KPMG publish regular information on the latest hot topics for retail organisations.

Changes to Capital Allowances Regime
Changes to the capital allowances regime post 2007 Budget The 2007 Budget introduced significant changes to the Capital Allowances Regime. The key changes have been summarised below, along with commentary on how these changes may affect retail clients.

The Budget also introduced a reduction in the main corporation tax rate from 30% to 28%. The overall effect of the changes to the capital allowances regime along with this reduction in corporation tax will have to be considered on a company by company basis.

Changes in the level of writing down allowances for plant and machinery From April 2008, the rate of plant and machinery allowances will change as follows:

Plant and machinery from 25% to 20% Long life assets from 6% to 10% ‘Integral building plant’ (fixtures) from 25% to 10%

With regards to ‘Integral building plant’, the Government will be consulting on the definition to be applied to this term.

It is assumed that assets in the general pool at April 2008 will remain there and that there will be no attempt to strip out the ‘Integral building plant’ included in the general pool. However this assumption has yet to be confirmed.

An Annual Investment Allowance will also be available for expenditure incurred after April 2008. Relief will be available at 100% on the first £50,000 of qualifying plant and machinery expenditure. In the meantime, first year allowances are still available at a rate of 50% for small companies and 40% for medium sized companies.

Abolition of industrial buildings allowances Industrial buildings allowances, which include hotel buildings allowances, agricultural buildings allowances and enterprise zone allowances, will from April 2008, be subject to a reduced rate of relief, culminating in abolition by 2011.

The effective rates of allowances will be as follows: From April 2008 3% From April 2009 2% From April 2010 1% From April 2011 Full abolition

From 21 March 2007, balancing adjustments which were available on disposal of industrial buildings have been frozen except for pre-contract expenditure or in respect of Enterprise Zones.

Details of many aspects of the phased abolition may not be available for some time.

There is no new relief being introduced to take the place of industrial buildings allowances.

What does this mean for retailers?

The key impact for retailers will be the reduction in the rate of allowances on ‘Integral building plant’ from 25% to 10%.

From April 2008 it will be crucial to not only identify qualifying expenditure, but clearly separate expenditure on plant and machinery and ‘Integral building plant’ to ensure that, where possible, relief is being obtained at 20%.

In the short term, retailers should:

• cost the impact of changes and assess whether this affects their development or refurbishment strategy;
• ensure that historic expenditure has been categorised as effectively as possible (this may involve amending computations);
• assess the impact on the effective tax rate;
• lobby for a sensible regime on fixtures - industry representation is likely to have a crucial part to play in influencing the new fixtures regime and trying to make sure that the new categories are workable. Strong representation should be made to ensure the definition only catches truly integral plant and not the more specialist equipment that is merely fixed for effective use;
• review any opportunities created by the abolition of the allowance clawbacks which used to apply on the disposals of industrial buildings;
• consider the effect these changes will have on their deferred tax position; and
• use this opportunity to review how they obtain relief on capital assets over the lifecycle of their ownership.

Other Budget Measures

Business Premises Renovation Allowance A Business Premises Renovation Allowance will be available for expenditure incurred on or after 11 April 2007. This expenditure must have been incurred in the conversion or renovation of property in a disadvantaged area in order to bring it back into business use. There are various other requirements which must be met, but for expenditure which does qualify, an initial allowance of 100% will be available.

This may be an opportunity to enhance the tax relief that is available to retailers on their property portfolio.

Consultation on Land Remediation Relief The Government has issued a consultation paper on how this relief could be targeted more effectively and has made specific proposals. The time limit for responding to these proposals is 14 June 2007.

Consultation on Cars Prior to the Budget the Government consulted on the possible options for changing the capital allowances regime in respect of cars.The Government has considered the responses received and issued a further consultation document.

Further Information If you would like to discuss any of the issues detailed above, please contact one of the Capital Allowances Advisory Team members:

David Woodward	020 7694 4171
Jeanette Edmiston	020 7694 4177
Harinder Soor	020 7311 2729
Kim Ashley	0117 905 4333
Gaynor Bilton	0141 300 5782
Philip Corfield	0121 232 3591
Fiona Longley	0161 246 4161
Matthew Smith	0131 527 6747
Athos Yiannis	020 7311 6604

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Retail Bulletin Column By Helen Dickinson: Will Consumers Tire Of Celebrity Endorsement?
Celebrities and fashion have always been inextricably linked, so the current trend for stars creating or endorsing ranges of clothes and accessories was always potentially set to be a winning combination.

With the recent announcement that Penelope Cruz and her sister are to design a range for Mango, she is the latest in a long line of celebs turning their hand to fashion retailing. If it’s not Madonna fronting a collection for H&M or Lily Allen for New Look, it’s Kate Moss at Top Shop, where the supermodel’s hotly anticipated range is due to hit the rails on 1st May.

Even M&S has been adding a bit of celebrity sparkle to its fashion ranges, with the likes of Twiggy and Myleene Klass currently modelling the retailer’s latest lines on a billboard near you.

All this leads me to conclude that there’s no doubt that celebrity endorsement can be a great promotional device for products and business.

And it’s not just the fashion sector where a bit star quality is used to get us through the door to part with cash. Most supermarkets have had a celebrity endorsement or two at some point, some more successful than others.

Sainsbury’s is a classic example. If you can remember it, consider the contrast between John Cleese’s ‘value to shout about’ campaign several years ago (Basil Fawlty-esque shouting through a loudhailer), compared with today’s highly successful link up with Jamie Oliver (fresh ideas for family food, presented by one of the UK’s most influential people).

Come to think about it, whether it’s electrical goods, frozen foods, home wares or sofas, there aren’t many sectors within retail that haven’t had the star treatment.

Using famous faces to front marketing and advertising campaigns has probably been going on for as long as there has been marketing itself, basically because it’s downright effective when the celebrity/business combination works. But companies have to tread carefully, both to protect themselves if things go wrong and to optimise the mechanic.

Of course, getting the right celebrity is crucial. Once they are aligned with your brand it’s clearly important that they don’t do anything to damage it. After all, it doesn’t seem so long ago that Kate Moss was being used as an example of how these deals can come unstuck when her relationship with several retail and consumer brands ended in the wake of tabloid revelations.

It’s also important to assess whether you are achieving value from a relationship. In some cases it’s pretty straightforward; if a particular range is flying off the shelves, it’s easy to measure and I’m sure we’ll be hearing lots about this in the coming weeks in relation to the Kate Moss range.

Similarly, with Jamie Oliver, it has been simple for Sainsbury’s to see uplifts in sales of specific ingredients that have been featured in ad campaigns. Apparently the supermarket had to order nine tons – the equivalent of two years’ supply – of nutmeg to meet demand when it appeared in one of Oliver’s hundred-plus ads.

It will be interesting to see the effect of Asda’s new approach to celebrity tie-ins. The company recently announced the demise of the company’s ‘Asda Price’ slogan as well as the ‘pocket-patting’ symbol, which had featured its fair share of celebrities over the years, from Leonard Rossiter in 1977 to a rather short-lived link up with Sharon Osbourne.

The new campaign is to feature a series of fly-on-the-wall style documentaries featuring different celebrities behind the scenes in a variety of Asda departments. First up was comedienne Victoria Wood, who hit the screens last week with a look behind the scenes in an Asda bakery.

But with more ‘general’ brand building ads it is a much more difficult task to measure the actual sales or brand enhancement that a celebrity endorsement adds and, let’s face it, these link ups don’t come cheap. Jamie Oliver’s contract is reported to be worth £1 million per year while it’s claimed that Kate Moss has received £3 million for her work with Top Shop.

However, in the midst of this latest flurry of celebrities getting involved in retail, could consumers start to tire of it? With it starting to feel like everybody’s doing it, is there a risk of reaching a saturation point?

Only time will tell, but in this current climate of celebrity obsession, I’m sure we haven’t heard the last of it just yet.

Contact: Helen Dickinson on 020 7311 8255 or your usual KPMG contact. 

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Retail Bulletin Column by Helen Dickinson: Has Internet Growth Been Overplayed?
Another week and yet another piece of research has appeared regarding the soaring growth of internet spending.

The latest findings on online retail, from internet research organisation IMRG (Interactive Media in Retail Group), reveal some impressive statistics about how the sector is growing. According to the group, UK shoppers are set to spend £48 billion online this year, growing to £78 billion by 2010.

Aside from the statistics which deal with value alone, it was interesting to note that 860 million parcels will be shipped to the UK’s 26 million online customers this year. That’s an average of 33 each, more than one per fortnight.

It all sounds very impressive and gets you thinking where this leaves traditional High Street retailers and whether they will have a place in our shopping habits in ten years’ time. Or does it?

Of course, there’s no question that the internet is one of the biggest things to happen to retailing for years. However, the question still remains as to whether the impact and potential scale of internet retailing has been overplayed.

This was one of the subjects debated by the KPMG/SPSL Retail Think Tank (RTT) late last year and the conclusion the forum came to was that internet retailing is not as large as some reports and statistics might have us believe.

The RTT debated how to measure the true size of the sector and concluded that a real problem exists because of the differing ways that internet sales are interpreted and reported upon. These discrepancies leave us a bit bewildered as to what the true picture really is.

As with all retail statistics, it’s important to examine them in the context in which they were produced, as well as consider what was included within the research. For example, should sales of things like concert tickets, travel bookings, insurance or car hire constitute internet retail spend?

The RTT concluded that these types of transactions should be included in leisure or entertainment spending, but these are often included in some statistics, distorting the picture of what is really happening. Going back to the IMRG’s figures on online spending, it is also interesting to note that the organisation is predicting that 20% of retail sales will be taken through the internet by 2010. But how likely is this and if it does happen, what will happen to traditional retail channels?

Revisiting the findings of the RTT’s white paper on internet retail, we acknowledged that the overall UK retail market growth rate is around 2.5%, of which 2% is attributable to bricks-and-mortar retailing. With the remainder of growth coming from the internet, that would equate to just over a fifth of UK retail growth being driven by a retail channel which accounts for – at most – five percent of total retail sales (using the narrower definition of retail).

Although this seems disproportionately high, it is understandable when taking into consideration the way in which internet retailing is able to grow quickly from a low starting point.

I remember posing the question at the time that if the internet continues to account for a disproportionate amount of the sector’s overall growth, will there come a point when traditional business models and cost structures no longer work?

Simple economics would tell you that this would eventually be the case if the internet grew to such an extent that it was no longer viable for mainstream retail to incur the costs of physical store locations and on-the-ground staff.

However, the effect on the property market was debated and it was noted that although some years ago there was concern that the growth of internet retailing may dramatically weaken demand for property, this never happened, and although the retail property market is slowing slightly currently, it is also not happening now.

This is not to say that the internet isn’t hugely important though. Its influence cannot be underestimated. Many people research purchases online, even if they don’t actually go through with a transaction – multi channel retailing is here to stay.

And that’s one thing that can’t be measured easily. It’s very difficult to know how the internet is playing a part in purchasers’ decision making and thought processes before they part with their hard-earned cash.

I’ve written before about how consumers are increasingly ‘channel hopping’, using different combinations of the High Street and internet to research and buy their goods, so it’s crucial that retailers are not left out of potential purchasers’ advance thinking.

Regardless of what the latest figures say, the fact remains that in the fight for market share, no retailer can be complacent about the internet.

Contact: Helen Dickinson on 020 7311 8255 or your usual KPMG contact. 

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Sectoral Snippets: India Industry Information
This is a newsletter brought out by KPMG, an India-focused, monthly newsletter, providing an overview of the Indian economy in the form of news-briefs from across key sectors. Please click here to view the section dedicated to the Consumer Markets and Retail Sector. (Word)

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