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Burden of business rates: is enough being done to level the playing field?

Burden of business rates: is enough being done to level the playing field?

As numerous high street retailers continue to struggle in an increasingly difficult marketplace, the burden of business rates remains a hot topic.

Amid a backdrop of reports suggesting online behemoths like Amazon are paying far less than their smaller rivals, Move Commercial examines whether enough is being done to level the playing field and looks at broader concerns around the issue.

Words by Lawrence Saunders

The UK high street is suffering its worst year on record with seemingly not a week going by without more bad news for a major retailer.

Recent figures released by accountancy and business advisory firm BDO LLP showed that in-store sales have been down in eight of the nine months this year to October.

House of Fraser, Marks and Spencer, New Look and Debenhams are just some of the established retailers to announce shop closures since the start of 2018.

Changing shopping habits, pressure from online rivals, slow rising wages and an over concentration of stores have all been blamed for the downturn, but for many retailers the issue of business rates is top of the list.

The British Retail Consortium, which considers 70% of the UK’s retail industry (by turnover) as a member, made forcing a “fundamental reform” of business rates one of its priority campaigns.

It contends that despite 2017’s rates review, retailers will pay an additional £2 billion over the next three years compared to the last three.

In March, the government made additional funding available to Sefton Council to help enterprises across the borough deal with large increases to their business rates. The local authority had handed out more than £500,000 by the start of November.

Meanwhile, in its recent Business Rates Manifesto, the British Independent Retailers Association (bira) proposed a change from a business rates “threshold” to an “allowance” system.

The organisation pointed to a drop in the average business rates bill for Amazon’s nine UK distribution centres, and an increase in rateable value for many retailers, as a sign that the current system does not promote an even playing field for businesses.

The manifesto highlights that although Amazon owns more than 200 million sq ft of warehousing in the UK, the online giant avoids having to occupy high street premises and therefore does not attract the same level of rates as a typical shop.

In October, Sir Geoffrey Clifton-Brown took bira’s proposal for a £12,000 allowance for small businesses to the House of Commons.

The Conservative MP said the policy change, based on the same principles of the personal allowance applied to income tax, would bring “instant relief to many thousands of hard-pressed retailers”.

It’s perhaps no surprise, therefore, that bira broadly welcomed the recent Budget which saw chancellor Philip Hammond cut rates by up to a third for businesses with a rateable value of £51,000 or below.

The chancellor also produced the new UK Digital Services Tax from his famous red briefcase.

Under the new levy, which could be in force from 2020, social media platforms, search engines and online marketplaces which generate £500m in revenue would pay a 2% tax on the revenues they earn which are linked to UK users.

The tax will not, however, apply to online sales but instead to advertising income and streaming services.

The chancellor also announced a £675m Future High Street Fund aimed at improving transport links, redeveloping empty shops as homes and offices, and restoring and re-using old and historic properties.

Phil McCabe, spokesman for FSB (Federation of Small Businesses) Merseyside and Cheshire, said that small shops that cannot get Small Business Rate Relief will be “delighted with the significant discount”, but some North West commentators were less enthusiastic about how much of an impact the measures will have on the full gamut of retailers.

Following the announcement Richard Roberts, partner at Brabners called it “only a sticking plaster”; whilst Tim Attridge, head of UK rating at CBRE, argued that it didn’t take into account “businesses with multiple sites and those looking to grow”.

“The outdated and unfair business rates system must be updated so that it works for all retailers – big and small – if we are to keep the high street open for business.”

“The benefit of further funding and tax relief will be short-lived,” added Roberts.

“The outdated and unfair business rates system must be updated so that it works for all retailers – big and small – if we are to keep the high street open for business.”

The Local Government Association (LGA), the national voice of local government in England and Wales, welcomed the rate relief but appeared less enamored with the current system in place for business rates appeals.

The LGA’s warning comes as we approach 2020 – the year the government plans to increase the share of business rates English councils retain from the current 50% to 75%.

“It is imperative that the government finds a better way to deal with the impact of business rates appeals as we move towards greater local business rates retention,” the LGA said in its Budget 2018 briefing.

“Councils are currently having to take billions of pounds away from already stretched local services to cover the financial risk and uncertainty arising from the backlog of appeals.”

In the lead up to the October Budget, the chief executive of Liverpool’s Chamber of Commerce CIC Group was adamant that a change to business rates was very much overdue.

“The business rates system in the UK is ripe for reform,” says Paul Cherpeau.

“It’s an antiquated system which adds to an increasingly bureaucratic and costly environment within which businesses have to operate, endure and adapt.

“Local authorities are clearly under financial pressure but rates cannot be seen as a cash cow from business to alleviate the challenges if it stifles occupancy, employment creation and the sustainability of the business itself.

“A more locally-focused and flexible business rates regime is required which is adaptable to our prevailing economic circumstances.”

One North West retail agent, which regularly deals with high street and shopping centre lettings, suggests more subtle alterations to the current arrangement.

“In theory the business rates system still works,” says Dan Oliver, founder director of retail and leisure property agency Emanuel Oliver.

“The problems at present emanate from the delayed revaluation from 2015 which resulted in the revaluation occurring in 2017, thus leaving occupiers with rates bills in excess of where they should have been.

“The delay meant the 2017 rateable values were even more different to the 2010 values which created the need for transitional phasing arrangements where there was a large increase or decrease in rates payable.

“We regularly come across shops where the rate payable is in excess of the rateable value due to the transitional phasing arrangements.

“As time goes by this is becoming less frequent but revaluations need to take place every five years to minimise the need for transitional arrangements and ensure rateable values are in line with market values.”

Perhaps worryingly, Oliver has also observed a continuing North/South divide when it comes to rateable value assessments for retail property, which leaves the North effectively subsidising the South.

“We often see in North West towns’ rates payable figures for shops in excess of achievable rents (therefore rateable values are double what they should be), whilst at the same time we see available shops in London where the rateable value is half the quoting rent (therefore the rateable value is half what it should be),” adds Oliver.

“The rates system needs to be adequately resourced by experienced staff who understand the system to ensure values are correct and minimise appeals.

“Revaluations need to occur every five years and this needs to be set in stone so that politics can’t interfere with the timings.”

> Related | Budget 2018: Tax on digital tech giants and business rates relief