Tesco estimated in October that Covid-19 will cost it £725m © Getty Images

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Tesco will repay £585m in business rates relief ahead of a bumper £5bn return of capital to its investors, in a move likely to pile pressure on rival supermarkets to follow suit.

As one of the UK’s largest ratepayers, the group was a big beneficiary of a year-long business rates holiday announced in March and had previously defended its decision to accept this relief.

Tesco on Wednesday insisted it had used “every penny” to manage the impact of the coronavirus crisis on its staff and customers. But chairman John Allan said the board had “agreed unanimously” to repay it.

“We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society,” he said.

Supermarket rival Morrisons later on Wednesday said it was also committing to paying business rates for the coronavirus period in full, amounting to £274m, including £230m for the 2020/21 financial year. The UK’s fourth-largest grocer said: “Profit has been significantly impacted throughout the year by the extra costs . . . but we have continued to manage our business well.” The company added that underlying profit would be in line with expectations.

At Tesco, virus mitigation measures — including hiring tens of thousands of new staff, installing protective equipment and acquiring new vehicles for home deliveries — cost Tesco £530m in the first half of the year.

The company estimated in October that the virus would set it back roughly £725m for the full year — well above the relief received, although at the bottom end of an earlier range of estimates.

Along with other supermarkets, the group has attracted criticism for continuing to pay dividends to shareholders while receiving relief from taxation.

It declared a £635m dividend in respect of the year to February 2020 and an interim payout of more than £300m in the current year, a rise of 20 per cent on the 2019 level.

Bar chart of Current tax year (£m) showing Value of business rates relief to UK supermarkets

But they will be dwarfed by the £5bn return of capital that will follow the disposal of its Asian operations, which it agreed to sell to Thai conglomerate Charoen Pokphand for $10bn this year. That return is likely to take place before the rates relief ends in March.

Supermarkets were deemed essential retailers during the UK’s lockdowns, so were able to continue trading while other retailers shut their doors.

At the same time, the shutdown of the hospitality industry resulted in a substantial transfer of spending to in-home eating. In its first half, Tesco sales increased 6.6 per cent to £27.6bn, with higher food sales offsetting lower fuel demand.

James Anstead, food retail analyst at Barclays, said the decision “will likely create significant political and media pressure for other retailers to return the business rate relief that they would otherwise have claimed”.

He added that J Sainsbury might be the worst affected in profit terms if it decided to follow Tesco’s lead and voluntarily pay the normal amount. The relief is worth about £450m to the UK’s second-biggest supermarket in its current financial year, suggesting underlying pre-tax profit could fall by two-thirds to £200m if it paid up.

Sainsbury’s shares closed down almost 3 per cent on Wednesday, the biggest faller in the FTSE 100. The company declined to comment on its intentions.

Other store chains perceived to be “Covid-19 winners” include variety discounter B&M, which has had an £80m benefit from business rate relief and declared dividends totalling almost £500m so far this year, including two special payouts.

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Halfords, Kingfisher and Dunelm have also prospered as consumers bought bicycles and spent money on their homes. None has declared a dividend since the pandemic began but analysts are forecasting full-year payouts at all three.

Clive Black, head of research at Shore Capital, said the move was “predatory” because of its potential impact on rivals, both public and private, whose margins are thinner and whose ability to fight price wars might be constrained if they too paid the business rates the government waived.

“It really is a big issue they are opening up here,” he said, adding that it would be odd for supermarkets to forgo the business rates relief when Amazon — arguably the biggest pandemic winner of all — was not paying any extra tax.

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