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Scottish Independence and Retailing

Shopping in an Independent Scotland

This webpage deals simply with the question of how Scottish independence will affect Scottish consumers and retailers in the UK. This means that, as usual, we will not be considering strategic or political questions except where they have a bearing on retailing in Scotland.

It is probably worth pointing out

Retail in independent Scotland: much the same
Continuity. For shoppers, not much will change if Scotland becomes independent. The same shops, the same logos, and the same assortment of merchandise will be there after independence as there was beforehand. Online retailers will continue to deliver to most homes in Scotland and continue to apply a delivery surcharge to less accessible or more remote households.

Prices. Prices may be slightly higher. Some UK-domiciled multiple retailers may reduce their capital spending and developments in Scotland for a period (see discussion later), until they are sure about the direction its economy will take. It is no secret that most large UK retailers are opposed to Scottish independence and the changes that it will produce.

Which currency?
What currency will be used in shops?
Will shops still price goods in UK pounds sterling? The SNP Scottish Government hopes that an independent Scotland will continue to use UK sterling as its currency, even though the UK Government and the Bank of England have warned that this will not be permitted. However as part of the negotiations over the breakup of the current UK (if a majority vote YES), it is possible that after negotiations and concessions Scotland will be allowed to join a sterling currency zone enabling it to use sterling, although limiting its freedom on monetary policy, banking and debts. In our opinion there is at least a 40:60 chance that an independent Scotland will be allowed to join a sterling currency union.

Various currency options for Scotland. Even if Scotland is not allowed to join a sterling zone, the country could still use UK sterling as its internal currency if it wishes to do so, or create its own Scottish sterling currency (a Scotsterling, the term used here purely for illustrative purposes) which would be convertible into UK sterling on a one-to-one basis (1 Scotsterling = 1 UK sterling). For many years the Irish currency (also called a pound, becoming the punt when they broke the link) was convertible at par into UK sterling, so this approach is not unique. The Scots already use their own banknotes instead of UK sterling banknotes, but they have exactly the same value as UK sterling notes: indeed every bank now issuing a Scots banknote has to have the equivalent value in UK sterling bank notes in its vaults to make this legal. This would continue if Scotland were to use UK sterling.

As long as the Scottish Government continues to use UK sterling or has a currency of its own operating as sterling-lite this would mean that goods would continue to be priced in UK sterling (or its Scotsterling equivalent) and transactions carried out in a mixture of UK sterling or Scotsterling. This would ease the problems of UK retailers and shoppers in the transitional period or for as long as the Scottish Government kept its currency at par with UK sterling.

Tourists can use pounds. Even if it did something else, and Scotsterling was not linked to the UK pound, it is (almost) certain that tourist-oriented shops, pubs, taxis and restaurants in Scotland would continue to will accept payment in UK pounds sterling (but probably give change in Scotsterling) and allow card payments to be made in UK sterling if that is what the customer wants. Thus shoppers, particularly those from across the border, would not notice much of a difference in the short-medium term.

Differences in VAT rates
An independent Scottish Government would be free to change the rates of VAT, the allowances, the bands and the definitions used in VAT legislation. The purpose of being independent is to permit the Scots to run their own show, and this might mean higher or lower VAT rates universally or for certain categories of product compared to the UK. The need for the Scottish Government to provide an 'independence dividend' may mean that some early reduction in VAT rates may be inevitable, if small. It is unlikely to make major changes to VAT definitions for the first few years, although simplification of VAT would be universally welcomed (remember all that discussion about why a bap is zero rated and a hot bap is 20% VAT; why hundreds and thousands are zero rated and chocolate flakes for baking are 20% VAT; and jaffa cakes are zero rated and chocolate biscuits 20% VAT?). For example, as part of its war on obesity the Scots Government could put VAT on all cakes, sugar and all biscuits, with the support of many doctors. This is purely a hypothetical example of what independence could mean.

VAT changes mean different prices. Any differences in VAT rates between Scotland and the UK are likely to mean that prices will differ between Scotland and the rest of the UK. There is no major problem about doing this for computerised retailers, except that cross-border retailers will have to adjust their computer price files and price tickets but it means that retailers will need to be careful in their advertising: "20 per cent off our garden furniture (only 15 per cent if purchased from one of our Scottish stores)" is a complex idea to get across to customers, irrespective of which country comes out better.

It will also create 'border' problems with people from the north of England flocking to Scotland (or vice versa) if there is a significant VAT difference between the countries on certain items. New EU regulations (now incorporated into UK law) require online retailers to charge the correct VAT (and price) for each country. This means that they will have to apply UK law and VAT rates in England Wales and Northern Ireland and Scots law (and VAT rates) when serving customers resident in Scotland.

Business structures in the new Scotland
Scotland already has its own legal system. Company/business regulations are similar to those elsewhere in the UK. The tax gathers will collect VAT, income tax and/or corporation tax from businesses in Scotland on behalf of the Scottish Government rather than the UK. Registration for VAT or as a self-employed operation or a company will be handled by an independent Scottish Tax Office and the Scottish Companies House. Tax collectors and company registration officials are already established in Scotland so the differences relate to changed banking details, new addresses, and new websites rather than presumably having to re-register completely.

~ A small retailer in Scotland , whether self-employed or registered as a company, operating solely in Scotland will operate much as before, except it will pay taxes to the Scottish authorities.

~ A Scottish wholesaler, currently shipping to Scotland and the north of England, will have to treat its English sales as VAT-free exports and create invoices reflecting this. It will have to agree terms and conditions of sale including the currency used for settlement, whether UK sterling or Scotsterling. If its exports to England are much greater than its Scottish sales then instead of paying VAT to the Scottish Tax Office, it will probably need to recover the VAT it has paid on its supplies from the Scottish Tax Office.

~ A Scottish online retailer selling to customers in both England and Scotland will formally be exporting merchandise to England but will need to account to the UK HMRC for VAT charged to English and other UK clients. It will not need a legal identity (company) in the UK but will need to register for VAT in the UK trading area as well as Scotland. It will probably need to pay its UK VAT liabilities in UK sterling.

~ A cross-border retailer will need to set up a Scottish legal corporation as well as a UK one. Most large retailers with stores in Scotland will become cross-border retailers. Companies like Sainsbury's, Tesco, Debenhams and Boots are used to trading in several countries so this experience will not be novel. They will need to create specific legal entities in Scotland that own and/or operate for trading purposes their Scottish shops and warehouses, produce their own accounts, pay VAT, national insurance and income tax deductions from their Scottish operations and employees to the Scottish authorities as well as paying the corporation tax on its Scottish profits to Scotland. At present all these requirements are normally met by UK-wide accounts and payments to HMRC in the UK.

Scottish Headquarters. Separating off the Scottish operations creates more complexity for large retailers but the problems are not insuperable. Many retailers already have Scottish offices or a Scottish region (which may not geographically be only Scotland but include chunks of northern England) and these will probably be the centre for the new legal entities: other retailers may simply use a brass plate facility providing legal and tax compliance but no operational authority for Scottish stores. Cross-border retailers will have to comply with the new Scottish business regulations, but although these will increase their costs there would be no particular benefit they would gain.

Supplies. Most Scottish stores owned by English retailers will be supplied in whole or part by contracts made by the (English/UK) buying office and supplied at least partly from warehouses based in England or suppliers' factories in England. This might change in future for businesses with an operational Scottish HQ. At present, the goods are simply shipped up the road, charged to individual stores on the management accounts of the central computer, and payment is made by head office. In future the consignments will have to be specially valued, treated as exports to Scotland (so VAT can be reclaimed by the English retailer from the UK HMRC), and shipped directly from a supplier based in England or from an English warehouse. The Scottish corporate arm of the retailer will need in future to receive a VAT invoice from the English Head Office priced probably in Scotsterling (or possibly UK sterling) but carrying 0% VAT (as an export). The Scottish corporate arm will pay the English invoice but charge VAT on its sales to the final consumer: the Scottish VAT will be paid to Holyrood. This is not insuperable, indeed much of this data is routinely created by each retailer's current IT system, but it creates more complexity and currency risk. Although it improves UK exports it also means that a proportion of VAT revenues under this system will leak to Scotland although most of the value was created in England (or the UK).
Scottish retailers with operations in England will have to create a new legal entity in England to deal with their English operations, UK VAT, accounts, employee taxes and corporation tax in the same way as English/UK retailers will have to create new Scottish entities.

~ A 'foreign' retailer also needs a Scottish legal company to account for its stores in Scotland. By 'foreign' we mean retailers whose headquarters are outside the current UK (although we accept that all non-Scottish retailers would in future be classed as 'foreign'. They will also need to decide how much, if any, operational independence they will allow to their Scottish subsidiary.

Will retail prices go UP?
There are three main reasons why retail prices may rise in the first year or so, although this may only be about 2% which is unpleasant but not a major jump in inflation.

  1. Greater complexity. Operating in Scotland will become more costly and complex and retailers will want to recover their additional costs.
  2. Eliminating the unprofitable 'tail' of stores. Retailers that cover the whole of Scotland, including remote areas, may be surprised at the losses made by many of their remote stores, when they start to account precisely for their 'Scotland' trading area. Retailers may attempt to staunch these losses by increasing prices somewhat; they may withdraw from areas where they consider the prospects of ever making a profit are low. Of course this may happen anyway (irrespective of independence) as retailers attempt to reduce their operating costs in every part of the UK. Retailers, mostly non-food, that are based mainly in the central belt or in the major cities are unlikely to be affected by this.
  3. Currency risk. Unless independent Scotland is placed firmly within the current UK sterling currency zone, cross-border retailers will face a currency risk by having funds in Scotsterling. They will not need to convert every customer transaction back into UK sterling, but they will need to pay insurance or trade forward to cover themselves against losses arising from their daily net trading revenues and the invoices for supplies that the English operations have outstanding against the Scottish corporate arm. A retailer with around 10 stores in Scotland might have annual revenues of £100 mn. If net profit is around 4.5%, this would mean that the Scottish arm made £4.5 mn pa (valued in UK sterling). If Scotsterling slides by 3% over twelve months then unless the retailer has made extremely clever use of the forward market it could lose up to one third of its net profit. When converting its daily takings into UK sterling, the amount received in sterling will prove to be lower than planned if Scotsterling is drifting downwards: but the value the Scottish arm owes to suppliers in UK sterling will rise. This will subject profit margins to a double squeeze. The cost of insuring against a fall in Scotsterling might be between £0.4 mn and £0.7 mn, which is also painful although it protects against currency losses. If Scotsterling rises of course, which is also possible, then the Scottish arm will make a currency profit. We can expect that unless Scotland keeps its currency at par with UK sterling (or is a member of the sterling currency zone) that in some years the Scottish currency will rise and sometimes it will fall. The fact that Scotsterling will be a petrocurrency, susceptible to significant shifts in the price of oil, means that changing currency prices (and exchange risks for retailers) will have to be a fact of life.

UK-wide marketing that treats Scotland as the same as other parts of the UK is likely to become increasingly difficult because of cultural/shopping differences between Scotland and the UK (likely to widen) and price differences with the UK as a result of tax and cost differences. Many retailers already use different marketing tactics for Scotland, so this may not be much of a change. It seems likely that major retailers will need to use large-scale analytics of big transactions data to create more specialised marketing aimed at Scottish consumers although many would say they are doing this already. This may create the need for different logistics and retail operations tailored to approaches that work better in Scotland.

However large retailers have made their fortunes out of applying common policies to many different countries, so the benefits for the Scottish consumer of retailers focusing more intently on what he or she wants should not be exaggerated. Nonetheless specifically Scottish corporate businesses may well focus more upon the Scottish consumer than they do at present in spite of the fact that they will often still be 100% owned by English-based business.

In the Longer term (when anything may change)

We assume that the early years of an independent Scotland will be taken up in ensuring the effectiveness of the new state rather than launching hundreds of new policy initiatives. We can expect however that the business-friendly new country will want to show it supports enterprise by reducing corporation tax. Retailers, along with other businesses, always get particularly emotional about such strategies and it may go some way towards reconciling them to the costs and complexity of the new country. The new Government may also want to boost consumer spending using income tax or reducing VAT. It is also very likely that it will show that it is trustworthy by putting more funds to stimulate business growth in areas such as oil, finance, tourism and food and drink than directly into consumer spending.

It's Scotland's National debt. It will also have to take its share of the UK's national debt, which will need to be managed and serviced (ie interest paid on time and new debt issued as expiring debt repaid) although the UK government has decided to continue to be responsible for historic UK National Debt to minimise investor nervousness. If Scotland fails to manage its part of National Debt or disavows taking its share of debt this is almost certain to create problems when operating its own currency or borrowing on its own behalf. Hence independence is not as 'free' as one might expect.

Onwards and upwards. In the longer term the case for Scottish independence is that home rule will mean that the economy will grow more quickly, unemployment will fall and that poorly-performing regions will also benefit from this policy. Naturally retailers would be excited about such policies which offered sustainable faster growth and hence increased sales and profits for them and their shareholders.

The SNP expects that its fiscal, monetary and development policies will increase productivity and growth in Scotland. There is no reason in principle why this cannot happen, it is just that (a) it is not simply a twist of a lever to boost productivity and growth and (b) every UK government since at least 1959 has tried the same trick and almost all have failed. It will also depend on the conditions for separation that are negotiated and we do not know these yet.

Scottish independence may produce a flowering of enterprise, increase the country's rate of growth, but no one in the forecasting game can say that this will be inevitable. Unless the terms are very onerous or/and the new Scottish government messes up in first two years there should be some improvement in growth and productivity following independence. 'How long will it last?' 'How significant will it be?' are two questions that cannot be answered until and unless the Scots vote 'Yes' to independence and the experiment commences.

A new Switzerland? If the new country ends up like Switzerland or Norway then no one will be able to gainsay the benefits of independence. If the improvement is only small, or gains are followed by stop and stagnation and Scotland still has to carry on paying for public services and pensions then the economic results will be problematic.

Likely outcomes
From a retail point of view, the most likely long-term outcomes are: Scottish retailing will remain similar to UK retailing; slightly faster trend growth in retail sales in Scotland; slightly higher prices for consumers; a fairly business-friendly regime although very controlling of the large supermarket chains; some strategic trading of retail operations that may be sold off to other companies or form new Scottish businesses trading in Scotland; and a national currency that in the longer term is either no longer pegged to sterling or is the euro.

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