As the battle to save the high street continues, retailers have called on the government to “fix the broken business rates system”, in a letter to the chancellor, Sajid Javid. Co-ordinated by the British Retail Consortium, the letter urged for a change in the rules, stating that the tax had jumped by 50% since the 1990s, making it difficult for businesses to stay afloat.
For high street occupiers, business rates represent a significant cost, and are often cited as a contributor to a vast proportion of business closures. Currently, the business rates burden stands at approximately 50% of rents – a substantial increase on 20 years ago, where the tax rate accounted for close to a third of rents. It is interesting to note that this is the highest rate of recurrent property tax in the OECD.
As an indicator of their expense, we are now seeing a large volume of charity shops setting up on the UK high street, as a result of the discount of at least 80% which they can receive on business rates. It seems that, in the present day, charity shops are among the few that can afford to maintain physical premises due to the rates.
A common complaint of occupiers concerns the fact that business rates rise with property inflation, without taking into account individual circumstances, income and profitability. However, business rates are not just a financial burden. They are believed by many to stifle growth, act as a barrier to investment and threaten the jobs of a significant workforce population.
It is, of course, imperative to note that business rates cannot take full accountability for the demise of the high street. According to the British Retail Consortium, one-tenth of high street shops are now vacant – the highest rate since 2015. Factors such as changing technological trends, the rise of online shopping and uncertainty amid Brexit all play an influential role in high street closures.
Our 2018 Property and Contruction survey found that retail properties are believed to be the most likely to be impacted by technological trends. As a result of changes in consumer behaviour, retailors have had to adapt to the need for convenience and, therefore, have increased their online presence and decreased their physical – a move which is often less costly and more profitable.
It is with this change in consumer behaviour that many are calling on a reform of the current business rates to bring the ‘outdated’ tax in line with the 21st century and the modern ways of shopping. For some, the answer lies in developing a tax on online sales and services to offset a reduction in business rates. With the current rules disproportionally impacting bricks and mortar retailers as opposed to digital retailers (which often locate physical premises in out-of-town industrial parks), this solution may go some way in bringing a balance to the way retailers are taxed.
Among tenants and landlords, there are calls for a ‘fairer’ approach to the tax, which many may see as penal and not conducive to current economic conditions. One proposal has been to introduce a freeze on the business rates multiplier, which is used by the government on an annual basis to reflect general inflation. A simplified approach is also requested – with businesses having to get to grips with a variety of multipliers, reliefs and exemption thresholds.
In the recent letter to the chancellor, the retailers pointed out that the retail sector accounted for 5% of the economy, but paid 24% of all business rates, showcasing the extent of the burden which is placed upon the shoulders of the UK’s high streets. It becomes ever more likely that, as momentum continues to build around the possibility of an overhaul, the system will change and we can expect modifications and more exemptions made, which will be partially welcomed by bricks and mortar retailers. However, for the full impact to be felt, the rates system needs to be overhauled in a way which looks at business taxes in the round.
Regardless of the reforms that may take hold, it is vital that the system is adapted to be flexible enough to cope with the changing economy and not add pressure on an already struggling high street. However, the question remains – if the government decides the tax is neither acceptable or appropriate and adding to the high street’s issues, how exactly do you go about replacing any loss in revenue?
Stacy Eden is partner and head of Property and Construction at Crowe