Retailers demand reform of ‘broken’ business rates

The government borrowed £151.8 billion in the year to March,though the figure was less than half that borrowed in the first year of the pandemic

Retailers have long demanded changes to the business rates system, which many regard as an unfair tax, out of step with modern shopping, but rarely has the clamour been as loud as it is today.

Retail casualties, including those of Wilko and Paperchase, and the closures of about 6,000 store sites in the past five years have prompted the industry to revive its campaign to reform the “crippling” system.

Olly Tress, the boss of Oliver Bonas, the fashion and homewares chain, argues that the property tax is a “terrible laggard” for companies operating shops, pubs and restaurants and “needs to be reformed, but the government doesn’t seem to have the spine to actually do it”.

Helen Dickinson, chief executive of the British Retail Consortium, has warned that there could be further company collapses if nothing is done to fix the system, resulting in “gap-toothed high streets”.

Their views are widely shared throughout the sector.

Business rates are charged on most commercial, non-domestic properties including shops, offices, pubs and warehouses. The tax demands more cash from companies that need a presence in town centres, where property values are higher, so they pay more in rates than online and out-of-town rivals.

Critics say the biggest problem with the system is the “multiplier” — the uniform business rate multiplied by the rateable value of the property, which is used to calculate rates bills. It has risen from 34p in 1990 to the “unsustainable level” of 51.2p. They also say that the revaluation process, when the Valuation Office Agency updates the value of business premises to reflect changes in the property market, is not frequent enough.

Talk of reform has quietened in recent years after the government offered rates “holidays” to retail, hospitality and leisure businesses to help them to survive Covid lockdowns. All commercial businesses were awarded 100 per cent relief until July 2021, when 75 per cent relief up to a cash limit of £110,000 per business was introduced, meaning that larger companies had to start paying in full again. The relief for small to medium-sized firms ends next April, which the BRC fears will add £400 million to the cost of doing business.

The owner of one pub near Tower Bridge, south London, said the uplift would be a nightmare: “With energy bills, 9 per cent staff wage rises for our key players to retain them and VAT, all we really do is work for the government and HMRC.”

Some industry onlookers suspect the government is likely to renew the relief for at least another year in, or before, the autumn budget to avoid “cliff-edge change”.

According to John Webber, head of business rates at Colliers, the property firm: “As the cash cap on relief per business is currently £110,000, this will continue to benefit only smaller and medium-sized businesses. The main employers in the high street up and down the country are larger retailers that have not benefited nor will benefit from this relief, but will continue to pay a tax of in excess of 50 per cent on the rental values of their premises.”

Webber said the problem with continuing rates relief was that any plans for change were kicked down the road. “The government has created a rod for its own back, because the longer these reliefs continue, the greater the reliance of companies in their models to the fact that they pay little or no business rates,” he said. “When that tap is switched off, keys will be handed back and businesses will close.”

Governments have recognised the need to change the system and have held numerous consultations and reviews, but reform has proved elusive.

“The government seems to tinker with reform and then claim ‘it has been done,’ ” Webber said. “One of the most significant failings was its failure to implement the recommendations of the long-awaited Treasury select committee report in October 2019.” That report queried how the multiplier had grown so high, criticised the system that allows businesses to appeal against the rateable value set for their properties and called for reform of the complexities of the system. “Sadly, its recommendations were largely ignored,” Webber said.

Shortly after the report was published, the 2019 Conservative Party manifesto (three prime ministers and four chancellors ago) promised “fundamental” reform of the business rates system. It launched another review, the findings of which were released in October 2021. The government hinted at reforming existing multiplier legislation and said it would consider “the arguments for and against an online sales tax” after the explosion of internet shopping during the pandemic.

Next, Asos and the BRC lobbied against it, warning that it would have to be passed on to consumers. Lord Wolfson of Aspley Guise, the chief executive of Next, said that an online levy would be an “extremely backward step” as it would hammer demand for click-and-collect services, which have helped to revive many retailers’ fortunes, albeit ultimately giving people yet another reason to shun bricks-and-mortar stores.

Like the promise of changes to the multiplier, nothing came to fruition with an online sales tax. Instead, the government tabled a new bill this year that it said would “modernise the business rates system”. It introduced more frequent valuations, to take place every three years instead of the present five.

Retailers welcomed the move, but the consortium said “the job is not done”. Michael Murray, chief executive of Frasers Group, which comprises House of Fraser, Flannels and Sports Direct, agreed. “It’s a step in the right direction and a bit of a lifeline, but it’s not the finished article,” he said. “It still needs a deeper review as it’s still an outdated system. We’re still paying more on property tax than any other country.”

At present, the Labour Party is committed to abolishing business rates and replacing them with a system that it argues is “ fit for the 21st century”. However, Peter Aldous, the Conservative MP and a member of the backbench business committee, said it would be “impossible for it to keep that promise because, despite the drawbacks that business rates possess, they have inherent advantages for the Treasury. They yield approximately £25 billion per annum, are relatively easy to collect and are difficult to avoid. It is impossible to find an alternative system of taxation that has those advantages.”

Every country in the developed world has a form of property tax. The abolition of business rates is likely only to result in another kind.

Many argue that the most realistic and achievable way of reforming the system would be to reduce the multiplier. “This is the elephant in the room and until it is tackled any other changes to the system are window-dressing,” Webber said. “We believe the solution is to reduce the multiplier for everybody and that all businesses pay something in terms of business rates, even if that multiplier starts off at 10 per cent or even 15 per cent as businesses will become acquainted with paying some element of a business rate charge.”

Businesses are also calling for annual revaluations that would prevent large jumps or changes in rateable values from one year to the next.

An area of focus for the government is making sure that all businesses pay up. The Treasury and the Department for Levelling Up, Housing & Communities have launched a consultation about business rates avoidance as officials are concerned that the empty property relief, which grants landlords or occupiers a three-month rates holiday when their premises are not being used, is “not working as intended”.

This has been met with criticism from landlords and occupiers, which say the government is “living in cuckoo land” if it thinks that clamping down on empty property relief for business rates is a sensible idea, especially in the present economic situation.

A spokesman for the Treasury said: “Our £13.6 billion business rates support package and review cuts the average bill for businesses in every English region.

“It helps to level the playing field for high streets and town centres by slashing bills for retailers by 75 per cent, introducing more frequent property revaluations, capping rising bills and protecting against inflation.”