Will business rates reform transform retail?

The UK gov­ern­ment released its long-await­ed Busi­ness Rates Review in its Octo­ber 2021 bud­get. While the retail sec­tor had antic­i­pat­ed the results for the bet­ter part of a decade, many were left dis­ap­point­ed.

Suc­ces­sive chan­cel­lors from George Osborne to Rishi Sunak had pledged such a review. How­ev­er, while it asks the right ques­tions about the nature of the rates sys­tem, the government’s answers don’t rep­re­sent any­thing like the fun­da­men­tal change retail­ers hoped for to reduce the tax bur­den, says Dominic Cur­ran, prop­er­ty pol­i­cy advis­er at the British Retail Con­sor­tium.

The cen­tre­piece of the review is a reduc­tion in the reval­u­a­tion peri­od from five to three years, he notes. While that is bet­ter, it’s a pol­i­cy that Sunak was already tak­ing through par­lia­ment in 2019/20 as local gov­ern­ment min­is­ter until it “was dropped because of the coro­n­avirus”, Cur­ran notes. 

Many senior retail fig­ures, such as Water­stones MD James Daunt, had hoped for the intro­duc­tion of an online sales tax. He esti­mates he has over 80 stores at risk of clo­sure over the next few years. “Once you’ve closed a shop, you’re not going to reopen it. Polit­i­cal­ly if they believe in lev­el­ling up, and they do talk a lot about it, this is a mas­sive tool for help­ing with that,” he says.

The gov­ern­ment text, how­ev­er, says it will “con­sid­er the argu­ments for and against” such a tax, with a pos­si­ble view to using it to fund future busi­ness rate reduc­tions.

Need for change

Reform to UK busi­ness rates is long over­due, accord­ing to Cur­ran. “Busi­ness rates have risen sub­stan­tial­ly as a tax since they were intro­duced in 1990,” he says. “The effec­tive tax rate has gone from around 35p in the pound in that first year to 51p in Eng­land now. In the last decade alone, there was a 25% increase. If you did that to any oth­er tax, you’d find tax­pay­ers rais­ing con­cerns about it.”

Cur­ran had been hop­ing for a mean­ing­ful reduc­tion in the tax bur­den, “a return to the orig­i­nal sum of 35p in the pound. I think peo­ple feel that pay­ing a third of your rent again in tax feels about right.”

British busi­ness rates are also notably high­er in pro­por­tion to rev­enue than else­where, says Dr Mar­tin Simm­ler, research fel­low at the Cen­tre for Busi­ness Tax­a­tion at Oxford University’s Said Busi­ness School. “The tax bur­den on com­mer­cial prop­er­ties in the UK is almost dou­ble what you would see in oth­er coun­tries,” he says. Point­ing to the OECD’s tax data­base, he notes that the amount of rev­enue raised from tax­ing prop­er­ties in the UK is 4% of total rev­enue, com­pared with 1–2% in oth­er coun­tries. 

In the­o­ry, busi­ness rates are sup­posed to be teth­ered to how well you’re doing as a busi­ness. But Cur­ran says in prac­tice it’s very much a lag­ging indi­ca­tor, with prop­er­ty val­u­a­tion done well in advance of the point that busi­ness­es start pay­ing the tax. “A val­u­a­tion that was done in 2015, that took effect in 2017, is still the basis for what you pay until April 2023,” he says. “You not only have a high tax rate, but a high tax rate based on a very his­toric and unrep­re­sen­ta­tive assess­ment of the val­ue of the prop­er­ty you’re pay­ing tax on.”

It’s a sys­tem that Simm­ler says “rein­forces booms and reces­sions on a local lev­el”. He doesn’t think the busi­ness rate sys­tem is respon­si­ble for hol­low­ing out the high street, which he instead attrib­ut­es to chang­ing con­sumer pref­er­ences. How­ev­er, he does think the busi­ness rate sys­tem makes the fall­out from that shift to online even more acute for bricks and mor­tar retail­ers.

Daunt agrees. “Busi­ness rates place a sig­nif­i­cant tax bur­den on phys­i­cal stores that sim­ply doesn’t exist in online oper­a­tions,” he says. “If you take a busi­ness such as Water­stones that has [both], it effec­tive­ly encour­ages us to favour our online oper­a­tion over our store oper­a­tion.”

Simm­ler advo­cates a more sub­stan­tial move towards a short­er annu­al or bian­nu­al reval­u­a­tion peri­od, and a greater focus on loca­tion-spe­cif­ic reliefs and exemp­tions. In July 2021, he co-authored a paper on the ben­e­fits of small busi­ness rate relief. 

Reform challenges

The prob­lem with reform­ing busi­ness rates is that the trea­sury sees them as a “good tax” says Cur­ran. “They bring in £25 bil­lion a year and they’re effi­cient because it’s hard to hide a build­ing, so there is a low lev­el of avoid­ance,” he says.

Daunt rejects the notion that the tax should be pre­served because it’s effi­cient. “We’re not in 1948,” he says, not­ing that “we’ve all got extreme­ly sophis­ti­cat­ed sys­tems for mon­i­tor­ing our cash flows. It’s not as though we’re in some flick­er­ing black and white TV sit­com where the tax­man with his bowler hat says, ‘don’t did­dle your tax­es, as long as I can see the build­ing I can get them’.”

Anoth­er con­cern is the poten­tial loss of rev­enue to local coun­cils, which since 2013 have retained part of the busi­ness rate rev­enue. “Cen­tral gov­ern­ment has oth­er tax instru­ments avail­able, where­as busi­ness rates raise sub­stan­tial tax rev­enues for local gov­ern­ment,” says Simm­ler. “It means it’s very dif­fi­cult to do sub­stan­tial reform because it cre­ates a lot of uncer­tain­ty for local gov­ern­ments.”

For Cur­ran, there’s a big con­tra­dic­tion between the mon­ey the gov­ern­ment is spend­ing on sav­ing high streets and the high tax bur­den posed by busi­ness rates. The gov­ern­ment has a whole series of funds to lev­el up com­mu­ni­ties, he notes, many of which have loca­tion-spe­cif­ic regen­er­a­tion fund­ing. He strug­gles to see the point in spend­ing this mon­ey when rates reform could help gen­er­ate eco­nom­ic val­ue, jobs and a sense of place, along with improved ser­vices, by sav­ing high streets. 

Daunt returns to the poten­tial for an online sales tax. “Big retail­ers like our­selves would end up with a rough­ly equiv­a­lent tax bill if we were taxed on our online oper­a­tions and you wiped my busi­ness rates. I’m not call­ing for any­one to save me tax: we’re say­ing allow me to keep my shops open and to keep employ­ing peo­ple. Update the sys­tem for the way the world is.”