Clicks to bricks

Whilst this brief article mentions a few tax considerations to consider when looking for a physical location, we are of course aware that it remains a difficult time for many retailers and even well-established, multi-location businesses can face difficulties – Wilko being one recent example. At the same time, the failure of one business can open opportunities for others, in the case of Wilko, The Range and Poundland.

The world of retail had a hard awakening post-pandemic is now evident. A cost of living crisis, high inflation and rising interest rates played a part in darkening the mood of consumers.

Yet, as vacancy rates rise – the British Retail Consortium says 6,000 stores were lost in the five years to July 2023 – an overwhelming majority of retailers believe there is a future for actual stores. Increasingly, shoppers are heading out to physical shops, particularly in retail parks to find a bargain, and there is evidence that consumers do more “impulse” buying while in a physical space.

Some local authorities are even lending a hand to fill their high streets. Westminster Council, for example, is offering some units rent-free to small businesses for six months.

Making the move from clicks to bricks is no simple task. There are properties to lease or buy, shops to fit and equip and extra staff to employ and train. And they bring with them important tax considerations, issues that represent a compliance risk or valuable financial support.

A close look at issues such as the capital goods scheme, capital allowances and the national minimum wage can highlight areas where an organisation can benefit and potentially head off significant risk.

The capital goods scheme

In a nutshell, the capital goods scheme allows VAT registered businesses to claim the VAT incurred in relation to buying, renovating or developing buildings costing in excess of £250,000, plus VAT, based on the intended use of the building. Then, each year for (normally) 10 years, an adjustment to the VAT claimed is carried out if there has been a change in use. Where the use of the building went from fully taxable to partly exempt or used for non-business purposes, some of the previously claimed VAT would need to be paid back to HMRC. 

For many retail businesses, the capital goods scheme causes no concerns. However, if you are looking to rent premises and spend £250,000 (plus VAT) or more on the renovation/fit-out and then, in less than 10 years either vacate the property or perhaps sub-let it, you could be in a position where a significant amount of the previously claimed VAT is payable back to HMRC. Depending on circumstances, and with prudent future proofing, the capital goods scheme does not have to represent a potential future cost. 

Capital allowances

With the main rate of corporation tax now at its highest level since 2011, companies have a real incentive to maximise capital expenditure relief and reduce the cash tax payable to HMRC.

From April this year to April 2026 companies can claim the “full expensing”, 100%, on qualifying goods such as new and unused plant and machinery, furniture and equipment. This will particularly benefit groups with high amounts of expenditure that exceed the annual investment allowance.

Expenditure in structural additions to stores, such as air conditioning, electrical works, lighting, lifts and other long-life assets, attract a 50% allowance.

The allowances must be claimed in the year in which cost is incurred which may be a significant saving for retailers fitting out new stores and overhauling their buildings. It is therefore critical to identify qualifying expenditures at an early stage and meet claim deadlines.

National minimum wage

The national minimum wage is another issue for brick-and-mortar retailers. Once a store is acquired, staff will be needed to meet the needs of customers. And that means ensuring they are correctly paid.

That can be harder than it sounds. Making the right calculations and paying the right sums is not always straightforward. The national minimum wage can seem simple, but things can easily go wrong due to the complex legislation in place.

Not only can getting it wrong mean financial penalties, but it could also mean making headlines for all the wrong reasons and damaging a retailer’s reputation both as an employer and as a business consumers want to have a relationship with.

In June this year, the government named and fined over 200 companies a total of £7m for failing to properly pay their workers. The failings left 63,000 workers out of pocket.

The four largest sums underpaid were all high-profile retailers, proving that even big brands can get it wrong.

There is no doubt that the current economic environment has made retail a challenging sector in which to do business. For those planning to move into or expand their physical space, ensuring key tax issues are considered and rigorously managed is an essential part of making the move.

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