Osborne Issues Legal Challenge To EU Bank Tax

By Ed Conway, Economics Editor

George Osborne has launched an unprecedented legal challenge against European plans for a financial transactions tax.

The move, which will be seen as a further sign of fraying relations between the UK and the rest of the continent, is designed to force the European Commission to reconsider the levy on Europe-related financial activity.

The Chancellor revealed the details on the fringes of the International Monetary Fund meetings in Washington.

Mr Osborne told Sky News: "What I am against is the European Commission coming up with a financial transaction tax that damages Britain. I want to make it clear Britain doesn't want to be a part of that and doesn't want to be affected by a European financial transaction tax even if we're not directly part of it.

"And so we've mounted a legal challenge in the European Court of Justice - that is the correct way to handle these things - the challenge went in yesterday."

According to insiders, this is the first time the UK has challenged legislation of this kind. Under the Commission's current plans, there will be a small charge (0.1% for shares and bonds and 0.01% for derivatives) on all financial transactions within the 11 members of the European Union which have signed up to the tax.

This alone is forecast to knock 0.25% off economic growth according to the Commission's official assessment, although some economists fear this could be an understatement.

It is feared the EU tax plans will adversely affect banks in the UK

The Chancellor said the reason for the legal challenge was that the tax will also hit Britain itself in two ways: first because it will affect any euro-denominated transactions – many of which happen in London.

Second, the tax will apply to all transactions of banks with headquarters in the signed-up EU nations, even if they are in London or outside Europe.

Treasury insiders said the worry was that it could knock significant value off British pension funds and investments.

They characterised the legal challenge, which may take years to be heard, as an important insurance policy in the legislative battle to get the tax amended.

However, analysts said that the move marked a significant escalation in tension between the UK and the Commission.

Mats Persson of think tank Open Europe said: "The economic, legal and political implications of this move for future EU-UK relations are huge… Legally, it could set out the parameters for how a 'flexible Europe' involving different levels of participation in the EU – which Prime Minister David Cameron has said he champions – will be governed.

"Politically, it's a test of the extent to which the UK – as a non-eurozone member - can halt or change EU measures with a profound impact on its national interest. Therefore, it will be a key issue in the on-going debate about the UK's continued EU membership."

The Chancellor also defended Britain's economic reputation, which has been dealt a blow this week by comments by the IMF chief economist Olivier Blanchard that Mr Osborne is "playing with fire" with his fiscal policy.

The Fund is due to come to the UK next month to carry out its annual survey of the economy. It is expected to advise the Chancellor to slow the pace of his austerity program.

"When the IMF comes to town we will make it absolutely clear that what we're doing is both enhancing the credibility of the United Kingdom by dealing with our debts and deficits but also supporting the British economy,"  Mr Osborne said. 

"For example, through the new housing scheme - the help to buy scheme which I launched at the Budget, through the work we're doing on funding for lending, through the work we've done on tax, for instance to increase the personal allowance."

Asked about criticisms of the Help to Buy scheme, under which the Government will guarantee mortgages for homebuyers, Mr Osborne said: "We are at a period of real weakness in the housing market, so the risks of a housing bubble are pretty non-existent.

"The key thing is that this scheme is time limited and we've given the keys to it to the [Bank of England's] Financial Policy Committee so it can turn it off in the future."

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Virgin Active Eyes £2bn David Lloyd Merger

By Mark Kleinman, City Editor

Virgin Active is mulling a takeover bid for David Lloyd Leisure that would create a £2bn health and fitness empire, and entrench Sir Richard Branson as the industry's most important British stakeholder.

I have learnt that Virgin Active has been undertaking detailed work on the structure of a possible offer for David Lloyd, which has been put up for sale by its consortium of shareholders.

The Virgin-backed chain is now deliberating over whether to submit a formal offer for the tennis-based network of fitness clubs ahead of a new deadline, which is thought to have been set for next month.

If successfully completed, a deal would create a group of more than 200 venues in the UK, with many more in a host of overseas markets, including Belgium, Ireland and South Africa.

People close to the process said that Virgin Active did not participate in the initial round of bidding for David Lloyd earlier this month, and cautioned that it may yet decide not to make an offer at all.

David Lloyd's advisers at UBS, the investment bank, are said to be seeking a sale worth £900m, although some insiders suggested on Friday that a lower valuation was likely.

Virgin Active, which is chaired by the former Boots boss Richard Baker, would have little trouble financing a deal.

A controlling stake in the business was sold in 2011 to CVC Capital Partners, the buyout firm behind Formula One motor racing, in a deal thought to have valued the gyms chain at £900m.

According to unaudited results published last summer, Virgin Active recorded a profit of £127m in 2011, up 11% on the previous year.

The company is understood to have concluded that a takeover of David Lloyd, which made around £100m last year, would not raise significant competition concerns.

The health and fitness market remains reasonably fragmented, with other significant players including a diminished Fitness First, which now operates around 80 clubs following a financial restructuring that saw many sites sold or closed.

A number of other gym chains are also on the market, with several private equity firms looking at a combination of Pure Gym and the Gym Group at the value end of the sector.

Even if Virgin Active does decide to pursue an offer for David Lloyd, it will face stiff competition to secure a deal. Private equity firms including Blackstone and KSL Capital Partners, which owns the Belfry golf resort, are reported to have submitted offers.

David Lloyd is controlled by London & Regional, the vehicle of the property tycoons Ian and David Livingstone, and Caird Capital, a firm created by former HBOS bankers responsible for many of the bank's biggest corporate deals before it required a rescue in 2008.

Virgin declined to comment, while David Lloyd could not be reached for comment.

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Fitch Strips UK Of AAA Rating On Debt Outlook

Ratings agency Fitch has stripped the UK of its AAA rating, citing a "weaker economic and fiscal outlook".

The agency placed the UK on an AA+ rating, following Moody's downgrade of UK debt in February.

A Fitch statement said: "The downgrade of the UK's sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch's medium-term projections for UK budget deficits and government debt."

The downgrade will place further pressure on the Government ahead of next week's first quarter GDP figures, which will reveal if Britain has managed to avoid an unprecedented triple-dip recession.

The agency now expects Government debt to peak at 101% of GDP in 2015-16, only declining gradually in 2017-18. That is worse than its previous forecast of debt peaking at 97% of GDP and declining in 2016-17.

Fitch, which waited until stock markets had closed before announcing the downgrade, had already warned that Government failure to stabilise debt below 100% of GDP and set it on a firm downward path would trigger a downgrade.

Chancellor George Osborne had pledged to retain the UK's AAA status

The statement said: "Despite the UK's strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with an AAA rating."

Fitch slashed the UK's growth forecast to 0.8% this year, from its earlier expectation of 1.5%. Next year it expects the UK economy to grow by 1.8%, down from its previous 2% forecast.

Earlier this week, the International Monetary Fund also cut the UK's growth forecast growth from 1% to 0.7% this year and 2014's projection from 1.9% to 1.5%, noting the recovery was "progressing slowly".

IHS Global Insight economist Howard Archer said the downgrade was "no surprise" and is likely to have minimal market impact.

"Nevertheless, Fitch's move is another slap in the face for the government - particularly as the Chancellor (George Osborne) made keeping the AAA rating a key focus for the UK," he said.

Fellow ratings agency Standard & Poors held the UK's debt rating steady at AAA earlier this month, but warned over the economy's "negative outlook".

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Retail Sales Drifted As March Snow Fell

The coldest March since 1962 stopped shoppers hunting down spring ranges, resulting in a 0.7% fall in overall retail sales.

The Office for National Statistics (ONS) figures said that left sales 0.5% lower on the year.

Despite the early Easter holiday, non-food sales tumbled by 4% in March and this was only partly offset by the biggest rise since March 2009 in non-store retailing, which includes online shopping.

Online sales accounted for 10.4% of all spending, compared with 8.8% a year earlier.

The information suggests that consumers stayed away from stores, especially those with DIY, gardening and spring clothing offerings, and carried out only essential food shopping.

Other earnings reports - and those of individual retailers - have been mixed.

While the British Retail Consortium found 3.7% annual growth in the value of retail sales, the ONS measured it at just 0.1%.

Meanwhile, Debenhams blamed snow in January for a 5.4% dip in profits in its first half.

Debenhams stock is up sharply on Thursday

Britain's second biggest department store group forecast a better second half of the year after making a pre-tax profit of £120.3m in the 26 weeks to March 2.

That was in line with guidance given in a March profit warning, when the firm said snow in January had dented sales.

Chief executive Michael Sharp said: "We expect to make further progress in the second half, despite consumer sentiment remaining weak and challenging market conditions."

Many retailers have been finding trading tough as consumers, whose spending generates about two-thirds of gross domestic product, continue to face a squeeze on incomes at a time of record household energy prices and other higher costs.

The soggy summer of 2012 followed by the cold winter also held back sales - although most economists are now tipping the UK to avoid a triple-dip recession.

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Lagarde: IMF May Urge Osborne Over Austerity

By Ed Conway, Economics Editor

Christine Lagarde has given her firmest signal yet that the International Monetary Fund is on the brink of issuing George Osborne with detailed advice on changing his austerity plans.

The IMF managing director warned that Britain's economic growth performance is "not particularly good", reinforcing suspicions that the fund will ask the Chancellor to moderate the severity and speed of his austerity plans.

The fund's chief economist, Olivier Blanchard, was more forthright earlier this week, telling Sky News that Britain's economic policy plans were "playing with fire".

Ms Lagarde refrained from passing detailed judgement ahead of the fund's official Article IV annual survey of the country, which takes place next month.

But she said: "We have repeatedly said in the last couple of years that should growth abate and be particularly low there should be consideration to adjusting by slowing the pace (of fiscal consolidation).

"Looking at numbers - without having dwelt under the skin - the growth numbers are not particularly good. This is a continuum of (our) position. What has changed is the quality of the numbers."

The comments came as the incoming Bank of England Governor, Mark Carney, said that Britain should be considered one of the world's "crisis economies".

In comments at an event on the fringes of the IMF meetings, he said: "There are three classes of economy. There's the crisis economies, including the United States, which is breaking out of that pack; it includes the Eurozone, the UK and Japan."

Mr Carney also dismissed hopes that central banks such as the Bank of England or the Bank of Canada, where he is currently Governor, could single-handedly generate growth.

He said: "Can they deliver sustainable growth? The answer is no. They can help with balance sheet repair and, for instance, transition to more sustainable euro area.

"But they can't deliver the long term growth necessary. That needs to come through full fiscal adjustment and fundamental structural reforms."

Ms Lagarde's comments on the fiscal situation in the UK will set up one of the most-eagerly awaited IMF annual surveys in recent British history, with the fund expected to set out precisely how far it expects the Government to change its position on tax and spending.

Although the IMF's advice is not binding, a negative judgement would be highly embarrassing for the Chancellor, even beyond the already critical comments of the fund.

Ms Lagarde also addressed the news that she has been summoned to appear in court in France over her handling of a scandal when she was the country's finance minister.

She said: "There is nothing new under the sun. Ever since 2011 I had known very well that I would be heard by the investigating commission of the Courts de Justice.

"I'll be very happy to travel for a couple of days to Paris but it's not going to change my focus, my attention and my enthusiasm for doing the work that I do."

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Tech Giants Boosted By New Strategies

Tech firms Google and Microsoft have reported strong quarterly growth amid shifting strategies for both.

Google's core internet business net revenue grew 23% in the first quarter as profit climbed to $3.35bn (£2.2bn), despite a trend toward cheaper ads on smartphones and tablets.

"We had a very strong start to 2013, with $14bn (£9.1bn) in revenue, up 31% year-on-year," Google chief executive Larry Page said

Shares of Google, which reached an all-time high of $844 (£550) in March, were up 1.5% to $777.75 (£505) in after hours trading on Thursday.

Microsoft was revenue rise in the quarter by 18%, year-on-year

Meanwhile Microsoft's strategy of selling more long-term software contracts to big business customers cushioned the blow from plummeting PC demand and lacklustre demand for Windows 8.

Net income was $6.1bn (£4bn) for the fiscal third quarter, which ended in March, up 18% from $5.1bn (£3.3bn) the same period last year. Revenue was $20.5bn (£13.3bn), up 18% year-on-year.

The boost comes as personal computer sales fell 14% in the first three months of the year, just as Microsoft tried to ramp up sales of the latest iteration of Windows.

But the company's ability to keep hold of big customers rescued its third-quarter results.

"Microsoft has successfully transitioned into an enterprise software company and these results show that," Fort Pitt Capital analyst Kim Caughey Forrest said.

"Because the strength of server and tools and the actual way they sell licences to business is making up for the missing PC sales."

In effect, Microsoft no longer relies on a new PC to make money from software - only 20% of the company's product revenue comes from computer makers paying fees to put Windows on their machines.

Google's Android operating system is used on Samsung smartphones

About 45% comes from multiyear agreements with customers - generally big companies - paying millions for three-year access to Windows and Office software.

The software giant is also working with manufacturers to produce a line of small touch-screen devices powered by Windows, apparently intended to compete with tablets like the iPad Mini and Amazon Kindle Fire.

Google has also stepped up its strategic shift, to mobile advertising spurred by its Android operating system leaping past Apple iPhone and iOS software to power some 70% of devices.

Google improved its cost-per-click (CPC), a critical metric that refers to the price advertisers pay the search giant, in the first quarter.

The CPC rate declined 4% year-on-year in the first quarter, following a 6% decline in the fourth quarter.

"It's classic Google. There's plenty of things to like and some things not to like," BGC Partners analyst Colin Gillis said.

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'Quick House Sale' Market Investigated

The Office of Fair Trading (OFT) is investigating fears people desperate for money are being preyed on by firms offering "quick house sales".

Fifty unidentified companies operating in the market have been contacted by the watchdog for details on their business models while consumers are being urged to contact the OFT with information on their experiences.

Firms in the sector offer to buy a house themselves or find someone else to snap it up, often for less than the full market value of the property.

The OFT said that while such companies may offer a "valuable service" for people who need fast access to cash, it is concerned that stressed and vulnerable home owners looking for a way out of financial difficulties could be misled into selling for far less than their home is worth.

There have been suggestions that some customers have been told at the final stage of the 'quick sale' process that the price they were getting had been considerably reduced.

Other practises the watchdog is watching for include firms hiding their fees behind initial valuations which appear to offer a good price and severe penalties for breach of contract.

The number of 'quick sale' operators has grown as the tough economic climate has continued.

More than 157,900 UK households had fallen behind on their mortgage payments at the end of 2012 and over 110,000 couples divorced in 2011 in England and Wales.

The OFT plans to publish a report on the quick house sale sector in July.

The new regulator, the Financial Conduct Authority, welcomed the investigation and said it will work with the OFT to tackle any concerns.

Peter Bolton King, global residential director of the Royal Institution of Chartered Surveyors, said that anyone considering a quick house sale should take a step back and consider other options.

He said they should get an estimate of what their house could sell for on the open market, even if their house is priced for a quick sale.

Mr Bolton King said: "Naturally, people feel under financial pressure. You think: 'I can sort out my problems in one fell swoop'.

"But you should take a breath, take a step back and make sure you totally understand what it will mean."

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Apple Share Value Peels Away On Demand Fears

Apple shares fell below the $400 mark on Wednesday for the first time since December 2011 amid fears about weakening demand for its iPhone and iPads as competition intensifies.

A surprise warning about disappointing revenue at Cirrus Logic, which makes audio chips for both products, sparked the sell-off.

The US firm's forecast added to market speculation that sales of the iPhone - which make up more than half of Apple's revenue - are slowing more quickly than expected as Samsung and other rivals flood the market with cheaper devices.

It also threw the spotlight on Apple's quarterly earnings announcement due out next week, with some analysts saying the results could miss already reduced estimates.

"This is a tough environment. Apple is in transition between products," said Michael Yoshikami, a portfolio manager at California-based Destination Wealth Management which owns about 50,000 Apple shares.

Cirrus Logic had warned of a reduced product forecast from one customer - which it did not name - but at least 90% of its business comes from Apple.

Apple shares dipped below $400 on the Nasdaq before closing 5.5% lower at $402.80.

The drop wiped more than $22bn (£14.4bn) off its market value.

Since its September 2012 peak, Apple has lost 40% of its market value - slightly more than Google's entire capitalisation.

The drop has been fuelled by worries about the effect on Apple's industry-leading margins if it is forced into faster updates of its products to keep up with rivals.

Some say Apple will not be able to sustain its high gross margins as competition in the tablet and smartphone markets leads to lower prices.

Analysts expect Apple to report a 9% increase in quarterly revenue on April 23, with net profit expected to be down 17%.

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Retail Sales Drifted As March Snow Fell

The coldest March since 1962 stopped shoppers hunting down spring ranges, resulting in a 0.7% fall in overall retail sales.

The Office for National Statistics (ONS) figures said that left sales 0.5% lower on the year.

Despite the early Easter holiday, non-food sales tumbled by 4% in March and this was only partly offset by the biggest rise since March 2009 in non-store retailing, which includes online shopping.

The information suggests that consumers stayed away from stores and carried out only essential food shopping, preferring to stay indoors in the warm.

Other earnings reports - and those of individual retailers - have been mixed.

While the British Retail Consortium found 3.7% annual growth in the value of retail sales, the ONS measured it at just 0.1%.

Early on Thursday, Debenhams blamed snow in January for a 5.4% dip in profits in its first half.

Britain's second biggest department store group forecast a better second half of the year after making a pre-tax profit of £120.3m in the 26 weeks to March 2.

That was in line with guidance given in a March profit warning when the firm said snow in January had dented sales.

Chief executive Michael Sharp said: "We expect to make further progress in the second half, despite consumer sentiment remaining weak and challenging market conditions."

Many retailers have been finding trading tough as consumers, whose spending generates about two thirds of gross domestic product, continue to face a squeeze on incomes at a time of record household energy prices and other higher costs.

The soggy summer of 2012 followed by the cold winter also held back sales.

More follows...

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Npower: Energy Firm Denies Tax Avoidance

Npower has admitted it has not paid corporation tax in the UK for three years - just months after increasing prices by around 9%.

The company made the admission to the Energy and Climate Change select committee - but its boss said they had invested billions in new power stations and wind technology.

Chief Executive Paul Massara said: "Effectively we have invested £5bn in the last five years building power plants, creating jobs, creating employment and helping to keep the lights on.

"If we had not made that investment we would not have the deductibility that we would be allowed. That is a simple accounting UK rule."

Npower reported a 34% rise in profits to £413m last year.

The admission came as the "big six" energy companies were questioned by MPs over topics including profits and how they treat their customers.

A company statement added: "Looking at RWE npower specifically, our investment programme since 2008 has amounted to almost £3bn, which means we have seen a large increase in tax relief.

"This is in no way tax avoidance, and all of our business is taxable in the UK. We've not paid corporation tax because we've been investing hundreds of millions to keep the UK's lights on."

Prime Minister David Cameron's official spokesman said: "I wouldn't comment on an individual taxpayer.

"More broadly, the Prime Minister's view is that it is important that companies pay the tax that is due."

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