Monday, 9 May 2016

Best Supermarket for Craft Beer?

If you have been following Hardknott for any length of time you'll know we've had great success with our beers into Morrisons. Certainly most of the supermarkets are now realising they need to add some craft beer to their line-up. Morrisons have certainly upped their game and are pushing to have better beers. We are part of that push.

Nothing can ever stay the same. We started with three beers in Morrisons, Azimuth, obviously, as our staple, Infra Red, which is a bit of a darling for us, and Code Black, which if I were honest is a bit extreme in the favour profile for most people.

Code Black didn't make the sales needed to justify the shelf space. It's a fairly hard costing issue. Shelf space costs the retailer money. Turnover per shelf metre is a key indicator of performance. Not surprisingly Code Black got the chop quite early. A shame, but hardly surprising given a microsecond of thought.

A year into supplying Morrisons and they are keeping things very live, as are we. It's fun to produce something new and it really excites me to get that new thing out there to the great craft beer fans. Last year we launched Intergalactic Space Hopper at Craft Beer Rising in Glasgow. It was well received and we supported it in our own way with a very daft video, where I make quite certain that no one is going to accuse me of not putting my own reputation on the line for the purposes of getting us noticed.

Intergalactic Space Hopper from Hardknott Brewery on Vimeo.

Looking at the total craft beer range the beer buyer decided that Infra Red perhaps hasn't done quite as well as they would like and we should try some thing else in it's place. He noticed Intergalactic Space Hopper had been making a few waves and asked if we'd like to consider supplying that instead of Infra Red. To be fair, I guess Morrisons probably listed it despite my crazy video antics, or for that matter any other imagery that might have originated from the Hardknott PR clunky machinery. Whichever, we're just pleased we can once again get much more of our great craft beer out to very many more people.

Apparently it is going live today, although twitter tells me it's been on the shelves for a few days already in some stores. Out goes Infra Red, in with Intergalactic Space Hopper, and early indications are that it is doing well.

Looking at Twitter I'm seeing some people finding Hardknott in Morrisons and declaring them the best supermarket for craft beer. I don't know if this is fair, or entirely due to Hardknott, but I'm going to claim it anyway, as outrageous and potentially inaccurate declarations are by and far the most successful ways of getting one's name better respected.

So, get sown to Morriosns and buy some stunning craft beer from Hardknott.


Tuesday, 3 May 2016

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 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.


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.