Reform Scotland

Spectre of grocer tax raised from grave to haunt Scotland’s retailers – David Lonsdale

Whilst retailers were trying to deliver a fantastic Christmas for Scotland’s shoppers the Finance Secretary Shona Robison instead focused on a New Year tax heist. Hidden away in the small print of her Budget, omitted from Ms Robison’s statement to MSPs or any accompanying press release, was a commitment to explore bringing back the euphemistically labelled ‘public health supplement’. 

 The news came as a complete surprise to firms, who had no inkling a new tax was even being considered. It was a reasonable assumption. The SNP’s 2021 election manifesto was explicit that they would “ensure that the largest businesses pay the same combined poundage in Scotland as in England”. This was reinforced in the government’s subsequent Framework for Tax. What we got from the Budget was business rates skyrocketing for firms occupying medium-sized and larger premises, including 4,500 stores, along with this new surtax aimed squarely at larger shops.

Another obvious reason for surprise was the flagrant disregard for the ‘New Deal for Business’ introduced by the First Minister only last year. This promised ‘no surprises’ and the involvement of business at the very inception of policy development. When Mr Yousaf said he wanted to ‘reset the relationship with business’ few anticipated he intended to set it back.  

The breaches of the manifesto and pledges on engagement matter. With the economy stagnant and costs ever-rising business leaders need to make informed decisions on where they will get the best and most predicable return on investment. After this difficult Budget it’s harder for the most patriotic of us to argue that Scotland is the best place to invest when the government’s economic strategy is bedevilled by ad hoc, unpredictable and often contradictory policies. That’s why the Scottish Retail Consortium described this Budget as a guddle. 

Grocery retailers must be wondering what they have done to deserve this special treatment. In the last four years supermarkets have done immense work in feeding the nation through the pandemic, where they had to battle disrupted supply chains and the whims of government restrictions. They subsequently invested billions in keeping prices under control despite record input inflation due to supply chain issues and the conflict in Ukraine. They were lumbered with a £50 million-plus bill last year when the Scottish Government’s troubled deposit return scheme collapsed. Instead of compensation they get threatened with being taxed twice – a new surtax to presumably come on top of this year’s bumper 6.7% uplift in business rates. So much for gratitude. 

The latter point highlights the philosophical incoherence behind this measure. For the last eight years Scottish Ministers have argued the correct way to manage the negative externalities which result from selling food and drink is through proportionate and targeted regulation. That includes charges on carrier bags and minimum unit pricing of alcohol. Furthermore, there has been voluntary action by retailers on reformulating products to be healthier, promoting low and no alcohol products, and providing nutritional information on café menus; alongside raising around £80 million in recent years for Scottish good causes through fundraising and donations. 

It’s reasonable to have an economic strategy in which targeted regulations put a specific cost on businesses and encourage them to adapt. It’s also reasonable to have a strategy which says businesses can do what they like but they must pay more tax to cover the negative externalities. To do both will merely deter businesses from investing in Scotland, or in taking the necessary voluntary action which helps improve Scotland’s health and wealth.

This isn’t just about a modest number of grocery stores. The risk with this surtax on retailers is that could be seen as an opening salvo. If the state of the devolved public finances turns out to be worse than feared then it opens the door to a widening of the scope of the surtax to smaller retailers or other sectors of the economy. Which other sectors will be next in the Ministerial cross hairs if the sums don’t add up in twelve months’ time?

In many ways the Scottish Budget was an unwelcome return to the past, with the grocery tax a spectre raised from its grave to haunt Scotland’s businesses. The previous incarnation of the public health supplement, from 2012 to 2015, left retailers nursing a £95 million headache. It undermined reserves of goodwill amongst business towards the devolved government. Yet the past does contain some good ideas. Rather than thwacking firms with new taxes, Ms Robison should instead descend into the catacombs of St Andrews House and dig out the long-forgotten Crawford Beveridge report into controlling government spending. Businesses have had to cut their cloth in recent years in response to the wider economic turbulence – on this 25th year of devolution it’s time for the Scottish Government to do the same.  

David Lonsdale is the  Director of the Scottish Retail Consortium