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Tesco rate relief payback turns screw on rivals

Chain has “proven resilient in the most challenging of circumstances”
Tesco rate relief payback turns screw on rivals
  • UK’s largest grocer to pay back £585m in business rates relief
  • Decision comes despite £725m cost hit from Covid-19
IC TIP: Hold at 225p

The board of Tesco (TSCO) has opted to return £585m-worth of business rates relief to the UK government and devolved administrations, in a move that puts pressure on fellow food retailers to follow suit.

At the end of March, with the weight of the coronavirus and looming lockdowns bearing down on the UK economy, the retail, hospitality and leisure sectors were given a 12-month holiday on business rates for the 2020-21 tax year.

For many firms, that was broadly viewed as a vital lifeline. But now, with the greatest risks behind it, Tesco plans to give up the relief's entire economic benefit. The repayment, equivalent to more than the Tesco’s first half pre-tax profit, will carry a full-year cash impact of £535m. A further £50m is set to be returned next year.

“We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society,” said chairman John Allan. “We firmly believe now that this is the right thing to do, and we hope this will enable additional support to those businesses and communities who need it."

The group made the decision despite putting “every penny” of the rates relief towards its pandemic response. This year’s Covid-19 related costs are expected to hit £725m, the supermarket said in October.

Tesco added that it was “immensely grateful” for government support at the start of the Covid-19 pandemic, when food retailers’ operations were under severe strain and posed an “immediate risk to the ability of supermarkets to feed the nation”.

The move also follows growing political pressure for supermarkets to pay back the relief, given their revenue and profit growth since the pandemic struck. Last month, the Sunday Times cited figures from advisory firm Altus which suggested grocers were in line to benefit to the tune of up to £1.9bn from the 12-month holiday on business rates.

“If the public is to have confidence in these measures, Ministers must ensure taxpayers’ money supports British jobs,” said shadow business minister Lucy Powell at the time.

Tesco’s first-mover advantage is likely to win it further plaudits as a model corporate citizen. But the decision also carries commercial logic. With a greater proportion of its online sales than its rivals, it is arguably in a stronger position to return the tax breaks than the discount retailers or J Sainsbury (SBRY), which has said it expects rates relief of £453m this year.

These businesses are now under pressure to follow Tesco’s lead.

This dynamic was reflected in the immediate market reaction. Though Tesco shares dipped 1.6 per cent on the announcement, Sainsbury’s stock sold off by 3.9 per cent, while B&M Europe (BME), saw its shares dip 2.4 per cent.

The discount retailer, whose classification as an essential retailer in April allowed it to operate throughout lockdown, has collected at least £38m in business rates relief this year. Its decision to announce a £250m special dividend with half-year numbers now looks even more suspect.

As some businesses emerge from the pandemic in much better shape than they initially feared, calls for the return of emergency state aid are only likely to grow. Aside from business rates relief, companies which accepted furlough support are increasingly being forced to choose between repaying the cash and shareholder distributions.

In absolute terms, Tesco’s decision adds another big dent to this year’s earnings expectations. On a longer-term view, it looks like a canny business move – as well as being the right thing to do. Hold at 225p.

Last IC View: Hold, 221p, 7 Oct 2020