Sacred Cows – Market Matters
Whitehall whisperings suggest a sacred cow is in danger. Civil Servants are believed to be investigating whether VAT should be levied on groceries which, together with books newspapers and children’s clothes are currently exempt. A levy of between 3 and 5 percent is being (very) quietly discussed as one way to help HM Government finance a budget deficit and borrowings expected to hit £180 billion in 2010/11.
As the ‘big four’ supermarkets currently sell about 80% of the UK’s groceries, a food levy would be easy to administer on their estimated turnover of £120 billion p.a. to raise a welcome £5 billion or so towards paying for HMG’s bail-out of the banking system. Taxing food would also bring the UK more into line with European tax policy and is a tempting option when added to cuts in public spending and a hike in the general VAT rate from 17.5%. It certainly ties in with successive Governments’ shift away from direct (income) tax on earnings and towards indirect (VAT) tax on consumption.
The ever-so-small fly in the ointment is that taxing food is electoral suicide. Despite food being cheaper in real terms than ever before,
the impact on the family budget would be
immediately noticeable to the electorate and VAT on food is a ‘regressive’ tax, i.e. it hits the poorest people hardest as they spend disproportionately more of their income on food than richer families. If the next Government were sufficiently bold to introduce VAT on groceries then we could also expect a suitably self-righteous response from supermarkets and the British Retail Consortium as prices rise and their profits fall – something along the lines of ‘an unjustifiable tax on living’. And if you own a business selling groceries, books newspapers or children’s clothes
you would need to rethink your VAT status.
One thing for sure is that no politician is going to raise this possibility before the General Election. A Treasury spokesman said, “It is not remotely on the table” and there was “Absolutely no question” of Alistair Darling imposing VAT on groceries. Taxes which raise food prices are the equivalent of political suicide notes, unlike taxes which give banks a good kicking. We can expect to see a few of them tabled between now and May.
Meanwhile on the High Street, the banks have been looking at boosting profitability by abolishing cheques. The problem with personal cheques is that private banking doesn’t generate profits but soaks up staff time on piddling little personal transactions. Individuals also kick up an unholy stink about being charged for transactions, unlike businesses. The news from the Bank Payments Council (which organises cheque clearing) that it intends to close in 2018, was justified by the statement, “Cheque fraud has been a very large figure and if cheques are abolished then it will help to get rid of associated losses.” Henceforth customers would presumably have to pay by cash, debit or credit cards or online.
But what about pensioners Dan and Doris who are stuck in their house and leave a cheque out for the milkman? They are hardly likely to use a computer or leave a tenner outside in the milk bottle. LibDem Shadow Cabinet Office Minister, Jenny Wilcott, asked for the figures in a Parliamentary question and uncovered some interesting facts about spending habits:
• 59.7% of transactions are by Cash – DOWN 6% since 2004
• 14.2% of transactions are by Debit card – UP 4.4% since 2004
• 5.2% of transactions are by Credit card – the SAME as 2004
• 3.7% of transactions are by Cheque – DOWN 1.9% since 2004
Presumably the remaining 17.2% of transactions are online. If you want to be a geek then you could discover the average value of transaction per category, but common sense suggests higher value sales are by credit or debit cards. Cash is still king for small transactions but plastic is fast closing the gap, something that will doubtless interest you as a retailer. But as Jenny pointed out, “How can the banks argue that cheques are dead when over 1.4 billion payments were made using them last year?” Quite so, but the move into plastic is evident, so start thinking about taking it if you don’t already do so. I’ve got a feeling that, unlike VAT free food, the sacred cow of personal cheques will be with us for some time to come, but we can expect to be charged per transaction.
The budget deficit is here to stay so now’s the time for Whitehall to be more imaginative and kick-start a public debate about balancing the books. For starters, why not forget VAT on groceries but levy a supplemental tax on supermarket profits? That would raise revenue and level the playing field a bit for independent retailers. Or how about levying VAT only on imported groceries to give domestic producers an edge and reduce carbon emissions?
That’s food for thought.
Jonathan Owen is a director of Quarterbridge Project Management – a specialist consultancy providing business advice and design services to market owners and trade associations. He has a keen interest in the politics of retailing, growing vegetables and eating well.
Market Matters, published in Market Trade News magazine
