How could the emergency Budget affect the sector?

What's in Store?

Business insights for the retail and consumer sector

Retail & Consumer companies will be monitoring the announcement on June 22

Here are a few pointers from Paul Davies, a partner in the PwC tax team:

Spending cuts vs tax rises?

“In general the Retail & Consumer sector would welcome a further commitment to spending cuts rather than tax rises, since the latter would have a far greater impact on consumer spending. Within the sector, any tax rises would clearly have a greater impact on companies at the discretionary end of the scale, rather than those supplying essentials like food and everyday household goods.”

National Insurance

“Retailers, in particular, have welcomed the fact that the Coalition has committed to deliver on the Tory proposal to reverse the proposed increase in employers’ National Insurance. The big retailers have some of the biggest workforces in the country, so any rise here would have had a disproportionate effect.”

VAT

“This is the real elephant in the room. The Government are studiously avoiding making any hard and fast statement on this either way, but many commentators believe a rise in the standard rate of VAT to 19% or 20% is a very real possibility. Even at that level, the UK rate would still be around the European average. History teaches us that VAT rises are generally more acceptable to the public than income tax rises. Despite that they are almost always introduced as soon as possible after a new government is elected or, to put it another way, as long as possible before the next election. VAT is also one of the more predictable methods of raising tax (far more so, for example, than Corporation Tax), and has the added advantage of being collected by the retailers themselves.

If we do see a rise it will have some obvious consequences for the sector. The first is when, and how quickly, they pass the increase on to consumers. Another is the purely practical task of changing price lists, systems, and advertising material though the recent VAT rate cut and subsequent reinstatement means that businesses have had recent experience in this aspect of the process.

Perhaps more interestingly, but less likely, we could see some goods that are currently zero-rated, like children’s clothes, books, and food, being brought into the scope of VAT for the first time, even if only at a reduced rate. This would mean a considerable upheaval for firms like butcher’s shops or booksellers, who have hitherto only reclaimed VAT on goods purchased, and not had to apply it to goods sold. Putting VAT on items like these definitely has political implications, but it is not impossible we will see it proposed.”

Making the UK “the most competitive tax system in the G20”

“This is a stated ambition of the new Government, but most companies do not see this reducing the overall corporate tax take. In other words, the headline Corporation Tax rate may drop, but it’s likely to be counterbalanced by reductions in some of the current reliefs. For example, allowances for plant and machinery may fall, which could affect some consumer goods businesses. Likewise international companies that finance their overseas operations through debt, and as a consequence reduce their UK tax liabilities, may well see the interest rate relief they claim being cut. It’s hard to generalise about this - some companies may be better off, some worse. The devil, as usual with tax, will be in the detail.”