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Scottish Businessman Criticizes Tax System

Robert Lee,, London

22 December 2010

James Watt, co-founder of the Scottish brewery Brewdog, has demonstrated his frustration with existing tax arrangements by writing an open letter to HMRC. In the letter he says that it is because of the onerous administrative rules that the company is not able to invest in the UK economy, giving it a massive incentive to look abroad when it came to both buying equipment and selling its beers.

He says: “Any start up company is tight for cash and any start up company which is ambitious has to figure out a way to leverage its capital and push its small reserve of money to its absolute limits. However as the government looks to fuel the economic recovery and return financial prosperity to our once great country I feel they have made some critical oversights and a few simple changes to the current system could make a big difference”.

Brewdog started in 2007 and now has 45 employees and this year a turnover close to GBP4m. But since its inception cash flow has been a thorn in the side of the company. Watt gives an example of the company’s purchase of a bottling machine in its first year: “We bought our bottling machine in late 2007 at a cost of GBP110,000. We had to push the banks really hard to accept our deposit of GBP30,000 and lend the balance of GBP80,000 to us. This was the absolute limit of what we could afford. We bought the bottling machine from Italy, although we would have preferred to buy this from the UK. However from Italy we only had to pay the GBP110,000 as there was no VAT. But if we had to buy this from the UK we would have had to pay GBP129,250 (including VAT at 17.5%). This meant we would have had to have an extra GBP20,000 cash which we simply did not have.

“Now obviously in the second scenario we would be able to reclaim the VAT back so in the end we would end up paying GBP110,000 too. However if we had bought from the UK we would have had to have funded the VAT of almost GBP20,000 for a interim period of close to three months and this was money we simply did not have. Our finances were pushed to its limits and we simply could not afford GBP20,000 of our money not to be in our bank account for this time.

“This is something which makes no net difference to the treasury at the end of the day, but gives small companies a massive disincentive to buy equipment from domestic suppliers at the start up stage. I would propose that start ups be given a VAT card which is valid for their first 24 months of trading. With their number on the VAT card when they purchase capital equipment the VAT is not paid and they then do not have to claim the VAT back. This straightforward change would make no difference at all to the VAT collected by the Government but it would enable small companies not to be penalized financially for buying equipment from UK based suppliers”, he says.

A second example of how there is a big incentive for the company to look outside the UK is when it comes to actually selling the beer. Watt says: “We pay the duty on every drop of beer we sell domestically. The duty is payable monthly so anywhere between 30 days and one day after the beer ships from our hardcore brewery. If we ship beer at the end of the month the duty is payable almost immediately. However, most of our large UK customers pay us in 60, or even 90 days.

“A situation which is quite common for us is that we ship some beer (let’s say 20 pallets of Punk IPA) on the 27th of the month (let’s say May), pay the beer duty (roughly £9,000 on this single shipment) six days later. However we do not actually receive the payment for the beers from our customer until August. This means there has been £9,000 of our cash in HMRC’s bank account for 80 days before we have received payment from our customer. If you consider the fact we sell over 100 pallets of beer domestically per month this duty anomaly has a big impact on any young company’s constrained cash position.

“When it comes to overseas sales we can ship the beer and the duty is paid by the importer in the import country. In the above example, if we sell beer to Sweden or France, we do not have to find £9,000 to cover this interim period. So if we only have £20,000 in the bank (common for a start up!), we can sell an infinite amount of beer overseas but can only sell 40 pallets domestically (in a three-month period) without risking running out of money.

“More trade in the UK will undoubtedly help the recovery, however there are some silly administrative rules which gave us a massive incentive to look abroad when it came to both buying equipment and selling our beers. We are 70% export and 100% of our equipment has come from outside the UK. We feel we could have done more (and other start ups could also do more) to help the UK economy if the system did not heavily incentivize us to buy and sell from overseas markets.

“Understandably with cash being tight for any start up, this anomaly gives them a huge incentive to sell abroad rather than focusing on the domestic market which would help bolster the home economy. If the beer duty payment terms more closely reflected the commercial payment terms of UK beer customers (which would have no net effect on the beer duty revenue collected by HMRC) there would no longer be the big financial cash flow carrot for small drinks producers to look outside the UK.

“Both of the changes I suggested are not looking for a hand-out, free lunch or financial help whatsoever. It would not reduce the amount of tax we pay by a single penny and would not reduce the amount of income collected by HMRC at all. However simply by making a couple of basic timing and administrative changes we could ensure that start up companies no longer have to look overseas to get the maximum bang for their limited buck. This in turn would keep more money and more trade in the UK and help the economic recovery”.

TAGS: tax | employees | France | Italy | Sweden | trade

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