City: Budget is "reasonably neutral" for food manufacturers

As widely predicted, chancellor George Osborne (pictured, right) will raise VAT to 20%, but has agreed that most foods will continue to be zero-rated for the life of the Parliament. He also chose not to increase duty on fuel or alcohol (although fuel prices will still rise in the autumn and the increase in VAT will affect alcoholic drinks).

Food and Drink Federation (FDF) director general Melanie Leech welcomed the news: "We had argued against ending existing zero ratings as such a move would disproportionately impact the poorest in society, dampen consumer spending and fuel inflation."​

Shore Capital analyst Clive Black said that for food manufacturers and retailers, yesterday's budget appeared "reasonably neutral, balancing off pressures on demand, particularly for every day essentials, against lower corporate taxes". ​

The proposed reduction in corporation tax (which is to fall by 1% per year for four years to 24%) was "a material potential boost to the build up of corporate earnings, retained profitability, future investment potential and dividend payments",​ he argued.

What it means for interest rates​

In addition to a progressive corporate tax boost from lower corporation tax, there could be a stronger basis to expect interest rates (and in turn financing costs) to remain lower for longer, he predicted.

"So, again, for profitable corporate groups, there could be an ongoing benefit, so long as demand remains firm. For low ticket non-discretionary categories, the outlook may be sound."​

Good news for exporters?​

Graeme Allinson, head of manufacturing at Barclays Corporate, said many manufacturers were "relieved​" by the tax measures proposed: “For the vast majority of UK manufacturers, the decrease in capital allowances will be more than balanced out by the incremental reduction in corporation tax, so the assertion by the Chancellor that the overall tax bill for manufacturers will decrease will certainly be greeted with relief.​

“UK exporters in particular will welcome the decrease in corporation tax, as it should go some way to balancing a possible strengthening in sterling in the medium term, increasing both the international competitiveness of the UK manufacturing base and the UK’s attractiveness for foreign direct investment.”​

His comments were echoed by the CBI, which welcomed the reduction in the small firms rate of corporation tax to 20% and the extension of the Enterprise Finance Guarantee.

Capital gains tax​

Capital gains tax remains at 18% for low and middle-income savers while higher-rate taxpayers will pay 28%. However, the capital gains tax 'entrepreneurs' relief' rate of 10% on the first £2m of gains will be extended to the first £5m.

10% cider duty rise scrapped​

Labour's plan to increase the duty on cider by 10% above inflation will be scrapped from July.