Warranties tax change hits Dixons

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The Independent Online

Shares in Dixons, Britain's biggest electrical retailer, fell 9 per cent yesterday after the company said changes to tax on extended warranties would cost it £20m in the current financial year.

Shares in Dixons, Britain's biggest electrical retailer, fell 9 per cent yesterday after the company said changes to tax on extended warranties would cost it £20m in the current financial year.

Kingfisher, which owns the Comet chain, said its figures would be hit by £8m and Carphone Warehouse, the mobile phone retailer, said the impact would be £2m.

The changes were announced by the Chancellor in his pre-Budget report on Wednesday. The move clamps down on a loophole which has enabled retailers to avoid tax on profits derived from extended warranties if the insurance divisions were based offshore.

Dixons has avoided the tax by basing its insurance underwriting operations on the Isle of Man where it has enjoyed exemption from the normal corporation tax of 30 per cent. Kingfisher's insurance business is based on the Cayman Islands.

The £20m tax hit indicates that Dixons makes profits of about £80m a year from the sale of warranties out of group profits of £281m last year. Dixons' tax charge will rise from a lowly 23 per cent to 27-28 per cent. John Baillie, a retail analyst at SG Securities, said: "It's been a nice wheeze but time has finally caught up with them."

The tax clampdown is a further blow to extended warranties, which have long been criticised as overly expensive. The policies are sold on a wide range of electrical goods from microwave ovens to video recorders. They are already the subject of a Competition Commission investigation.

Dixons, which also owns PC World, Currys and The Link, said it would continue to sell warranties but did not say whether it would continue to base its insurance operations on the Isle of Man or move them somewhere cheaper. "We regard after-sales service as a key part of our service proposition," a spokeswoman said. "We will not be quitting the business."

The company added: "We have 12 million warranties out there. They offer customers peace of mind."

Analysts said it was unlikely that retailers would be able to claw back the tax through raising warranty prices, which are already seen as expensive, or by raising the prices of its products as the electricals market is so competitive.

Dixons' shares closed down 17.5p at 171.5p.

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