The process of narrowing the gulf between the business rates paid by online retailers and their high street peers will take a small step forward this week, as the government assesses the higher rents paid by warehouses ahead of the next revaluation.
Online retailers, which have been criticised for paying much lower business rates than their high street counterparts, are likely to face higher bills from 2021 as a result of big increases in rents for the distribution centres that are key to their operations. By contrast, many high street operators — which have seen sales stagnate — will see their bills fall.
Rents on commercial properties on April 1 will be used as the basis for setting business rates from April 2021 onwards. Business rates are calculated by applying a multiplier, which rises with inflation each year, to a ratable value that is reappraised every three years in England and Wales.
The last business rate revaluation was in 2017 and was based on rents prevailing in April 2015. Since then, the growth of online retail — coupled with the expansion of grocery discounters such as Aldi and Lidl — has pushed up the rents on large warehouses located near key motorways.
According to Savills, the real estate services group, warehouse rents in locations such as Northampton and Rugby — part of the “golden triangle” of logistics operations in the UK — rose by more than 40 per cent between 2013 and 2018. Key locations in the south-east, such as Woking and Crawley, have seen even bigger rises.
Business rates consultancy Altus Group said that since 2017 the equivalent of 589 football pitches has been added to the supply of warehouse space in the UK, including giant facilities such as Amazon’s 2m square foot distribution centre in Essex. More properties are in the pipeline, but they have not yet moderated rental growth.
One reason could be Brexit, according to Robert Hayton, head of UK business rates at Altus. “Stockpiling for Brexit may have been the prudent thing to do with all the uncertainty but there could well be tax consequences given the effect it has had on rents,” he said.
David Parker, national head of business rates at Savills, agreed: “Brexit has created a bit of a boom in the market. Even if it is short lived, it is hitting right at the valuation date,” he said.
At previous revaluations, large increases in business rates for some stores were tempered by transitional relief, a measure intended to cushion companies from very sharp rises. A new relief scheme is expected in 2021, but Mr Hayton noted that even with the measures, warehouse operators could face rate increases of 40 per cent in some areas.
Mr Hayton also pointed out that from 2021 revaluations will take place every three years, rather than every five, which means changes in the rental market will feed through into business rates more quickly. This will benefit stores in areas where rents are falling, but will hurt the operators of warehouses.
Even so, it will be a long time before the rates burden for online businesses is comparable to that of high street stores. “Whilst surging rents will be reflected in new ratable values in 2021 and the commensurate tax liabilities, they won’t address the rates to-turnover-disparity with online-only retailers,” said Mr Hayton.
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Large warehouses will pay a total of £790m for the 2019/20 financial year, according to Altus — only slightly more than the amount paid last year by Tesco alone. Online retailer Amazon paid just £63m in business rates in 2018, it disclosed in a letter to a House of Lords committee, although its sales that year were worth £8bn.
Pressure has grown on the government to reform business rates because of the burden they place on retailers. Business rates generate almost £30bn for the Treasury each year; £7bn of this comes from retailers.
The government has already introduced a number of measures. From 2018 the annual increase on the multiplier was pegged to the lower consumer price index from the retail price index. The Treasury also introduced more frequent revaluations. From 2021 they will be carried out every three years rather than every five. Last November, it announced another scheme giving smaller retailers some rate relief, although according to Altus fewer than a third of retail premises will benefit from it.
“The general talk is that some form of digital services tax could hopefully replace some element of business rates,” said Mr Parker. “But I’m not sure the government can afford it.”
Cambridge retains crown as top retail destination
Rising business rates may be a burden for retailers, but they are not yet having a big impact on the UK’s best high streets and shopping centres, according to a survey.
The latest Vitality Index, which measures the health of shopping areas using yardsticks such as vacancy rates and types of shops, found that Cambridge retained its crown as the UK’s leading retail destination.
Many of the top 25 centres, as assessed by Harper Dennis Hobbs, a commercial real estate agent, were in areas where rents and rates have risen sharply, including London stalwarts such as Knightsbridge and Chelsea. Apart from Cambridge, only five centres — Meadowhall in Sheffield, Edinburgh, Marlborough and spa towns Harrogate and Bath — were outside London and the south-east.
The index appears to show that wealth is the primary factor in making a destination attractive. Market towns that dominate a small but affluent catchment area continue to score well. So too do major regional centres, with cities such as Birmingham and Glasgow climbing the rankings since the last survey in 2017. By contrast small towns and neighbourhoods, particularly in poorer areas of the country such as parts of the north-west and north-east, fare much less well.
But size matters too: of the bottom 50 centres, just four had over 300 shops whereas more than half of the top 50 did. “This shows that primary shopping destinations are, if anything, growing in strength whereas the number of small but healthy centres is waning,” said Jonathan de Mello at HDH.
The survey is compiled by ranking centres using criteria such as vacancy rates, the proportion of premium to value retail in the context of the local clientele, and the prevalence of less attractive tenants such as betting shops, pawnbrokers and payday loan providers.
