The case for business rates reform

Market sentiment towards the recent struggles of the UK high street has been unequivocally negative, which in turn has left many people wondering if this is an indicator that hard times lie ahead for the wider economy. Regularly-used descriptions such as 'bloodbath' for retail performance, and the fall of household-name retail giants have only served to compound such concerns.

Yet, in the context of consumer purchasing power, and the wider economic outlook, it's rather wide of the mark. In reality, consumers are still shopping in their droves - they're just doing it online. Last week, data from the Office for National Statistics showed that nearly a fifth (18.2 per cent) of all retail purchases for the month of July were done online - a new record. Overall retail sales actually increased to the tune of 0.7 per cent last month too, and this broadly continues an improving trend for the sector following a dismal Q1.

The drag of business rates

Nevertheless, there is no doubt that our long-established, and much-cherished high street is under threat in the digital age, with the shadow of online giants such as Amazon looming large. In particular, there is one such headwind which most retailers could do without - one which, on the face of it, seems to be an own goal on the part of Government: business rates.

This controversial system requires tenants who use the property for business purposes to pay a tax, collected by the local authority. The rate of this 'tax' is set by Government and is based on a so-called 'rateable value' - one which is calculated every five years, and determined by the combination of shop rental values and a multiplier (linked to the Consumer Price Index).

Business rates rake in roughly £30bn for the Treasury each year - but for many shop-owners, they are a crippling, and seemingly-arbitrary overhead. For starters, spare a thought for small business, whose business rates bill is entirely unrelated to their profitability, turnover, or even their ability to pay.

Adding to this sense of injustice is the fact that land values are changing at a rapid pace, so to only be assessing these every five years leaves many businesses paying over (or under) the odds for lengthy periods of time. It also creates cliff-edges for businesses upon each revaluation - ones which are difficult to predict, given the volatility of the multiplier.

Then there is the issue of unequal playing fields for brick and mortar versus online retailers. It is quite extraordinary, for example, that Amazon - with 189 sites across England and Wales – was liable for just £38 million in business rates this past year, despite generating £9bn in sales. By comparison, House of Fraser - with 59 UK locations - was on the hook for £36 million in business rates, despite turnover of less than £1bn.

Is there a better way?

Adam Corlett, an economic analyst for the Resolution Foundation, is publishing a report in September which argues that business rates should be replaced by a land value tax - one which would be payable by the landowner, rather than the tenant. This would immediately eliminate the cost of property tax for over 500,000 SMEs, according to the report, with around 92 per cent of businesses seeing their tax bill drop as a result.

The report suggests that this would particularly favour those operating in more deprived areas, with the manufacturing and technology sectors set to reap the most significant benefits.

The key argument underpinning this approach is that business rates disincentive productive investment, as a boost in productive capital will ultimately increase shop rental value, and, consequentially, business rates. By taxing only land value, rather than shop value, such a hurdle for investment is removed.

Time for change

Whether this report gains a lot of traction, and influences policy, remains to be seen. And indeed, there would likely be knock-on effects for tenancy costs of the businesses themselves, as landlords look to cover the cost of this new levy.

Nevertheless, one thing which unites economists and politicians across the board is that something needs to be done. That the business rates system is outdated and unfair is not in dispute. Many believe business rates should simply be scrapped entirely without any form of substitute - something which would blow a hole in the public finances in the short term, but ultimately be a major force for good in the quest to boost the UK's ailing productivity growth.

We have barely scratched the surface of the online revolution, yet the UK boasts key competitive advantages in many, many digital industries. To ensure we build a dynamic economy moving forward, it is vital that we don't resort to unduly suffocating or stifling online businesses in a well-intentioned bid to level the playing fields. Instead, we should welcome our digital prowess.

But giving our much-loved retail stores and small businesses a leg-up by reforming an archaic tax like business rates? Well, that's just a no brainer.

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