A delay to the Government’s next rates revaluation has angered retailers and property professionals alike, with many believing it will lead to more pain on the high street.

Easing the business rates burden would be a welcome relief to UK high streets

A seemingly innocuous memo began circulating the corridors of Whitehall in October last year. The Government, it said, had decided to postpone the planned 2015 business rates revaluation by two years.

The reason, in typical Whitehall language, was to create “certainty” for businesses, and “avoid local firms and local shops facing unexpected hikes in their business rate bills over the next five years”.

But despite the carefully couched wording, the memo’s impact was resounding. A baffled retail industry rounded on the plan, questioning everything from its motivations to the evidence on which it was based.

Now, a year after the initial furore, has the Government persuaded the industry of its case? And what will the extra two years before a revaluation mean in the real world, away from Whitehall and Westminster?

When Theo Paphitis stood up to address a packed audience at this year’s BCSC conference, he laid out in his own colourful style the troubles on Britain’s high streets - falling occupancy, the growth of online, weakening consumer spend and a lack of investment.

Of all the possible solutions, he said, the UK needs “first and foremost a more modern model for our rates and taxes”.

Not all retailers can claim to grasp the complex details of the ratings system, but everybody understands very well the net result of rates on their businesses.

In the UK overall rental values have fallen by 8% since 2008, and that’s only half the picture. In the worst-hit towns and high streets, rents have fallen by 50% or more as landlords take action to avoid vacancies.

And therein lies the rub for many. Commercially minded landlords have to adapt to the times or face disaster. Business rates have continued to rise throughout the downturn - this year by £175m - and the multiplier which sets that rise remains stubbornly fixed for an extra two years now thanks to the postponement.

Jerry Schurder, a partner at commercial property consultant Gerald Eve, says: “It’s a brilliant tax as far as the Government is concerned; it’s highly predictable and they don’t want to give it up. It doesn’t adjust to changes in the market.”

Businesses are paying rates as though the good times were still rolling, but out there on the high street everybody knows the reality is very different.

Commercial properties currently lying empty in Liverpool demonstrate the new rents-to-rates ratio starkly. Retail Week has seen some of the figures. One property, a 5,000 sq ft unit in the city centre, has a rateable value of £87,000 before the rates multiplier is applied - significantly higher than its rental of £65,000 per annum. Another example, in Anfield, shows commercial properties being marketed with a rent of £24,500 per annum and a rateable value of £38,250.

History repeating

The really irritating thing for many is that all this has happened before. In 2007 the Lyons report - an independent inquiry into form, function and funding of local Government - made clear that the rates system was not suitable for the modern age. The report argued prophetically that in severe economic conditions the rates system would actually heap more stress onto businesses.

BPF director of policy Ian Fletcher says: “The report suggested a number of changes to the system including more regular revaluations and freezing the multiplier during times of economic hardship, which is particularly relevant now. But the Government is still being led by the Valuation Office; it’s not listening to retailers.

“The revaluation is the shock absorber in the system. The longer we put that off the more shocks we’re storing up.”

Final nail in the coffin

Despite so much talk about saving the high street and high-profile exercises such as drafting in Mary Portas to suggest how to do it, the industry actually feels the coalition’s actions are having exactly the opposite effect.

Colliers International head of rating John Webber says a revaluation would take away many of the shocks Fletcher describes, particularly for new businesses, because overnight rates would be set at a more equitable level.

He says: “In some places rateable values would come down by about 30% to 40% with a revaluation. Business might live with the rating assessment being high for the next two years but they couldn’t survive with it high for the next four years. It’s the final nail in the coffin.”

British retail property is extremely unequal, with an already marked rich-poor divide now widening. In the rare places where rents have stayed high through the downturn a revaluation would have little effect, however, it is
only for a few streets - largely in London’s elite locations - that this would be the case. The real danger of delaying the revaluation is for the secondary and tertiary locations that are already facing ruin.

This kind of inequality is leading to huge stress on the poorer locations in desperate need of occupancy, and is the key source of the outcry against postponement.

And while the burden is heaviest on the small businesses on which UK economic recovery depends, the whole retail industry loses out to an unfair tax system.

As Sainsbury’s chief executive Justin King says: “This can’t be fair to any bricks-and-mortar retailer, but most of all it hurts the tens of thousands of small retailers for whom business rates are becoming a crippling burden.”

One of the most prominent campaigners against the rates system is retail veteran Bill Grimsey. Bringing experience from some of the leading UK retail names, in October Grimsey launched a Downing Street petition to get the rates debate back in Parliament.

He says: “The decision to delay the revaluation from 2015 to 2017 is having a huge impact on small retailers, particularly in the north of England. Big retailers in prime sites are in line to pay more as a result of this revaluation so they’re getting a holiday from 2015 to 2017, and the people carrying the burden are the small retailers in the north of England. That just isn’t fair.”

Shifting the burden

The most likely result of a revaluation, if it were to take place tomorrow, would not be an overall loss of revenue to the Treasury, as many would expect. The amount levied by rates would probably remain the same, only it would be more fairly distributed.

BCSC director of policy and public affairs Ed Cooke says: “Postponing the revaluation essentially transfers the cost of tax from the rich to the poor, which is a pretty regressive tax measure. It’s the phenomenon of ‘Middlesbrough subsidising Marylebone’. The business rates system is a barrier [to new and small businesses] and a marked failure.”

Matt Kerrigan, partner at Liverpool property agency Hitchcock Wright & Partners, sees first-hand this phenomenon playing out to the detriment of the local retail market. He says: “Landlords are seeking to do everything they can to secure tenants and while they can negotiate on rent and incentive packages, the rateable value is out of their control. Unfortunately in some circumstances it is the unrealistic rate that is preventing deals taking place.”

So what can be done to stop this alarming trend? Nobody is suggesting business shouldn’t pay rates, and as many point out, it isn’t a case of the industry calling for a reduction. It is the way in which tax is collected that causes so much rancour, as well as the fact that many feel the alternatives - such as a sales tax - are being stubbornly overlooked.

Webber explains: “We don’t need to scrap business rates, we just need the Government to understand them and their cycles properly. In a recession, we need a shorter rates cycle and not a lengthened one.”

And as Schurder points out, vacancy rates on the high street are increasing anyway because of natural market forces. “There are a lot of leases that were taken at the end of the 80s which are now coming up for expiry,” he says. “They simply won’t be renewed.”

The solution may not be simple, but the facts are plain. The recommendations of the Lyons report have been ignored, the plight of embattled businesses and high streets is being overlooked and the poorest locations, already paying the price of an intransigent tax system, will continue to do so for what seems to be a long time yet - unless drastic reform happens soon.

The industry speaks out

Growth relies on businesses being able to invest in themselves; over-inflated rates only serve to divert money away from that growth to the Government. It flies in the face of what the Portas Review was meant to do, which was to listen to retailers. We as retailers feel that we haven’t been heard, and we’ve tried very hard.

  • Ben Wall, Poundland

I think we are facing a cliff edge. The Government just doesn’t see this or it’s turning a blind eye. Rather than being postponed I think they should have brought the revaluation forward.

  • Jerry Schurder, Gerald Eve

The rates system is in need of significant review and overhaul. Rates have become more than rents in some cases. The burden that rates are now placing on retailers is not appreciated outside the industry.

  • Ian Fletcher, British Property Federation

There’s always going to be a tax on commercial property. But if the revaluations were every three years, the system would become fairer and more reflective of what’s happening in the rental market.

  • Tim Attridge, CBRE

The delay in rates revaluation was an outrageous decision based on no consultation, only a lot of woolly evidence; essentially it was politically motivated.

  • Ed Cooke, BCSC

If you’re a landlord and you’re thinking about major investment in the UK, if the rates are too high then a project becomes unviable. You can’t get a return on your money because the Government is getting in there first.

  • David Fischell, Intu

We’re dealing with muppets. They have parked the delay without thinking about it. The Government made a big fuss of the Portas Review, but the closer you get to it all the more you realise that these decisions are based on very little research.

  • John Webber, Colliers International

For every £1 in corporation tax a retailer spends, £3 is spent on business rates. We pay the highest level of business rates in comparison to the rest of Europe.

  • Tom Johnson, Pinsent Mason

Non-prime areas need the greatest assistance from the Government to stimulate retail activity. There are instances were landlords are offering to assist tenants with the payment of business rates as part of the incentive package.

  • Matt Kerrigan, Hitchcock Wright & Partners