Annex B
The Climate Change Levy and the National
Insurance Rebate—The Impact on Retailers
Executive Summary of an Independent Study
by Capital Economics Ltd
Commissioned by the British Retail Consortium
EXECUTIVE SUMMARY
— The climate change levy is intended
to be neutral in its effects on the profits of business as a whole
through the distribution of an offsetting reduction in employers'
National Insurance Contributions (NICs). Whether an individual
business will be better or worse off on balance should therefore
depend on how much energy it uses compared to how much labour.
— Given that the retail sector is a
large employer of labour and a relatively light user of energy,
you would readily imagine that the retail sector would be a net
gainer from the levy combined with the rebate. Yet many retailers
have asserted that they will be sigificant net losers. This report
tries to establish why this might be.
— One possibility is that the rates
set for the levy and rebate are such that the sums will not in
fact be offsetting for the economy as a whole. Retailers' net
losses may simply represent their share of the national shortfall.
Although the precise amounts to be raised from the levy and disbursed
by the rebate are to some degree uncertain, and although the Government's
official plans envisage some extra amount raised by the levy which
will be disbursed via energy conservation measures rather than
through the rebate, (not much of which may find its way to retailers),
we do not think this is adequate to explain the apparent discrepancy
between retailers' levy and rebate.
— One possible explanation lies in
the fact that the proposed rates for the levy applying to different
fuels are different, with electricity singled out for particularly
heavy taxation. Retailers use elecricity far more than other energy
sources, and to a greater extent than is true for the economy
as a whole. Accordingly, their levy payments will be higher than
the average prevailing in the rest of the economy. Even so, this
point does not seem to be adequate to explain the size of the
apparent loss facing many retailers.
— We think that the main part of the
explanation lies with the structure of the National Insurance
system and its inter-action with the structure of the workforce
employed in retailing.
— Part of the problem relates to the
use of workers who are contracted-out of SERPS. Whether such workers
will be eligible for the ½ per cent reduction which applies
to the conventional NIC rate is not altogether clear but many
of the retailers we have spoken to have assumed that it would
not. This, of course, leaves open the possibility that the rebate
will indeed be paid on contracted-out workers and that for many
retailers this will be enough to eliminate their projected losses
from the levy and rebate combination.
— But of the retailers we have consulted,
even with the ½ per cent rebate applied to contracted-out
workers, many would still be net losers.
— The most likely reason is that retailers
employ a large proportion of part-timers, and of their full-timers,
a high proportion are paid relatively low wages. This is relevant
because NICs are only payable on that part of the wage above the
NIC threshold of £83 a week. Correspondingly, the NIC rebate
is also only payable on that amount.
— The upshot is that retailers will
not benefit from the NIC reduction because they have a low ratio
of NICs to their total pay bill. This result highlights a serious
design fault in the NIC rebate scheme. If implemented in the proposed
way, it will lead to a haphazard redistribution of profits between
companies and sectors. And there will be some positively bizarre
results. Whereas many, if not most, retailers will be net losers,
investment banks will receive large NIC rebates and may even be
substantial net gainers overall.
— What makes this particularly ironic
is that the NIC system was redesigned partly with a view to encouraging
the employment of low-paid workers. Yet the greatest beneficiaries
of the rebate scheme are the employers of highly paid workers.
— Actual evidence from calculations
provided by four retail firms confirms these points. Two of the
firms—large retailers who employ more than 80,000 workers
combined—estimate that the combined impact of the levy and
rebate measures will represent a substantial increase in costs.
For one of them, the cost is estimated at more than £2m per
year, although this would be reduced if the rebate were to be
applied to contracted-out workers earning between £83 and
£500 per week.
— One key factor in determining the
costs was the heavy use of electricity—owing to the sale
of frozen foods—which is liable to be taxed at a higher
rate than gas. For one of the retailers, refrigeration accounted
for half of total energy use.
— The second factor was the structure
of the workforce—around half of the companies' combined
workforce is part-time. Since this produces relatively low weekly
earnings, the companies' NIC bill is low in relation to their
total wage bill. As a result, the total amount that would be received
through the proposed rebate is correspondingly low.
— Estimates of net losses were not
restricted to the larger retailers. Another firm, employing around
50 workers, estimates that it will be worse off by just over £350
per annum, which it complains is high in percentage terms. The
main reason for this is that its average wages are fairly low,
resulting in a small NIC reduction.
— One large retailer, however, did
estimate that the measures would result in a broadly revenue-neutral
outcome, with both the increase in energy costs and the saving
on labour costs amounting to some £2.5m per year.
— Two factors were responsible for
this. Firstly, the firm is a relatively intensive user of gas
power over electricity. Secondly, the ratio of employer NICs to
total wages was much higher than in other firms, producing a relatively
large rebate.
— The results suggest that the Government
should re-examine the proposed use of the National Insurance system
as a way of channelling the climate change levy back to business.
Other suggested ways have included reductions in the rate of corporation
tax and the use of enhanced capital allowances. Without commenting
on the relative merits of these, it would be possible to construct
an alternative way of disbursing the funds through the National
Insurance system but which ensures a more equitable distribution
of funds by different sectors and companies.
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