2nd UPDATE: Tesco Joins Calls On UK Government To Shun VAT Rise

15th Jun 2010 11:53

(Adds detail.) By Simon Zekaria Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Supermarket Tesco PLC (TSCO.LN), the U.K.'s largest retailer, Tuesday joined calls on the U.K. government not to damage a fragile economy by raising value-added tax. Economists expect the U.K.'s new coalition government to announce an increase in VAT to 20% from 17.5% when it presents an emergency budget next week. But retailers are concerned the tax hike could jeopardize the recovery and see consumers cut back on spending once more. Tesco's Finance Director Laurie McIlwee said Tuesday that a government-imposed increase in VAT would have a negative impact on the economy. "[It] wouldn't be appropriate. The economy is recovering but it is pretty fragile, " he said. Asked if it would be better to introduce the rate hike next year, McIllwee said, "If there is a VAT increase, it should be in the future rather than now." McIlwee's comments follow a plea from J Sainsbury PLC (SBRY.LN) Chief Executive Justin King last month for the government to avoid raising VAT during the key Christmas trading period and to focus on long-term stability, rather than short-term changes to VAT which are costly for retailers to implement. Sainsbury also spoke out against the possibility of adding VAT to food saying it "would be regressive and would penalise the poorer members of society who spend a higher proportion of their income on food." Tesco's McIlwee was speaking as the retailer reported slowing U.K. sales growth for the fiscal first quarter. It posted a 1.1% year-on-year rise in U.K. sales from stores open at least a year, excluding fuel, for the 13 weeks to May 30. Adjusted for VAT, the figure was 0.1%. This compares with a 4.3% rise excluding fuel and VAT last year. But the group maintained guidance of 3% U.K. same-store growth for the full year. "We're in good shape and well-positioned to deliver further growth as the economic environment continues to improve," Chief Executive Terry Leahy said in a statement. "The...recovery is well underway although the pace and strength of economic recovery varies across our markets." Sainsbury, the U.K.'s third-largest grocer, is also expected to report slowing sales Wednesday as falling food inflation has hit the top line of U.K. supermarkets since the start of the year. Economists fear that consumer spending and confidence in 2010 will come under pressure from rising fuel prices, as well as forecasted tax hikes, public spending cuts and unemployment as the coalition government reins in borrowing. Tesco--which accounts for over 30% of the U.K. grocery market--said it sees evidence of a steady consumer recovery in sales growth for its premium food ranges, non-food and games. It said its television sales have been boosted by the soccer World Cup. The company also said the number of families redeeming points for its Clubcard scheme rose 20% year-on-year, and it is growing the number of customer accounts for Tesco Bank. Excluding fuel, Tesco's group sales rose 6.9% in the first quarter compared with a 12.6% rise in the same period last year. International sales at actual exchange rates excluding fuel rose 11.9%, with 15.4%, 7.3% and 37.8% growth in Asia, Europe and the U.S. respectively. In April, Tesco--the fourth largest retailer in the world behind U.S.-based Wal-Mart Stores Inc (WMT), France's Carrefour SA (CA.FR) and Germany's Metro AG (MEO.XE)--posted a forecast-beating 9.3% rise in full-year net profit to GBP2.34 billion. Philip Clarke, currently head of Europe, Asia and IT, will succeed Leahy as CEO next March. At 1051 GMT, Tesco's shares were trading up 7 pence, or 1.8%, at 399 pence compared to a 0.5% rise in the FTSE 100 index. -By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; [email protected] (END) Dow Jones Newswires June 15, 2010 06:53 ET (10:53 GMT)