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Opinion

'Taxes killing pubs while supermarkets surge'

By Tim Martin , 22-Nov-2016
Last updated on 22-Nov-2016 at 17:29 GMT2016-11-22T17:29:25Z

Tim Martin: 'pubs will be forced to raise prices more than supermarkets'
Tim Martin: 'pubs will be forced to raise prices more than supermarkets'

Two taxes in particular are killing pubs according to Tim Martin: business rates and VAT. Here the JD Wetherspoon chairman has his say on the situation... 

The effects of these two taxes are far more harmful than the admittedly penal rates of excise duty (alcohol tax), since pubs' main competitors – supermarkets – pay far less in business rates and VAT than we do, whereas they pay the same excise duty.

So, industry campaigns that prioritise excise duty, are helping supermarkets as well as pubs.

Information supplied by Dalton Philips, former CEO of Morrisons, indicates supermarkets pay about 2% of their sales as business rates.

Based on an average selling price for a pint in a supermarket of £1, excluding VAT,  supermarkets are paying business rates of about two pence per pint, and perhaps much less in some cases.

Pubs, on the other hand, are assessed for business rates at about 12% of sales and the industry pays about half of that (6%) in cash tax.

Assuming an average pub price for a pint of £3.60, including VAT, pubs pay about 18p per pint (6% of the excluding VAT price of £3).

Pub rating assessments are about to increase nationally by an average of around 15% from April 2017, which works out at about 3.6p per pint (15% of 18p = 3.6p). Adding on the same again for margin would result in about a 7p increase per pint for pub customers.

On the other hand, if supermarket business rates increase by the same 15%, they will pay less than a third of one pence in additional tax (15% of 2p = 0.3p).

Forced to raise prices

In contrast to pubs, an increase of a mere half a pence (0.5p) is likely to be enough to preserve supermarket margins.

So, once again, as a result of taxes, the pub trade will be forced to raise prices by far more than supermarkets in order to maintain the margins that are essential for any business.

Just to rub salt in the wound, at least one of the major supermarket chains has told investors that it is expecting minimal impact from the April business rates revaluation.

A second factor will dramatically increase the cost difference between pubs and supermarkets in April – the proposed rise in the national 'living' wage.

Judging by Sainsbury's accounts, supermarket wages are about 10% of sales. So a pint selling at £1 excluding VAT, as above, will have a labour cost of about 10p.

A pint in a pub, however, where wages are around 30% of sales, will have a labour cost of about 90p per pint (30% of the excluding VAT cost of £3 = 90p).

Assuming the April wage increases go through at 5%, the cost to supermarkets will be an extra half pence per pint (5% of 10p = 0.5p), whereas the cost to pubs will be 4.5p (5% of 90p = 4.5p).

Adding on the same amount for margin and pubs will be increasing prices by 9p or so to cover this cost. As in the above example, the increase in prices that supermarkets will need to preserve margins is minimal.

VAT disparity

In addition to these increases is the biggest 'Sword of Damocles' hanging over the industry – the VAT disparity with supermarkets. Pubs pay 20% VAT on food sales, whereas supermarkets pay almost nothing – an identical sandwich bought in pub attracts 20% tax in a pub and nothing in a supermarket.

This allows supermarkets to sell food for less, and to subsidise the selling price of alcoholic drink sales – the pub industry is always competing with one arm tied behind its back. The playing field is anything but level.

Pubs contribute to society in many ways, including their role as a huge employer and contributor to the exchequer. We understand that society and governments need taxes, and we also want and need to pay our staff well. 

However, if the pub industry is to survive and thrive in the future, equality of taxes with supermarkets is vital. Many thousands of pubs have closed in recent years and thousands more are shadows of their former selves.

Unless there is a sensible rebalancing of the tax regime so that pubs and supermarkets pay approximately the same tax per drink or meal, the price gap between pubs and supermarkets will continue to widen. This will have inevitable consequences for pubs – and for the country.

The message from the industry needs to ring out loud and clear: lower excise duty is important, but tax equality is paramount.

MPs, the Government and the public want to help pubs, and they generally appreciate their vital role in the economy and society but, unless the industry explains the maths, which most pub companies have signally failed to do, supermarkets will continue to be the beneficiaries of the tax fog in which our industry flounders.

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