Premium tax ‘will squeeze profits of electrical stores’

The introduction of an insurance premium tax will force electrical stores to raise retail prices in an attempt to protect profits, according to a report by research group Verdict.

The report, on the controversial issue of price fixing, predicts that the tax increase, from 2.5 per cent to 17.5 per cent, will severely hit profits made from warranties.

With most retailers generating an average eight per cent of turnover from warranties, the tax rise may mean that retail prices will increase by up to two per cent to protect margins.

The report predicts that Dixons, the market leader with 19 per cent of the audio-visual equipment and household appliances market, will lead the way.

The change in tax rate will not only hit retailers’ bottom line but, says Verdict, will hand a competitive advantage to other players in the warranty market such as banks and insurance companies, which face a tax increase of only 1.5 to four per cent.

On the issue of price fixing, Verdict believes some suppliers and manufacturers exercise an “unusually high degree of influence in order to stabilise and maintain control of prices, to protect their existing profit levels and the integrity of their brands”.

The results of the Monopolies & Mergers Commission (MMC) investigation, completed at the end of April, will not be published for several weeks.