Budgets are always a mix of good and bad news for pretty much any business sector, and indeed for individuals and families and other interest groups. Looking narrowly at the 2018 Budget from the perspective of our members, I’d say there’s more positive than negative news in there. I’d also give the caveat that much of the real Budget news comes in the documents published when the Chancellor sits down, detailing the proposals, processes and timelines for the headline announcements he skipped over at the despatch box, so days two and three of budget analysis are often more instructive than the set piece speech itself.
Business Rates / High Streets
Let’s kick off with the announcements and the issues surrounding business rates. Ahead of the Budget, all the speculation was about some form of digital sales tax to level the playing field between high streets (where politicians note the woes of some high profile retailers) and on line retailing. Our conversations with the Treasury suggested that the focus would be on international co-operation to ensure digital companies operating across national boundaries pay fair levels of tax, and I see the new digital services tax as a mechanism to provide impetus to this work. It’s not credible to think that raising up to £400m by 2020 is a meaningful re-adjustment of the tax burden between on line and bricks and mortar retailing, and if anything I saw behind this announcement a decision by the Treasury that fundamental changes to the business rates system were not going to be tackled until the next revaluation in 2021 at the very earliest.
Of course the Chancellor said plenty about business rates and much of it was relevant to us. Reducing by a third the rates bills of shops with a rateable value between £12,000 (they’re already exempted from paying rates) and £51,000 is a big deal. Most convenience stores fall within those bands, and so a “typical” (there is no “typical”, of course) store of maybe 1,800 square feet, well-invested, on a suburban parade, paying say £12,000 in business rates, now saves £4,000 a year. Across the sector, I think this will come to about a £50m saving. No shops will lose from this policy, but some don’t win either. Many petrol forecourt stores have RVs above £51,000, and multiple stores will have their benefit from this policy capped by state aid limits. We would have criticised the Chancellor if he had increased our sector’s rates burden by this amount, so let’s give credit where it’s due and welcome this significant reduction which will help shops to invest, take on new services and improve their offer.
Note also the £675m fund to help high streets to change. My impression from the MHCLG explainer on this is that we’ll see relatively few town centres get large amounts of money - £25m has been quoted – to undertake quite large projects. That’s all good, but probably not directly relevant to most convenience stores trading on housing states, petrol forecourts and villages. Interestingly, this part of the Chancellor’s speech was coupled with a promise to open up planning law to convert shops into housing. It’s hard to deny the logic of this approach, allowing high streets to shrink, and to get more people living in town centres to support the remaining businesses. But this process needs to be managed very carefully; unplanned conversion of retail into residential can bring spread out, incoherent centres that function as neither good places to live nor to shop.
I was interested to see the reaction to these policies. Some groups had been hoping for more fundamental changes to the business rates system and, ultimately, a bigger reduction in the amount of tax raised through this route. I would support this as an objective, but a) let’s not pretend that’s easy – all of the alternative approaches touted have their own strengths, weaknesses, winners and losers, and b) the need for longer-term reform doesn’t render invalid these substantial reliefs within the existing system.
Future Employment Costs
I won’t talk much about the National Living Wage rate increase in April 2019, because that was entirely expected, just as we confidently expect an increase to around £8.60-£8.65 the following year. That would meet the government’s stated policy of the NLW being at 60% of median earnings by 2020. The real debate is about what happens after that. Does it continue at that same factor of median earnings, or does it adopt a different target? I was really encouraged by the Chancellor’s tone on this, talking about full consultation and working with the Low Pay Commission to set their role and remit into the future. Do retailers mind seeing their biggest cost go up by 4.9%? Absolutely, but what they really can’t cope with is the unpredictability when the NLW becomes a political consideration rather than an objective balancing of the needs of businesses and employees.
New Plastics Tax
Lastly I want to touch on the Chancellor’s interventions on plastics. The big news here will be the outcome of the ongoing review of the Packaging Recovery Note system that tries to incentivise reduced packaging and increased recycling, but which creates huge bureaucracy in doing this. This may well be a big campaign issue for retailers next year, if that review imposes new obligations on small retailers to measure packaging waste and pay for its recovery. For now, the Chancellor has focused his attention further up the supply chain through a levy on the manufacture or import of plastic packaging. The language sounds rather like that used when the soft drinks industry levy was announced, and so taking that as a model for how this may work, we can expect significant re-formulation of packaging by suppliers, different products attracting different levels of tax, and the various players in the supply chain making decisions on how to absorb or pass on those costs. I can sit here and pass this off as the problem of suppliers and packaging producers, but there will be an impact on shops and we’ll work closely with HMRC to weedle out any unnecessary complexities in this.
This is a longer than usual blog, and perhaps a more relevant than usual Budget. You can see our statements and discussion about the Budget here, and give us a call if you’ve got views on any of this.
