Tesco tax will strip stores of 10% of profits, say analysts

A report by the Centre for Economics and Business Research (CEBR), commissioned by Asda, argues that the new levy, to be introduced on all large stores selling alcohol and cigarettes, will have a bigger effect on retailers than claimed by ministers. The SNP government has said that the levy, which is designed to bring in between £30 million and £40m a year, will have a negligible impact on supermarket giants such as Tesco, Sainsbury’s Morrisons and Asda, which between them rack up billions of pounds in profits every year. But the CEBR study says ministers have ignored the business model that stores operate on, based on huge sales and low profit margins. Asda commissioned the survey after ministers declined to provide their own business impact assessment of the cost to stores of the new levy. The CEBR says that the estimated 240 stores that will be hit by the levy in Scotland will be between 8 per cent and 10 per cent less profitable. It concludes: “The proposed health levy thus represents a substantial share of Scottish supermarket profits; this is likely to have a negative impact on the Scottish economy, deterring job creation and business investment in the retail sector.” The new levy was unveiled by finance secretary John Swinney last year, and will impose a supplement on the business rates of stores that sell both drink and cigarettes. Only stores with a rateable value of more than £300,000 will have to pay, meaning that smaller convenience stores are not affected. Mr Swinney said the money would be put to use in preventative health measures, aimed at reducing drinking and smoking rates across the board, while penalising stores whose profits are boosted on such sales. However, the CEBR paper argues that the levy is a pure “cash grab” on the sector. It comes after supermarkets successfully fought off a bid by the SNP minority administration to impose a similar tax before last May’s election when the party gained a majority. The report declares: “The levy is in the form of a business rates supplement and is thus not proportional to the amount of alcohol or tobacco sold by a retailer. Given this, the proposed health levy appears to be little more than an income generator for the Scottish Government, aimed at extracting more tax revenue from some 240 large retailers in Scotland.” The CEBR paper quotes Office for National Statistics data showing that profits in the supermarket sector are just 5 per cent of turnover. It argues: “Margins in the retail sector are lower than in other sectors of the UK economy, meaning that a tax which looks modest as a share of turnover can be significant as a share of profits.” The levy is almost certain to be passed into law this year. However, retailers are to continue to lobby for reform, saying that ministers should modify their plans so that the levy applies equally to all licensees in the on- and off-trade. Scottish Retail Consortium director Ian Shearer said last night: “In justifying the proposed ‘health levy’ the government has argued that it would have negligible impact on the bottom line and on Scotland’s competitiveness as a location for investment and doing business. This research clearly shows this isn’t true. The government must reconsider before the damage is done, not only to some of the country’s biggest employers but also to retailing’s suppliers across the wider Scottish economy.” David Lonsdale, assistant director for CBI Scotland, added: “Larger retailers often have a choice of locations in the UK or abroad for their investments and rigorously evaluate post-tax returns on their investment options. This tax will make it more expensive for retailers to operate in Scotland and could put at risk much needed new investment and jobs. The introduction of this levy is a decisive departure away from the uniform business rate that business fought so long and hard for, and opens the door to smaller retailers and indeed other sectors being similarly targeted in future.” In a letter to ministers, Asda warned recently that the new tax “sends the message that Scotland is a less attractive place to invest in the future”. Mr Swinney has previously pointed out that the levy will hit only the “very largest retailers in Scotland”. Ministers have also said that their consultation remains open.