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WILL BUSINESS RATES DESTROY THE HIGH STREET?

Business Rates

There is nothing improper in a business having to pay taxes on the property it uses as well as on its profits, sales and employee's wages.

The problem with business rates is -

In fact many retailers are now in dire straits and the impact of business rates only makes survival more difficult. The 2017 revaluation showed that more than half of all retailers had been paying too much in rates (Summers, 2017).

Retailers pay 25% of ALL business rates, even though the gross value-added from retail is less than 10% (ONS, 2018). In 2018-19, we estimate retailers will pay a total of £7,625m in business rates. So this is not a neutral tax on all businesses.

Online business rates vs bricks-and-mortar business rates

It is even less neutral between retail formats because business rates weigh particularly hard upon bricks-and-mortar retailers compared to online sellers.

We estimate that business rates will cost bricks-and-mortar stores in 2018-19 2.3% of their turnover and for online retailers the proportion will be only 0.6%.

research (2015-16) showed that the business rates paid by a sample of large retailers (mostly bricks-and-mortar) represented 42% of all the taxes they paid, yet the apportionment of property taxes between online and offline business bore no relationship to the value generated by each subsector. This makes business rates the biggest form of tax that large retailers pay.

The Chancellor's View

Philip Hammond's view is that nothing needs to be done (Bates, 2018). In a letter sent to MPs, the Chancellor said that a 2016 inquiry had concluded that the rating system should not be axed and that the Government was already considering how to tax digital firms.

The System of Business Rates

The rateable value (RV) of a property is decided using an arcane method of calculating what its rental might be on a set date. One problem is that since the recession business rents have been falling in many parts of the north, midlands, and Wales but have continued to rise in London and the southeast. Retailers in the north and the midlands have therefore been overpaying business rates for years and in the southeast and London they have been underpaying.

The unfairness problem has been made worse because the government decided to abandon the five-year RV revaluation due in 2015 and revalue after seven years instead.

In London restaurants, business rates are estimated to have risen one-third from £202mn in 2016 to £269.3mn in 2017, although transitional rules mean the full new level of business rates is only paid after some years (Deloitte, 2017a). The new business rates system from 2017 has meant that many small businesses pay no rates at all and protects some pubs and community stores.

The System of Business Rates is in a Mess

Real hardship is being created by the fact that the majority of retailers, especially in the North, Wales and Scotland, had been paying too much in rates since the previous revaluation. They would now continue to pay excessive rate totals for a period of ten years since the previous revaluation (Armstrong, 2017). It is absurd to require companies that have been overpaying business rates for seven years to fund others who had the good fortune to be underpaying their true rate of business rates.

The government has now agreed to carry out regular RV revisions every three years to overcome these problems.

Shah (2018) quotes the retailer, Next, as stating that when existing leases came up for renewal in 2017-18 they resulted in an average saving of more than one-quarter, suggesting that shops rents and rateable values have some way to fall yet. The inflexibility of the business rates system puts bricks-and-mortar retailers at a disadvantage.

Mike Coupe, the CEO of Sainsbury's, complained last year that his business faced a rise in business rates of almost £120mn to a new business-rates total of £500mn. Meanwhile Amazon, which benefits from the same government services as Sainsbury's such as roads, hospitals, education, universities and welfare payments, will pay lower business rates on its huge warehouses (Summer, 2017) and only £100m on the Amazon Group as a whole.

Rate Exclusions and Exemptions. The government now levies zero rates on many smaller stores (RV less than £12,000). Rates payable rise in a tiered way until full rates are payable at the relevant RV. There are rate concessions in rural areas, including the last pub, post office or shop in a village. These exceptions are costly and create further anomalies if a business wants to improve its premises taking it over the RV=£12,000 threshold, when the full burden of business rates is payable.

The business rates system is antediluvian. The most successful part of retailing, online retail, is only paying 6% of the total business rates paid by retailers, and bricks-and-mortar retailers that employ more than 2.6m people and face considerable hardship if they are to keep going pays 94%.

How to Replace the Rates

The Centre for Retail Research in its own report Retail At Bay 2018 proposes a compromise that could be put into effect immediately, were the Chancellor so minded. This would involve a twin system:

1) Continue with business rates but halve the rate of rates;
2) Introduce a turnover tax on all retailers;
3) Abolish the maze of exemptions from business rates.

Eliminating the exemptions and halving the actual rate of business rates would probably improve the success of business rates, with more premises occupied and a larger population taxed. The new system would be cheap to collect and this could be done centrally rather than by each council. The turnover tax could be collected along with VAT and would help smaller retailers whose sales are comparatively low and would pay a reduced amount of tax than at present. Online businesses that pay comparatively low business rates would find they had to pay higher taxes under our proposed scheme.

This scheme would create other anomalies, but is put forward as a temporary measure to give a breathing space to retailers in trouble and give time to help politicians to devise a better system of taxing retail without running the risk of killing off everyone who trades from high street premises.

Will Business Rates Destroy The High Street?

Bricks-and-mortar retailing is being driven into the ground by a combination of weak consumer demand, high cost increases, online competition and intense price competition. Business rates are a major business cost and anything the government can do to freeze rates and adopt a fairer system will help the retail sector. Business rates are not the only problem facing retailers but they are the only problem that the government can do something about.

References

Armstrong, A. (2017) 'Business Rate "Winners" Shocked by New Charges' Daily Telegraph, 7 March, p. B1.

Bates, L. (2018) 'Philip Hammond Sparks Row By Dismissing Calls to Overhaul Business Rates', Politics Home, 6 July https://www.politicshome.com/news/uk/economy/taxation/news/96606/philip-hammond-sparks-row-dismissing-calls-overhaul-business

Jahshan, E. (2018) 'Thousands of retailers dragged to court over missing business rates payments', Retail Gazette, 9 July, https://www.retailgazette.co.uk/blog/2018/07/retailers-dragged-court-missing-business-rates-payments/

ONS (2018) Monthly GDP based on GVA (Gross Value Added), 10 July 2018, London: Office for National Statistics.

Shah, O (2018a) 'Can't Pay? Won't Pay!' Sunday Times, 20 May, p.B5.

Summers, H. (2017) 'Sainsbury's chief calls for 'fundamental reform' of business rates', Guardian, 19 February https://www.theguardian.com/business/2017/feb/19/sainsburys-chief-calls-for-fundamental-reform-of-business-rate







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