last year it has been a legal requirement to ensure that we are confident that anyone we sell beer to is adhering with the law. In the New Year HMRC will require every wholesaler to register. In some ways all of this puts an ever increasing burden on those of us who are already trying very hard to ensure we are above board.

Luckily, SIBA are doing quite a lot to support us. They have various tools available on the website in the members area.

Despite this I expect over the next couple of years some breweries will only able to keep trading by avoiding some beer duty and VAT. These breweries are going to find it difficult. I wonder if Jarrow is the start of the whole pack of cards tumbling? Certainly, those breweries who already have a strong pricing structure, defended by good marketing, strong PR message, quality beer and adherence to the law are much more likely to survive.

Diphthongs

Æther Blæc – the origin of the name.

When I made Æther Blæc I knew I had created something special. A stronger stout, fermented with Belgian style yeast, matured in a 28 year Islay whisky cask along with dry hops sounds good to start with.

The stout only went into the cask at just over 6% ABV and some advisors were dubious about this being strong enough to ward off any unfortunate infections from the wood. I had ensured however, that the cask had remained sealed from the moment the whisky had been removed up until the point I was ready to put the beer into the cask. I was relying on the cask strength spirit to be a good disinfectant, and I am convinced that this helps. As the whisky had been permeating the wood for such a long time; indeed, since the time I was preparing for my “O” levels and around the time John Lennon got shot, bacteria will have long since been driven into a pickle rendering them unable to influence the beer.

A little residual fermentable carbohydrate and a reasonable amount of yeast remaining in the beer helps to combat both infection and oxidization as will the antiseptic effect of the whole cone hops. Never daring to open the cask, despite the compelling urge to taste the beer, ensured minimum chance of contamination.

Despite all these precautions I was somewhat nervous the day I did prepare to bottle the beer. Would I have just made a whisky flavoured malt vinegar? Perhaps a phenol bomb with no balance to offset this challenging, and considered to be an off flavour by the traditional view. Those present that morning got to taste the raw cask version. First me, just to make sure, in the privacy of the cellar taking a pipette full from the shive hole. Once I found that the result suited my tolerant taste I was lucky to have the new, but superbly enthusiastic beer geek Ben (@AKA_Franklin) to give a second opinion. Even Ann decided that the combination of whisky flavour in a stout to be superior to whisky in its normal form. A winner, it was decided, had been born from its oaky womb.

But what do you call such a special beer? A mysterious and complex beer that has taken nearly 3 decades, effectively, to achieve this end result, deserves a name with equal mystique and complexity. A name one might be scared to say incase it got pronounced incorrectly and a name that makes you question how it came to be and what does it all mean. A thinking man's beer and a thinking man's name.

The name of course has no direct meaning and I’d challenge anyone with knowledge of the various languages it is derived from to delve deeper. I started, however, with the premise that as the beer becomes as it does due to the influence of those lovable maverick countries of the British Isles, a nod to their cultures was appropriate. In short I wanted a strong Gaelic influence and an old historic feel to the name.

I started with my understanding of the origin of the meaning of the word whisky. Derived Eau du Vie, water of life or in Gaelic "Uisge Beatha" which became "iskie bae" by 1583 until eventually being called whisky. I like that explanation, but failed to find exactly what I was looking for. I also like the diphthong usage that can be applied in such languages, not sure if it is appropriate and more knowledgeable people will no doubt throw in comment on that, but putting in a couple of æ’s into the name seemed an appropriately poncy thing to do.

Ether is a somewhat nebulous word to find a definition for; Scientifically it refers to a chemical compound which links to ethyl alcohol but it’s origins go back to Greek and refer to spirits, air, heaven or space. A Wikipeadia search finds the spelling Æthere. There, that’s my first word, shortened to Æther, and by my definition meaning spirit, or liquid of life.

Further Wiktionary searches found an old English spelling of blæc, which of course means the complete absence of any visible colour, as you might find in a stout. Perhaps this unnecessary spelling might confuse the customer, as has been pointed out by my new branding team, but I like it that way and hopefully will stay that way.

This explanation of the name might well be flawed and unsatisfactory, but there it is. An honest and truthful explanation of how I arrived at the name. As for how to pronounce it, well, it contains diphthongs, which should be self-explanatory and is certainly subtly different to Ether Black.

Just this morning I received confirmation of the ABV by distillation analysis. It appears to have picked up around 1.3% ABV from the whisky cask. More knowledgeable people than myself have pointed out the grogging law might cause various problems with HMRC. I would like to think that my explanation here of the process used demonstrates that it is for the purpose of making a superb beer, and not for the purpose of "extracting any spirits absorbed in the wood".

My point would be - that to first allow the angels to consume the spirit off the wood would also permit spoilage bacteria to contaminate the wood; the alcohol is essential to ensure sterility of the timber. To dilute the beer back to the original ABV, which is the other "fiddle" used to satisfy HMRC, would also have a detrimental effect on the quality of the finished product.

Therefore, in the spirit of the grogging law, I am not trying to avoid payment of duty.