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.
Business rates place a significant tax burden on physical stores that simply doesn’t exist in online operations
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.”
