You’ve got to hand it to Dixons. It knows how to make a monkey out of the Government and save itself – quite legitimately – a few million pounds into the bargain.
At issue is the controversial subject of extended warranties on electrical goods. Dixons’ profit margins, it may be remembered (MW July 26, 1996), are highly dependent on the sale of these warranties. Indeed, according to some City estimates, as much as 40m of last year’s 135m pre-tax profits were derived from this source.
But they are not without their critics. The warranties, which are widely marketed throughout the electrical retail sector, attracted two Office of Fair Trading inquiries, both of them inconclusive. Finally, the Government lost patience and decided on a little fiscal reengineering to solve the problem. In the last Budget, Kenneth Clarke imposed a swingeing increase in the duty (Insurance Premium Tax) payable on them: it went up from 2.5 to 17.5 per cent. The effect was electrifying: Dixons shed 87m of its market value that same day.
Now read on. Last month, when the tax hike began to bite, Dixons artfully substituted what it calls a ‘service contract’ for its previous warranty. The difference is more than semantic. Because the new scheme involves no third-party insurance company (it is underwritten by Dixons itself), it therefore attracts no IPT.
Clever old Dixons. At a stroke, it saves itself some money (10m to 20m, depending on how you calculate it), gives its competitors a nasty headache, earns some brownie points in the City and cocks a snook at the government.
This is all very satisfying and, of course, a crafty marketing ploy. But is it entirely wise? Dixons’ rivals have two choices, if they are not to be undercut. They can cry ‘foul’ about an unlevel playing field, or follow suit (and the evidence is they are) with their own ‘service contracts’. Either way, the issue is likely to play straight into the hands of the OFT, which surely cannot be Dixons’ intention. On the one hand, the Government will not enjoy the prospect of losing budgeted tax revenue. On the other, legitimate concerns may be raised about the robustness of the service contracts themselves; because they rely not on the financial security of an insurance company but upon the retailer’s itself. What if that retailer goes belly up? Dixons is scarcely in the reckoning here, but smaller competitors certainly could be – as the collapse of Rumbelows in 1995 amply demonstrated.
Ironically, Dixons’ inspired tax avoidance scheme comes into play just as market conditions are tilting in its favour. The DTI seems poised to act on manufacturer price fixing in the electrical goods sector, a move which would have the net effect of aiding the bigger retailers against the smaller. Has Dixons been too clever by half?
News, page 9; Cover story, page 38