Everyone seems to agree the UK’s outdated business rates are broken and its many detractors claim the system is crippling hopes of retail recovery post-lockdown. Yet there is less unanimity about finding a fairer alternative, as Mark Faithfull discovers.

  • Suggestions of an online sales tax would “at least allow us to keep our shops open”, say retailers.
  • Calls to reset the Uniform Business Rate and commit to annual revaluations after 2023.
  • Slash rates on shops and hike them on online warehouses, says one chief executive.
  • Other suggestions include scrapping business rates to introduce a local sales tax, and taxing property rather than rental value.

What do you do with a problem like business rates? The retail and property industries appear united in the view that the current system is not working, with Marks & Spencer chief executive Steve Rowe declaring them an “unbearable yoke around the neck of thousands of shopkeepers”. As for a solution, well it depends on who you are.

The aim is to create a more equitable playing field for all retailers, but at the same time address any shortfall in the estimated £26bn that business rates raise for Chancellor Rishi Sunak, who is hardly awash with revenue-generating options right now.

The answer? Well there are many that have been put forward.

Increase warehouse rates, according to Dixons Carphone boss Alex Baldock and Next chief executive Lord Wolfson. Introduce an online tax, according to a Tesco-led representation of retail leaders. Reset the uniform business rate to 30p from its current rate of 51p+, says retail property organisation Revo. 

So many options, so little progress, especially with business rates reform kicked down the road to autumn before a proper review.

But retail, hospitality and leisure operators need change and they need it fast. So how viable are the main alternatives?

An online sales tax

Or, put another way, let’s talk about the Amazon in the room. 

Should retailers be taxed for their ecommerce sales? Real estate adviser Altus Group’s UK president of property tax Robert Hayton says it “came as no surprise” when Treasury officials revealed they were considering such a ‘rebalancing’ move. 

Amazon’s rates total £72m for the last financial year, which gives a comparable business-rates-to-turnover ratio of just 0.4%, according to Hayton.

And there is weighty retail support. In early February the chief executives of 18 companies including Tesco, Morrisons, Asda and Waterstones wrote to the chancellor asking for a 1% online sales tax, with Waterstones boss James Daunt saying: “A tax on online sales would at least allow us to keep our shops open.” 

Amazon parcels

The Amazon in the room: many retailers believe an online sales tax would help to keep their physical stores open

The chancellor is understood to be considering a 2% online sales tax. However, such a tax has the potential to hit retailers with a strong multichannel offer – such as Next, John Lewis and Dixons Carphone – twice with their overall tax set to rise.

Dixons Carphone boss Alex Baldock is not a fan of the proposal. “Retail’s already over-taxed and, given the history of new taxes, who can doubt that in time it would increase our total burden?” he says.

“The property tax burden in relation to overall taxation is too high in the UK, much higher than in comparable developed countries. It needs to be reduced”

Helen Dickinson, British Retail Consortium

He also believes it will be difficult to determine what an online sale is. “Is buying in store from the online range an online sale? Is ordering online and collecting in store? How about video shopping online, assisted by a store colleague? Property is easier to pin down, which is one reason the government likes business rates.”

British Retail Consortium chief executive Helen Dickinson would rather see a complete step back from the taxation system, instead of simply reducing the tax onus on one element of the retail sector only to impose it on another, reflecting: “More fundamentally, the property tax burden in relation to overall taxation is too high in the UK, much higher than in comparable developed countries. It needs to be reduced.”

Reset the Uniform Business Rate

Revo is calling on the government to reduce the Uniform Business Rate (UBR) – the multiplier that local authorities use to calculate business rates – to 30p from the current 51p+ at the next revaluation in 2023 and commit to annual revaluations after 2023. 

It also wants the government to extend rates relief on empty retail units to 12 months at 100% and introduce a 50% rate relief after this.

Empty shop

Revo is calling on the government to reduce the Uniform Business Rate (UBR) to 30p from the current 51p+

This would reduce business rates for all store-based retailers and would lead to a shortfall for the government of somewhere around the £2.9bn to £3bn mark compared with its normal business rates revenues, according to an October 2020 estimate by Revo.

Revo proposes that the income shortfall be addressed by introducing three “viable, alternative, interchangeable tax options” – an online sales tax, a sales/turnover tax and delivery surcharge that would be payable to the government. It believes introducing one of or a combination of these would redress this.

“When the UBR was first introduced in the 1990s it was 34.8p, but it is now 51.2p, so the multiplier is far higher,” says Jonathan Cole, investment director at retail developer Ellandi.

“The business rates holiday has been hugely important, but in some ways it defers the issue, so we need the government to use the time this has bought”

Jonathan Cole, Ellandi

“As the retail property sector we’re calling for the rate to reflect market changes and, as part of that, we put forward possible options to plug the circa £3bn gap in Treasury revenues.

“We’re not necessarily advocating one of those specifically – and it may well be a hybrid mix that is actually needed. The business rates holiday has been hugely important, but in some ways it defers the issue, so we need the government to use the time this has bought.”

The warehouse tax

Lord Wolfson believes an online tax is not the answer, and that business rates should be slashed on shops and hiked on online retail warehouses.

This would get over the big problem that store rates are out of kilter with rents that have fallen substantially in recent years. Today’s rates are based on 2015 rental values. And while store rents have plummeted warehouse rents have grown dramatically, yet their rates have not. 

Retail warehouse

Next chief executive Lord Wolfson believes rates should be hiked on online retail fulfilment centres

Wolfson proposes that rates on shops should fall by 35%, while the bills for online fulfilment centres should rise by 50%. Any online sales tax would, he fears, result in the consumer paying the price and will prove a failed attempt to “tax people back on to the high street”, while a warehouse tax would reflect more accurately how values have actually evolved and the source of sales. 

“It would largely be self-funding: the bill would go down for stores, but up for sheds. It wouldn’t just benefit retailers, but also hard-pressed pubs, restaurants and landlords”

Alex Baldock, Dixons Carphone

Baldock, another supporter of the warehouse tax, says: “It would largely be self-funding: the bill would go down for stores, but up for sheds. It wouldn’t just benefit retailers, but also hard-pressed pubs, restaurants and landlords. 

“Omnichannel retailers like us would pay more on our warehouses, as is fair. Amazon would have to start paying its fair share of tax, rather than getting a free ride on the infrastructure other retailers are funding today.”

Other alternatives: local sales tax and property tax

High street campaigner Bill Grimsey, former Wickes and Iceland CEO, and author of the Covid-19 Supplement Report: Build Back Better, published in 2020, has proposed abolishing business rates and introducing a local sales tax for all as a fairer solution. 

His report claims that if the local sales tax was set at 2% it would compensate for the abolition of business rates.

Meanwhile, Will Tanner, director at Onward and a former government adviser, has put forward taxing property rather than rental value of commercial property, with no exemptions for vacant stock. 

The idea behind this is not to reduce the overall rates total collected, but to redistribute the burden to ease the costs for retailers in less affluent parts of the country and incentivise landlords to let or repurpose their buildings.

“At a stroke, this would make high streets in poorer places like Stoke-on-Trent more viable, because land values tend to be lower,” he says.

Keep it simple, keep it fair

Colliers International head of business rates John Webber believes the industry’s evolution could simply be taken into account by bringing the system up to date, and fears that the industry could become distracted by “tinkering around the edges”.

“Business rates have survived the Industrial Revolution, two world wars and Spanish flu. So they should be robust enough to survive Amazon,” he says. “The multiplier fundamentally needs to be addressed. If it was brought down to 30p or 35p we wouldn’t be talking about any of the rest of it. 

“Business rates have survived the Industrial Revolution, two world wars and Spanish flu. So they should be robust enough to survive Amazon”

John Webber, Colliers International

“It needs to be rebased and the rest is tinkering around the edges. If the council tax had increased in the same way that business rates have, there would be rioting in Tunbridge Wells.”

So, while Webber broadly supports a reduction in UBR as put forward by Revo, he would prefer the focus to be on the wider issue of making business rates fit for purpose, with a strategy to even out the load between those who pay and don’t pay to make the system more equitable.

“What’s needed is far more transparency. Currently a lot of small businesses pay no business rates at all – during the 2017 Barclay Review in Scotland they described some high streets as ‘ratings deserts’ [because very few retailers reach the threshold to pay business rates] while those not exempt have to stand the entirety of the bill,” he says.

High-Street

Annual revaluation, a tiered system and more transparency are just some of further suggestions to help reform the business rates system

Webber believes that most businesses, big and small,  recognise that a contribution according to means would be fair.

“A tiered system would be fairer,” he says. “Revaluations should be every three years maximum, ideally annually. All these things would help make the tax fairer and clearer and help spread the load. Property taxes are easy to collect, so they should be constructed in a way that does not incentivise avoidance or mitigation.”

Is there political will for reform?

There is a lot of second-guessing about just what comes next. Fundamental reform, even in the autumn, seems ambitious and a report by CBRE, Where Next for UK Business Rates?, warns that the Treasury will be reluctant to undertake radical reform of what it views as a stable, non-distortionary tax, implying short-term fixes are more likely.

“Whether the Treasury is looking at how it could plug a hole created by reduced business rates revenue, how to fund the pandemic or how to tax business as a whole in a global and increasingly digital world, this is an economy-wide question not a retail specific one,” stresses Dickinson. 

However, retail is the hardest hit sector. “Despite representing 5% of the economy, retail already shoulders 10% of the business tax burden. We would oppose new taxes that increase this burden, or stand in the way of an economic recovery,” says Dickinson.

“Despite representing 5% of the economy, retail already shoulders 10% of the business tax burden. We would oppose new taxes that increase this burden, or stand in the way of an economic recovery”

Helen Dickinson, British Retail Consortium

The danger in all of this is the suspicion that retail’s luminaries – for understandable reasons – have attempted to present the chancellor with a pre-packaged solution – lose from here, but gain from there – to try and hasten obviously needed reform. 

Yet there is no guarantee that the introduction of an online sales tax, for example, would automatically mean revamped business rates. Perhaps it’s better to avoid ‘oven-ready’ alternatives lest retail’s fingers get burned.