Ask a British retailer what has gone wrong on the high street and the chances are they will complain long and loudly about business rates.
The retail sector accounts for 5 per cent of UK economic activity, but pays a quarter of the £31bn the controversial property tax levied on most businesses raises each year. Lobby groups have long campaigned for reform, saying the tax is outdated, unfair and accelerating the decline of high streets — where 10 per cent of shops are vacant, according to the British Retail Consortium.
On Friday official data showed that the retail sector, based on sales volume, was suffering its worst contraction since records began in 1957.
The issue has shot up the political agenda. MPs said town centres’ deteriorating condition was a big factor on the doorstep in last year’s general election, particularly in the so-called “red wall” constituencies in northern England that the Conservatives seized from Labour.
“It is a sense of being left behind,” said Tom Tugendhat, a Tory MP. “Reform of rates is one of the changes we need along with improvements to bus services, because if you can’t get to a high street or park then people will go elsewhere instead.”
In the Queen’s Speech, the government pledged a “fundamental review” of business rates, alongside some more temporary reliefs for retail businesses. But any review will require hard choices.
More than 600,000 business owners pay no business rates at all because they are eligible for various reliefs, double the number in 2010. Many of them are small independent shops. Relatively few are operated by large retail chains which, according to the Local Data Company, closed a net 3,500 premises in the first half of 2019.
Business rates are based on “rateable values”, which are calculated every five years by reference to shop rental values, and a multiplier that rises annually in line with inflation.
The last major review of business rates, in 2016, concluded that reforming taxation of the digital economy through international co-operation was more effective than unilaterally changing business rates to help a particular sector.
Since then, the government has made minor concessions. The multiplier now increases by the consumer price measure of inflation, while from 2021 revaluations are to take place every three years rather than every five.
In the 2018 Budget, it introduced a temporary discount of a third for independent retailers occupying property with a rateable value of less than £51,000. This was increased to 50 per cent in the Queen’s Speech.
There are several other short-term measures that might reduce the impact of rates. Top of many lists, and recommended by a House of Commons Treasury select committee inquiry into business rates, is improving the appeals process against rateable valuations.
Another option would be to phase out transitional relief, which limits how much a bill can change as a result of revaluation, a system described by Sports Direct founder Mike Ashley as “useless”.
Mr Ashley and his colleagues wrote a letter to the prime minister in December, urging him to reform transitional relief so that rent cuts feed through into rateable values more quickly.
Altus Group, a consultancy, estimates that businesses in England have paid £509m more over the past five years than if business rates had simply reflected prevailing rents.
More controversial would be a levy on online retailers’ sales to finance a one-time cut in rates for high street operators, as advocated by Dave Lewis, chief executive of supermarket Tesco.
Stuart Adam, a researcher at the Institute for Fiscal Studies, a think-tank, said strategic reform should take precedence over “an endless stream of tweaks and temporary policies”. But any big rethink would carry risks for the exchequer.
Mike Coupe, chief executive of supermarket group J Sainsbury, has advocated a re-evaluation of corporate taxation more generally. For businesses like his, rates are a bigger expense than corporation tax. But for the Treasury, they have the advantage of being easy to collect and hard to avoid.
The IFS said that a land value tax would be a better system than business rates. But such a major change to the tax system would require years to implement.
Another option is to re-examine the balance between residential and business tax in funding local authority spending.
Councils currently keep half of the business rates revenue and remit the rest to the Treasury.
David Magor, chief executive of the Institute of Revenue and Rating Valuation, a professional body, pointed out that, while commercial premises are revalued frequently, council tax bands for residences had not been touched since the early 1990s.
Not everyone agrees rates are the pernicious force claimed by the retail industry. “Business rates are not destroying the high street,” said Mr Adam at the IFS, who reckoned that while it was a badly structured tax, other factors such as oversupply and the migration of shoppers online had been far more significant.
He also argued that, over the long term, changes in rates were simply reflected in rents, resulting in a total cost of occupancy that balanced supply and demand.
But Will Jennings, co-founder of the Centre for Towns think-tank, said such arguments would be difficult to make politically, especially in those northern towns where up to a quarter of retail units were standing empty. “This is part of a wider disaffection, a realignment of values. It’s about people who feel overlooked and ignored,” he said.
