Sainsbury's boss warns VAT increase is coming soon

Justin King's comments come as the supermarket group reports an 18 per cent increase in pre-tax profit

The chief executive of the supermarket giant J Sainsbury yesterday joined other retailers and conceded that the Government could be set to increase the VAT rate to 20 per cent, as David Cameron's coalition sets about cutting the gaping public finances deficit.

Justin King, who was speaking as Sainsbury's announced a 17.5 per cent increase in annual profits, said: "A VAT rise to 20 per cent is clearly on the Government's mind. What we would say is we need to know in good time and would say that there needs to be sensible timing and not in our key trading periods such as the run-up to and in the aftermath of Christmas."

VAT is not currently applied to food. It is thought that an increase could be announced as early as the end of June, when George Osborne is expected to deliver his first Budget.

Mr King, a signatory to the election campaign letter that supported the Conservative policy of scrapping Labour's planned 1p increase in national insurance contributions, is one of several retail leaders to have foretold of impending VAT rises. Simon Wolfson, the chief executive of Next and a well-known Tory backer, has said he would support a rise as long as it did not exceed 20 per cent.

VAT is currently 17.5 per cent, but was temporarily cut to 15 per cent during 2009 to help stimulate demand during the worst of the recession. It is estimated that a 3.5 percentage point increase in VAT would generate £11.5bn for the Treasury, costing the average household an extra £425 a year.

A Treasury spokesman said: "The Chancellor's position hasn't changed. There are no plans to raise VAT."

A survey for the BBC yesterday found that 24 out of 28 independent experts used by the Treasury said they expected a rise in VAT, from 17.5 per cent to 20 per cent, in the coming Parliament.

An increase to 20 per cent would put the UK's sales tax on a par with those in the rest of the European Union, according to research compiled by the accountancy group KPMG. After any rise, however, both France and Germany would have a lower rate. At 17.5 per cent, the UK has the fourth lowest sales tax rate in the EU. Despite preparing for a VAT increase, Mr King said yesterday that Sainsbury's had outperformed the rest of the industry, by continuing "to lead on providing healthy, fresh and tasty food with universal appeal".

The company's results also beat analysts' expectations. Total sales were up 5.1 per cent in the 12 months to 20 March, generating revenue of £21.4bn. Like-for-like sales, excluding fuel, increased by 4.3 per cent, while underlying pre-tax profits were up £91m to £671m. Analyst consensus had been for profits of between £590m and £600m.

Mr King said that 19 million people were shopping at Sainsbury's supermarkets each week, but warned that the impressive performance was unlikely to be repeated: "In the medium term the market is growing like-for-like by 2 to 3 per cent," he said. "Our aspiration has been to grow market share and grow at 3 to 4 per cent. It may be that this year the market is only growing at 1 to 2 per cent so the tramlines have been changed."

The UK's third biggest supermarket group has claimed to be taking market share off its biggest rival, Tesco. The group partly ascribed this to its expansion plans, which saw 1.1 million sq ft of floor space being added in the last financial year, resulting in 38 new supermarkets. The group said that in the next two years it expects to increase capacity further, by opening an additional 2.5 million sq ft of new space.

In addition to strong profit numbers, the company also said that the estimated value of its property portfolio was £9.8bn in March, up from £7.5bn a year earlier. According to analysts at Charles Stanley, the increase "reflects an improvement in yields to 5.1 per cent".

Much of the company's property portfolio is freehold, helping it to borrow from secured credit markets, rather than relying on the more expensive unsecured markets.

The group said yesterday that it has no outstanding unsecured securities, and has asked the ratings agencies, Standard & Poor's and Moody's, to withdraw its credit rating.