The Retail Note - Autumn Budget: more income tax, more VAT, no money back, no guarantees

Key Messages

• Muted response (at best) from the retail & hospitality sector
• Minimum wage to increase from £12.21 to £12.71 from April
• An above-inflation increase of +4.1%
• Minimum wage increases far outstrip retail sales growth
• Minimum wage has more than doubled (+105%) since 2012…
• …vs retail sales growth of +60% (non-food +43%)
• A significant U-turn on business rate exemptions
• Foodstores not exempted despite extensive lobbying
• Base multiplier rate set at 48p vs 55p previously
• <£51k RV properties = 38.2p, >£500k RV = 50.8p
• Scrapping of business rate relief (from 40% previously)
• Many small retailers may actually pay more
• Larger retailers hit through stores and logistics
• Far from the online leveller it is dressed up to be
• De minimis rules to be phased out rather than scrapped outright
• Sub-£135 import loophole to stay in place until 2029
• Potential lost excise duty is substantial (ca. £500m p.a.)
• Welcomed by the logistics sector, but not the retail one
• Most by-products of Budget in retail are inflationary.

 A very different Budget from last year, but a familiar pattern. An endless stream of catastrophising in the days and weeks prior, lowering the bar of expectation. The Budget itself then appearing less bad than feared against these lowly expectations. But the reflection afterwards raising as many questions as providing answers.

‘A bond-friendly Budget’. ‘A Budget of guardrails over giveaways’. Two of the conclusions from my esteemed colleagues in Knight Frank’s wider Commercial Insight reaction to the Autumn Budget (which can be read here).

Financial markets and Labour backbenchers may have been placated, but the response from the retail sector has been decidedly less warm. In essence, three things stood out. 1. Another inevitable margin squeeze for retail & hospitality operators in the shape of an increase in the national minimum wage. 2. Further divisions in a three-tier market within business rates, the promised exemptions reneged upon in the highest (>£500k RV) bracket. 3. A half-baked plan to phase out de minimis rules from 2029, rather than a decisive move with immediate effect.

Minimum wage increases – a silent killer

Absolutely no surprises in the minimum wage rises, this is an absolute given in any Budget. It’s perceived to be a “good news story” by any government, a vote-winner. The retail & hospitality industry didn’t expect anything else.

From April next year the minimum wage with increase from £12.21 to £12.71. A 50p increase may seem modest, but it will have a significant impact. Pitched as a boost to the retail sector, increases in the minimum wage are actually a major cost headache for retail & hospitality operators. The latest rise represents an annual increase of +4.1%, lower than the average of ca. +6.0% over the last 10 years, but still higher than inflation.

But the full impact can only be appreciated by looking at the full timeseries. Since it was launched in 2012, the living wage has now more than doubled (+105%), from £6.19 originally to £12.71 from next year. In contrast, all retail sales have grown by just +60% over the same period, with non-food sales growing by just +43%.

In simple terms, staff costs have grown significantly higher than top line growth. QED operating margins come under pressure. QED something has to give. QED retail & hospitality operators will try to keep a lid on staff costs, in part by employing and hiring fewer people. Oh yes, inflation is another inevitable pressure-relieving valve.

The business rates minefield

Somehow, the high street has been singled out as a ‘winner’ from the latest business rate revaluations. Before unpacking the detail, a couple of ‘bigger picture’ points. While in opposition, Rachel Reeves actually promised to totally scrap business rates if Labour came to power – a pledge that seems to have since been conveniently overlooked.

Likewise, another more recent dramatic U-turn. In the run-up to the Budget, grocery retailers in particular lobbied hard, warning that increased business rates bills would be inflationary. We were led to believe that the Chancellor had heeded this message and was prepared to make exemptions. We wondered whether these exemptions would just apply to foodstores or where the dividing lines would be drawn. In the event, we were wasting our time as no exemptions were granted at all.

The Budget and the 2026 Draft List were released the same day. Starting with the latter – with the new Rateable Values (RVs) reflecting the change in rents between April 2021 and April 2024, almost every (repeat, almost every) commercial real estate sector has seen an increase, as the country recovered from the pandemic. Overall, the total RV has increased by +19.2%. This has allowed Government to reduce the standard multiplier (applied to RVs to calculate a ratepayer’s liability) from 55.5p to 48p.

Retail, of course, is always the exception to everything. And this is where it gets very complex. Dressed up as way of helping the high street, the Government has announced permanently lower multipliers for occupiers of Retail, Leisure & Hospitality (RHL) premises, as follows:

-         RV below £51,000 – multiplier of 38.2p
-         RV £51,000 to £500,000 – multiplier of 43p

These lower multipliers will be funded by a 2.8p supplement on RVs above £500,000, applicable to all commercial properties (including supermarkets). Despite seeming radical, the Government could actually have gone much further with greater reductions in the multiplier (as much as 20p) and a higher supplement on large properties (as much as 10p).

So much for hard facts, what of the nuance, narrative and real implications. In the words of the Chancellor: “the high street will benefit from permanently lower business rates for retail, hospitality and leisure, funded by higher rates for the most expensive properties such as warehouses used by large online retailers”.

The sentiment may be touching, but the thinking is flawed on two counts. Firstly, many retail properties have a RV of more than £500k, particularly (but not exclusively) supermarkets, retail warehouses and stores in Central London. They are as much a part of the “high street” as any other retailer and are clearly not going to see any benefit – quite the opposite. Secondly, retail is not binary, it is multi-channel. “Warehouses used by large online retailers” are also used by many high street operators. So, it’s just as likely to impact the likes of John Lewis, M&S and Next as it is Amazon. Many of the large retail operators will have the double whammy of higher rates bills on both their stores and their logistics sites. And the fact that they are “large” and can stomach this just doesn’t wash.

But surely that’s OK if it helps the smaller operators? The cynic in me remains to convinced. The new lower multipliers will replace the current RHL relief, which works by applying a 40% reduction to rates bills up to a cash cap per business of £110,000 (a legacy of COVID). The result is not universally positive, even for smaller-scale operators. Take, for example, a shop with a Rateable Value of £25,000. This year, its rates bill after the 40% relief will be £7,485. Next year, with the lower multiplier, its rates bill will be £9,550, an increase of +27.5%.

However, if a retailer has a large portfolio of shops, the reduced multiplier will no longer be subject to the £110,000 cap or State Aid limits. So, whilst the relief on an individual property may be less generous, the total level of reduction across a large portfolio is likely to exceed £110,000.

A minefield that my Business Rates colleagues would be more than happy to help you navigate. But a minefield that could have been avoided if the Chancellor stuck to her original pledge of scrapping them altogether? In fairness, that would probably result in an even bigger minefield than we have now…

De minimis nimium longus

Dusting off my ‘O’-level in Latin. Positive movement on the de minimis rule, but the proposed timeframes far too drawn out. Rather than simply close the loophole whereby international retailers do not pay import duties on shipments below £135 with immediate effect, the rule will only be phased out from 2029, apparently for fears of potential bottlenecks at borders. That seems a small operational price to pay for a move that is purported to bring in £500m per annum in additional levies. Surely, the sooner the better?

Is this an issue for the retail sector? Yes, for many domestic retailers it certainly is. Apparently, sub-£135 imports having surged 53% last year to nearly £6 billion. This basically means that overseas retailers are trading in the UK, but are making zero contribution in tax through any means (corporation, rates or VAT). They are undercutting operators who pay all of the above. Retailers are losing out and so is the Government.

With the protracted phase out, at least logistics operators now have clarity, and crucially, time to prepare. It has created something of a window of opportunity, as the demise of the de minimis threshold won’t just raise revenues; it will reroute supply chains through the UK’s warehouses and act as a catalyst for expansion of onshore fulfilment and logistics networks.

My logistics colleagues may welcome the delay. But from a purely retail perspective, the sooner the better. Tomorrow, not in 2029.

One positive

“I will support the great British pub through our new national licensing framework – encouraging councils to back our pubs and to back late-night venues with greater freedoms”. Hurrah. Let’s just hope they won’t be completely crippled by business rates and additional staffing costs that they have to close.

Final thoughts

Maybe not the “triple whammy” of last year’s Budget, but precious little for the retail sector to cheer this time around.

Low economic growth, but generally lower inflation expectations seems to be one of the key takeways from this Budget. The latter jars a bit with the Retail read on things. Increased staffing costs and higher business rates for larger retailers both point to inflationary pressures, rather than deflationary ones. In reality, we may see a multi-tiered inflation market, with headline CPI and RPI trending down, but the retail components within that (Shop Price Inflation) remaining stubbornly high and sticky.

Grocery inflation is unlikely to dip below 3% for a considerable time. Higher supermarket prices are not conducive to addressing a cost-of-living crisis, nor relieving child poverty. And the Chancellor can’t say she wasn’t warned by the grocers themselves. Retailers lobbied to this effect, but this lobbying appears to have fallen on deaf ears.