VAT on food ‘could cut grocers’ profits by 16%’

Its introduction could reduce group operating profit by 6% at Tesco, 13% at Morrisons and 16% at Sainsbury’s, according to the broker.

The impact would be lowest on Tesco because only 70% of the grocer’s revenue comes from the UK, a higher proportion of its revenue already attracts the full 17.5% VAT rate because of its higher non-food mix and that it starts with higher operating margins than its peers.

The possibility of VAT on food has been mooted in recent weeks against the backdrop of strained government finances, although the main parties have distanced themselves from the idea.

Bernstein analyst Christopher Hogbin said: “The UK is one of only four EU states with a zero rate of VAT on food, a rate that is below the 5% minimum for ‘reduced rates’ suggested by the EU VAT directive.”

He said VAT is one of the levers the Government has to address the financial deficit and that VAT at present levels “will contribute £67bn of revenue in 2009/10”. He added that HM Revenue & Customs estimates the imposition of the standard 17.5% rate on currently zero-rated foodstuffs could raise £11bn.

Hogbin maintained consumers would cope with VAT on food in the same way they did with rapid food price inflation in 2008, when they switched products and shopped around, with the net effect that they offset 80% of the price increases. He said if the pattern was repeated, shoppers might trade out of premium grocers.

He added “the biggest counterargument is that VAT on food would be highly regressive” and “any increase would disproportionately impact lower-income households”.