Business rates – the death of the high street?
Time for a change?
Business rates are outdated and place an unfair burden on bricks-and-mortar shops, contributing to the decline of the high street. Reform is needed and this formed a key part of the December 2019 Queen’s Speech which promised a full review of the business rates system.
Business rates are calculated based on the property’s ‘rateable value’ – an estimate of the open market rental value of the property which is then multiplied by a set multiplier (approximately 50%).
In October 2019, the House of Commons Treasury Committee’s report on the impact of business rates on businesses revealed that the current valuation regime can lead to problems, with reports that one company’s business rate valuation was calculated at £17,000 more than its actual rent outgoings. There is little transparency on how the rates are calculated which is then compounded by the difficulty in appealing possibly unfair business rates. Rateable values are set for five years, which creates an unresponsive and rigid system.
The effect of business rates on the financial strength of high street chains should not be underestimated, particularly when compared to exclusively digital companies. It was reported that House of Fraser’s £4.6m business rates bill for its then flagship store on Oxford Street was the same as Amazon’s total corporation tax bill in the UK for 2017.
Last month, 52 retailers including Asda, B&Q, Greggs and Ann Summers, wrote to the former Chancellor Sajid Javid calling for an overhaul of the business rates regime.
Options for reform
Temporary fixes such as the retail discount relief in England and the High Street and Retail Rates Relief in Wales are in place for this financial year. The Queen’s Speech in December 2019 also promised legislation to change valuations to a three yearly cycle and to increase the retail discount. More radical change is required, each of the following solutions have gained some support:
- Land Value Tax – shifting the tax from the property to the underlying land, making the landowners the taxpayer rather than the tenants, providing relief to businesses in areas with overall lower property values and encouraging investment in the high street. There is an obvious risk that the additional tax would be passed onto tenants in any event.
- Profits based tax – with the benefit of being easier to calculate than the current business rate system (similar to the way in which corporation tax is charged). However, avoidance by profit reductions or shifting could make collecting tax difficult and certain non-profit organisations (such as schools and hospitals) who currently contribute substantial business rates would be exempt
- Single consolidated tax – a model suggested by the Centre for Policy studies, who have proposed combining business rates, together with VAT, corporation tax and employer’s national insurance, under one tax system aimed at businesses with a turnover under £1 million. The transformation of the tax system required is unlikely to receive sufficient political support.
- Digital Sales Tax (DST) – seemingly the government’s preferred option.
DST
“Be absolutely crystal clear: the web has killed the high street.”
Mike Ashley’s explosive view during his evidence to the High Street and Town Centres Committee in December 2018 warned that the tax disparity between online businesses and traditional bricks-and-mortar shops is contributing to the significant decline of the high street. With the proportion of goods bought online rising to about a fifth of all sales, updating UK’s tax system to reflect this new retail environment seems a self-evident obvious solution.
This reform may be implemented through digital services tax, charging a rate of 2% on UK revenues of digital businesses and may come into force in April 2020. DST aims to level the playing field for digital businesses and those on the high street, adding a burden to online business crudely matching high street overheads and rent. Tax will not apply indiscriminately to every online business, but only to those who undertake certain online activities. It is also worth noting that businesses will only become liable where they fall within one of these activities and:
- as a group it generates more than £500 million in global annual revenues; and
- as a group it generates more than £25 million in annual revenues linked to the participation of UK users (the first £25 million of UK taxable revenues is untaxed).
These thresholds will protect the vast majority of businesses with an online only presence. The tax is really aimed at international companies with huge revenues such as Amazon or Google.
DST has been met with a critical response from industry insiders – Tom Ironside of the British Retail Consortium has questioned how the tax “is really going to resolve the challenges we currently face.” Doug Gurr, Amazon’s UK Manager also points out that if such a tax is introduced Amazon will pass the increased costs onto their sellers, which could have a harmful effect on smaller independent business who use Amazon to sell and make up the majority of their sales.
The idea of a tax on digital sales and services is not a new concept with other nations implementing similar measures. The European Commission proposed a directive for an interim digital tax as a short-term solution for Member States until reform of a wider scale is implemented. This has been introduced in France, where a tax of 3% applies retrospectively from 1 January 2019 on the gross revenues of digital activities where French users are considered to create significant value. Implementation of a similar scheme in the UK has prompted adverse comment from the US Treasury secretary who has threatened retaliatory tariffs if US business interests are prejudiced.
Prediction
There is a danger that DST will do more to damage the UK’s global relationships during the Brexit transition period than boost high street retail. The web has killed many traditional retailers’ high street businesses with the burden of business rates accelerating that demise. Those that have survived need to continually innovate to offer their customers an experience that cannot be delivered online.
