UK ministers are facing fresh calls to reform business rates, with an industry trade body demanding a two-year freeze and a town centre policy review describing them as “an outdated and unfair tax” on retail companies that should be scrapped.
Business rates raise about £30bn for the Treasury each year, of which £8bn is paid by retailers. They are based on “ratable values” calculated every five years according to shop rental values, and a multiplier that rises annually in line with inflation.
The British Retail Consortium wants the multiplier frozen at its current level for two years, pending a wider discussion of business taxation across all industries.
The trade body estimates that a freeze would save retailers, many of whom are struggling with rising costs, weakening consumer sentiment and a structural shift to online shopping, about £500m over the period.
Helen Dickinson, BRC chief executive, said there was now a cacophony of voices calling for reform.
“Business rates are outmoded and outdated,” she added. “They were created in the last century and are not fit for purpose in the 21st century.”
Ms Dickinson highlighted how the retail sector accounted for 5 per cent of the UK economy’s gross value added, but paid 10 per cent of all business taxes.
Separately, a study about the future of the high street concluded that the business rates system is accelerating shop closures in many towns.
“An immediate independent review should look to replace [business rates] with either a land or property tax, or a sales tax,” said Bill Grimsey, lead author of the study and a former chief executive of Iceland Foods and DIY chain Wickes.
He also advocated changes to planning law and better use of technology to reinvigorate town centres, and warned local authorities they should accept that bricks and mortar retail “can no longer be the anchor for thriving high streets and town centres”.
Many leading retail executives have publicly criticised the business rates system, particularly after the large increases that occurred last year following a delayed revaluation. These fed into retailers’ overheads just as they were facing big increases in other costs, such as the national living wage.
“The tax system taxes business that employ lots of people and use lots of buildings, which is a strange thing to do when both those things are important to society,” said Charlie Mayfield, chairman of the John Lewis Partnership.
Business rates and employer national insurance account for about four-fifths of the taxes that the partnership pays each year. Corporation tax is a relatively small component.
A Treasury spokesperson said that the government had introduced more than £10bn of business rates support, to help shops and restaurants in particular.
“But we know there’s still a lot to do and over the summer, we will launch a call for evidence and establish an expert panel to diagnose the issues currently affecting the health of our high streets and advise on the best approach for their revival,” added the spokesperson.
Ms Dickinson accepted that there had been some improvements to the business rates system, such as the switch from retail to consumer prices inflation in calculating the annual increase in the multiplier, and the introduction of more frequent revaluations.
However, she said that tax based on output rather than input would still be more equitable. “Surely it is only fair that more profitable businesses pay more tax?” she added.
Paul Turner-Mitchell at Altus, a consultancy, said trade bodies and academics calling for business rates reform or abolition “are going to be sadly disappointed”.
“It is such a huge revenue generator,” he added. “It underpins local authority finances. It is hard to defer, hard to avoid and easy to collect.”
Revaluation exercise fuelled rises in rates
Business rates are paid by virtually all companies based on the commercial properties they occupy, and are calculated using “ratable values” and a “multiplier”.
Ratable values were historically assessed at five-year intervals by the government’s Valuation Office Agency using the rents prevailing two years earlier.
However, a revaluation exercise in 2015 was delayed by two years, during which time rents in some parts of the country rose rapidly. When commercial properties were revalued in 2017, many tenants saw big increases in rateable values.
A system of reliefs was implemented to cushion the impact of the rises, but this was paid for by limiting the pace at which business rates could fall.
Future revaluations will take place at three-year intervals, to better link calculations to movements in rental values.
The multiplier, currently 49.3p per pound of ratable value, now rises in line with consumer rather than retail prices.
Until 2013, local authorities collected business rates but remitted them to the Treasury, which then issued revenue support grants to councils.
Currently, councils keep half of the business rates paid by companies but get lower support grants. By 2020-21, the government intends that councils keep three-quarters of business rates.