An Open Letter to HMRC
An open letter to the Government, HMRC, UKTI and anyone else who gives a damn about the economic welfare of their country.
From BrewDog xxxxx
We have done reasonably well since we started in April 2007. We are quite a healthy little company now with a great team, some cash in the bank and awesome growth prospects. We will turn over close to £4m this year, make a decent profit which will be re-invested to fuel further growth. We BrewDog now employs over 45 amazing scamps! The fact we have done this in a terrible recession is something we (and hopefully the government) are quite proud of. Employing over 45 people and paying almost £1m in taxes in 2010 alone is surely bound to help!
Some of our team bottling 5am Saint
However as anyone who has started a company will know, it is a tough journey to become sustainable and viable and there are certain undeniable truths. The most pressing of these inalienable maxims is that cash flow is a mother fucking son of a bitch. With staff and overheads to pay, any mistake in cash flow management severely threatens the business and the livelihood of all the staff. The stakes are high in a fast growing baby company. It is a sad but true fact that loads of great, profitable companies go out of business because they cannot fund cash flow and working capital.
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.
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 came 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.
The first incentive to look overseas is when it comes to buying equipment. As I outlined initially cash is tight for a start up and you have to make sure you make the best possible use of every penny. A brewery is a cash intensive business and we have over £1 million tied up in capital equipment.
New tanks arriving from Italy
Take, for example our bottling machine. We bought our bottling machine in late 2007 at a cost of £110,000. We had to push the banks really hard to accept our deposit of £30,000 and lend the balance of £80,000 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 £110,000 as there was no VAT. But if we had to buy this from the UK we would have had to pay £129,250 (including VAT at 17.5%). This meant we would have had to have an extra £20,000 cash which we simply did not have.
Now obviously in the 2nd scenario we would be able to reclaim the VAT back so in the end we would end up paying £110,000 too. However if we had bought from the UK we would have had to have funded the VAT of almost £20,000 for a interim period of close to 3 months and this was money we simply did not have. Our finances were pushed to its limits and we simply could not afford £20,000 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 for domestic suppliers at the start up stage. We would have liked to have bought all our brewery equipment domestically and this £1m would have helped the UK economy but instead, due to the way VAT is administered, we spent the whole £1m overseas.
Bottling 5am Saint today on our bottling machine
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 penalised financially for buying equipment from UK based suppliers.
A second example of how there was a big incentive for us to look outside the UK is when it comes to selling our beer. We pay the duty on every drop of beer we sell domestically. The duty is payable monthly so anywhere between 30 days and 1 day after the beers 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) 6 days later. However we do not actually receive the payment for the beers from our customer until August. This means we 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. We paid almost £70,000 in beer duty last month.
BrewDog drinkers in California
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 3 month period) without risking running out of money.
Understandably with cash being tight for any start up, this anomaly gives them a huge incentive to sell abroad rather than focussing 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.
Love from BrewDogJames
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- Could you please expand on your point about how selling to uk customers could help the 'home economy'?
If you print your account details on the bottles I could just half-inch them from Tesco and send the payment to your bank direct :)Shazzblasty Si12.12.2010
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Vat will never be removed on beer, as it is a tax on 'luxury' goods. While there is vat on tampons, there will always be vat on beer...Tom Mann04.12.2010
- HMRC are well aware of the VAT thing. It massively improves their cash flow and they are unlikely to give that up. Especially now. It's a great idea though and I shall now argue for it.
Perhaps HMRC should make up the negative cash effects by turning the spotlight on the manipulation f the VAT system by supermarkets who discount VATable below cost items at the expense of putting a premium on non VAT items thereby creaming off VAT for themselves.Denzil Vallance03.12.2010
- I agree with all your points, have you sent this to Dr Vince Cable MP? For legislative change you will need a Champion and he should be able to help. Good Luck for the future. Ian Cox03.12.2010
- You guys remind me of Reardon Steel!
Glad I am an investor, as well as a customer!
- A great example of how the government make a small business survive by making it fight with its hands cuffed. I agree with James, and the sooner we get more progressive policies that encourage business rather than hobble it the better. What did your MP say James - he works for your and the BD team afterall! PNC03.12.2010
- Nice to see a company offer solutions instead of just whinging. Love brewdog, loving your values. colin macleod02.12.2010
- Remove the swearing. Slang won't be read. Some fascinating incites into how to a small brewery runs and now I need to fetch something hoppy. Thomas Marshall02.12.2010
- From someone who deals with HMRC on a fairly regular basis - they would take 4 months to even read this and probably just put it in the "don't care" pile. But it's all very straight forward thinking, something the revenue in the UK are not into. I worked for the Inland Revenue in NZ and thought it was fairly counterproductive but HMRC really takes the cake... Jo02.12.2010
- An approach that makes so much commone sense and would make such a difference - You just know that the government will ignore it. Typical. Great letter James jim mccreadie02.12.2010
- A wise and insightful letter - hope you get a reply. Cash flow is king for the small business and it would have meant we could do more in the last 12 months rather than having to choose between projects.
It does make a difference. The money that is in HMRC account for 3 months costs us small businesses more in overdraft charges than it makes HMRC in interest.Hardknott Dave02.12.2010
- Interesting and insightful, although I think one point is oversimplified, although you solution is excellent:
The VAT you pay ( in this case for the machinery ) in the end makes no difference for you, but for the treasury, having the cash for close on 3 months will earn them substantial interest.Andreas02.12.2010
- Great letter! Mind if I forward this to my local MP? Ade02.12.2010
- Great read and very sensible suggestions.
I hope you've actually sent this in to HMRC in more civil servant friendly language :-D Who knows, they might even listen!Ciaran02.12.2010
- Great letter, but it makes tonnes of sense too. I love the branding of brewdog and really think the image at the bottom is top quality.
- James for Prime Minister! Stacey D.02.12.2010
- Beer is Food! Rosie02.12.2010
- Well said. What about removing VAT on beer altogether? All brewing ingredients are 0 rated (no VAT), yet you pay VAT on sale. People will say, yeah, but shouldn't it balance out. Nope, it doesn't, VATMAN wins, every time, big time...Her Majesties Royal Cunt... Palmer02.12.2010
- brilliant letter guys. Great read and makes a hell of a lot of sense. Let's hope someone listens!
Shows BrewDog in a completely different light too which is interesting.Matt02.12.2010
- The Dog talks sense. Tristan02.12.2010
- Fantastic post.
Now we just need to get the govt to appreciate this.
- Really interesting piece and highlights the struggles which the government place on our small emerging businesses. Scootray02.12.2010