The Business Rates Debate: Remain, Replace or Reform?

The last 12 months has seen an increasing number of high profile retail businesses failing or restructuring.

26 Oct 2018
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Some retailers are blaming their high street struggles on business rates. But are business rates really the problem? What can be done to improve the business rates model or does it need to be scrapped completely?

The "remainers"

Some argue that slashing business rates won't fix the problem and is not the answer to the high street's problems.

Despite people thinking that business rates have increased overall, as a result of three-year revaluations and linking business rate rises to consumer price index inflation figures, they have gone up in some areas such as London but actually gone down in other areas, particularly in the north.

Paul Johnson, Director of the Institute of Fiscal Studies, argues that while cutting business rates might reduce a business' costs in the short term, it won't make much of a difference to its long term success. Rent is still payable to the landowner. Since there is only limited land for shops, cutting business rates will largely lead to higher rents.

Another strong argument for business rates to remain is that the government receives £30 billion a year from business rates. Any cut to this tax would have to be matched by raising some other tax elsewhere.

So there are always losers but there are alternatives.

The "replacers"

Even if some people don't think that the business rates system is the reason for the crisis facing our high streets, there are a number of problems with the system. In its simplest form, business rates tax the value of a company's machinery and premises, seen by some as a tax on investment itself stifling business expansion. Further, commercial property is taxed more heavily than other forms of wealth and other production factors, which has caused inefficiencies in property use.

Of course, everyone has a view on scrapping business rates and what can be done to replace them.


Land tax

Bill Grimsey, former Wickes, Focus and Iceland chief, proposes replacing business rates with either a land, area, property value or sales tax. Tax on land value rather than rental value of the property would be better because if the tax was on property value then this would provide an incentive for demolishing buildings. A tax on land value seems widely supported.

Tax on internet sales

Philip Hammond has expressed concern that taxation needs to be fair between sales on the high street and online sales. He has said that he is strongly considering introducing a so-called "Amazon tax" (a 2% charge on goods sold online) to try to rescue struggling retailers. Many people think that the budget next week will be used to reinforce this.

Local business tax

Savvas Savouri, partner and chief economist at Toscafund Asset Management expects there to be the introduction of a new sales tax, set by local government and spent as is seen fit, at local government level. Local business tax could then be linked directly to respective revenues. The problem with this proposal is that there is a "business" cycle risk to what is raised from local business tax.

Commercial Landowner Levy (CLL)

A new report called "Taxing Land, Not Investment" by Andrew Dixon, founder of the Liberal Democrats Business and Entrepreneurs Network proposes the replacement of business rates with a new tax, which is based solely on land value. The proposed CLL would exclude premises and machinery from calculations and would be paid for by landowners rather than businesses such that empty or derelict property would be caught by the new tax system.

If business rates were scrapped and the CLL was introduced in their place, the winners would be capital-intensive sectors such as manufacturing, energy and technology, business in the most deprived parts of the country where land is cheaper and SMEs as they will be spared from the burden of paying business rates. However, it seems that much of the cost of the CLL would be passed down in the form of higher rents so this could result in more losers.

The "reformers"

Business rates were introduced long before the internet changed the retail landscape. There is a real need for change but some commentators are saying that the best way to improve the tax system would be to make some immediate changes including: -

  • Introducing more frequent revaluations.
  • Scrapping the relief for vacant property, which is leaving properties empty that would otherwise be in use and is costing nearly £1 billion a year.
  • Freezing any business rate increases next year.
  • Removing downward phasing of business rates payments, enabling rate-payers to meet their true rates liability now and not wait four years to do so.
  • Reducing the multiplier (the uniform business rate against which the rateable value of the property is multiplied to give the final rates bill) by asking small businesses to pay a minimum contribution or removing agricultural relief.
  • Simplifying the appeals system.
  • Abolishing "staircase tax" such that separate parts of a shared building are treated as a single unit for business rates if they are contiguous and in the same occupation.

Our view

This topic was debated at our Economic Breakfast Briefing on the future of the high street on 16 October. Sean Gillies, Head of UK Retail at Savills, said that "business rates is one of the biggest pressure points and the government needs to do something about it such as introducing geographical reliefs or replacing it with a sales tax – fast action is needed." However other assumptions were that tax is not the answer to struggling retailers' problems – taxing retail affects consumers.

The business rates system is evidently not fit for purpose but there are winners and losers with all systems and ultimately the government has to get its tax income from somewhere. There is no one-size-fits-all answer for retail so reforming the system to make it more flexible and "future proof" is probably the best solution. It is also likely to be the quickest solution and change needs to happen now to save our high streets from terminal decline.

Business rates is not a tax on retail — it is a tax on land use. Therefore, the simplest way to reform it may well be to make it a tax on land value.

With Labour putting pressure on the Conservative-led government to reform the business rates system and murmurings of this being addressed at the Conservative Party conference, we eagerly await the Autumn Budget on Monday 29 October.


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