A Christmas bombshell of VAT and duty hikes and the withdrawal of trade credit support threatens this vital trading period and beyond. Join our new campaign to fight it. By James Ball

Christmas is a time for giving. Or so we thought. But the government’s gift to the industry this yuletide comes with a ticking clock and fizzing fuse: a bombshell combination of badly timed tax hikes and the withdrawal of crucial trade credit support that could cost the industry millions, undermine Christmas itself, and cause a chain reaction felt long after the festive season. 

That’s why The Grocer is launching a Push Back the Tax campaign. We are demanding a one-month delay in the increased VAT rate and an extension of trade credit protection until the end of this financial year. We are also calling for a one-year suspension of the alcohol duty escalator, to escape a double-increase in duty. 

This campaign is not about dodging tax responsibilities. It is a plea for simple delays that will avoid extra work and extra costs at the busiest and most important trading period in the year. 

VAT is set to revert to 17.5% on 31 December after 13 months at the lower rate of 15%. The very same day, the government’s trade credit support scheme, an initiative to keep suppliers’ working capital flowing, is set to be withdrawn. If they survive these two blows, retailers and producers alike then face a hit from the alcohol duty escalator in the new year.

Industry figures accept that VAT rates need to be increased, but warn reintroducing it in the most important trading period of the year will be damaging. Widespread expectations of a difficult Christmas for retailers make this trading period still more crucial. 

“The timing of government help-for-business policies should be determined by trading circumstances, not arbitrary calendar dates,” says Jane Milne, director of business environment at the BRC.

“Getting it right at the busiest time of the year is extremely difficult even without a recession, and the VAT hike is the last straw,” says Milne. “Retailers may have more notice of the changes this time around, but it will take time and money to update and amend shelf pricing, catalogues, PoS, and these are in short supply at Christmas.”

Clive Black, retail analyst at Shore Capital, believes a delay of one month is a practical step. “Given the utterly disastrous state of public finances, there is no doubt VAT will have to return to its old levels. It may even increase further, or be extended to more categories as tax rises to pay off public debt. But changing the timing is a sensible compromise. Even a few weeks would be better. January is a very quiet time and would be more suited for a change in VAT.”

The BRC estimates the cost of implementing the cut in VAT last year at about £90m. It expects the figure to be comparable when it increases. But there may be further complications this time round if signage is not altered as the change involves an increase in price. When VAT was cut, the major multiples coped with PoS discrepancies by simply taking off VAT at the till while signage was updated. But while consumers were happy as long as their bill was slightly less than expected, retailers will struggle to charge them more when tax reverts to 17.5%. 

In theory, this could lead to Trading Standards investigations. But it’s a consumer backlash retailers fear more. Rather than risk an outcry, most outlets will try to have their prices changed before the VAT change kicks in. This will mean more staff overtime at Christmas, when overtime bills are at their highest. Supermarkets typically pay time-and-a-half for overtime beyond a certain number of hours, between 36 and 40, in a week, and so generally try to avoid staff exceeding these limits.

‘Insane’ timing
Several leading industry CEOs have already publicly spoken out against the timing of the VAT increase. Sainsbury’s chief executive Justin King has claimed “there probably is not a worse day of the year [to increase VAT] from a retailer’s point of view”.  M&S executive chairman Sir Stuart Rose went a step further, branding the New Year’s Eve timing “insane”.

But for drinks manufacturers – and the numerous independents reliant on alcohol sales – VAT woes won’t end with the chimes of New Year. When VAT was cut, duty went up 8% to prevent alcohol getting cheaper. But when VAT returns to the 17.5% rate, duty won’t be cut. The Chancellor has said the alcohol duty escalator – a 2p duty increase each year – will continue, leaving drink manufacturers and retailers facing two hikes in a year.

This is expected to hit the trade hard. Though the off-trade is more resilient than the on-trade – where six pubs are closing every day – volume sales of wine and beer are both falling, particularly in independents, while a number of suppliers have gone under. “We’ve already seen some very good drink companies fold this year,” says Wine & Spirit Trade Association CEO Jeremy Beadles.

“At this time the industry certainly doesn’t need two duty increases in the space of months. If we want the industry to grow and develop we need a reprieve from duty increases that are constantly eating at margin and now hitting volume, too.”

And it’s not just alcohol suppliers who will be hit by the calendar crunch. In April, the government introduced a support scheme to help provide trade credit insurance to companies who’d seen their limits cut. At the end of December – just eight months later – the scheme is due to be withdrawn.

Trade credit helps keep working capital down by insuring payments, allowing suppliers to extend credit to their customers. Where it is reduced or withdrawn, suppliers are forced to ask for cash on delivery, or cut order sizes. Christmas, when orders are at their biggest, is when suppliers’ working capital is under the most pressure – making it a tough time to suck liquidity back out of the system.

Quite simply, just delay
The FDF is one of a number of organisations already campaigning for government to provide a trade credit scheme to help smaller food and drink manufacturers. Says member services director Charlotte Lawson: “Any trade credit support should be extended beyond the Christmas period, which is always a critical time for food companies.”

The BRC also feels the trade credit guarantee should be extended as long as is necessary. We believe the financial year-end is the minimum time it will take for private insurers to be willing to shoulder more risk.