Saving the pub will take sensible taxes and sensible business models by Tim Martin
“Who killed Cock Robin? I, said the sparrow, with my bow and arrow, I killed Cock Robin…” Unlike the sparrow, no one has stepped forward to accept blame for the killing of 10,000 pubs which have shut down in the last ten years – about 15% of the total number of pubs in the country. A large amount of blame can be attributed to the VAT inequality between pubs and supermarkets. Supermarkets pay no VAT on food sales, whereas pubs pay 20%, allowing supermarkets to subsidise their drinks prices with their massive ‘tax break’. Another huge factor relates to the business rates disparity between pubs and supermarkets. The average pub pays around 6% of its sales as rates. This amounts to about 15p a pint, believe it or not. Supermarket chain Morrisons’ chief executive, Dalton Philips, told the Financial Times (11 July 2013) that his company paid £240 million of business rates in the previous year. Morrisons’ accounts for the year in question (to February 2013) show sales of £18.116 billion. Supermarkets, therefore, appear to be paying rates somewhere in the region of 1.32% of their sales. So, a pint purchased in a supermarket for about £1.25 will have a business rates cost of roughly 1.65p. This analysis clearly demonstrates that each pint purchased in a pub has approximately nine times the level of business rates as a pint purchased in a supermarket. You don’t have to be Mark Carney, governor of the Bank of England, George Osborne or Ed Balls to work out the economic consequences of the disparity in VAT and rates between pubs and supermarkets.
However, there are a lot of other tax disparities in addition – for example, the coalition government increased taxes on fruit machines and introduced a ‘late-night levy’, taxes which apply only to pubs, further increasing their economic disadvantage. I doubt that the government or the treasury has malicious intentions towards pubs, but I strongly suspect that they haven’t thought through the financial consequences of their actions, a malaise which also afflicted the previous Labour government. No thoughtful or sensible economist, presented with this information, would deny the huge impact of the tax system on pub closures. However, the situation is complex and there are indeed other factors, less important overall, which have contributed to the demise of so many pubs. The main additional reason for pub distress is the high level of debt assumed by some pub companies in the years running up to the credit crunch. Two of the main architects of the debt-fuelled pub boom were Guy Hands, formerly of Japanese bank Nomura, and Hugh Osmond, a financier who has been involved in substantial debt-raising exercises in respect of public companies. In essence, Hands and Osmond bought the large tenanted pub estates of the major brewers, using borrowed money, and then hiked up the rents and the beer prices paid by the tenants. As a result of the increased income which they generated, they were able, in effect, to remortgage the pubs, extracting tens of millions of pounds of ‘profit’ for themselves. The problem, in my opinion, is that the so-called ‘business model’ which they helped to pioneer was unsustainable – and thousands of tenants have gone to the wall – and thousands of pubs have closed. Not all pub closures were formerly tenancies, but very many were. After Hands, Osmond and their acolytes and imitators sold out, the majority of the pubs in the tenanted estates ended up with public companies called Enterprise Inns and Punch Taverns. They continued to buy pubs and increase debt (as well as continuing to increase rents and beer prices for tenants) right up until the credit crunch hit. When the individual licensees/tenants started to suffer between the hammer of high rents and beer prices and the anvil of the tax-subsidised supermarkets, unprecedented numbers of publicans went bankrupt – and the Enterprise and Punch shares plummeted on the stock market to a fraction of their former value.
A depressing aspect of this sad chain of events has been the attitude of the former pub Titans to the plight of the tenants. Guy Hands and Hugh Osmond, joined recently by former Enterprise Inns’ boss Ted Tuppen, have said nothing at all about the tax disparity with supermarkets which weighs even more heavily on pubs than their own financial engineering. Yet they have been exceptionally vociferous in criticising high tax rates which apply to them personally. Guy Hands, in high dudgeon, removed himself some time ago to the tax haven of Jersey. Hugh Osmond and Ted Tuppen remain residents, but have been shouting from the rooftops at the injustice of the Labour Party’s proposal to increase the top rate from 45 to 50%. There is a justifiable argument for a reasonable top rate of tax which encourages hard work – Britain did not benefit from the Rolling Stones hiding from the taxman in the south of France in the 1970s. However, the disregard of the financial engineers for the plight of their tenants and their egocentric concentration on their own positions, dressed up as national concern, might even have caused Maggie Thatcher to side with Ed Balls.
Tim Martin is chairman and founder of JD Wetherspoon. This article appears in the current edition of Wetherspoon News