12 Jul 2021

Business rates: how the government could deliver a bold, new vision

When it comes to business rates, we can all agree that change is long-overdue. The current system is outdated. It’s broken. But worse than that, it’s now actively hampering retail’s ability to recover post-pandemic.

As the retail property industry nervously awaits the outcome of the government’s ‘Fundamental Review’ of the rates system – expected imminently – we’re all pinning hopes on the current leadership seizing the opportunity to make brave changes to the tax, that will help revive the UK’s struggling high streets and shopping centres.

The impact of the pandemic and the continued rise of online shopping has made it clear over the last couple of years, that without substantial change to business rates, bricks-and-mortar retail faces an uncertain and challenging future.

Rates have increased from 35p in the pound when first introduced in the 1990s, to 51p in the pound now. Since today’s rates are set using valuations from 2015 – which in retail terms is eons ago – in some places, due to the impact of the pandemic, rental values will have almost halved since those figures were set!

A recent British Retail Consortium report found 25% of the 40 large retailers surveyed now pay more in rates than they do in rent. This imbalance has led 83% to warn they are likely to close shops if the rates burden is not significantly reduced.

Retailers big and small are facing these tough decisions when totting up their total occupancy costs, meaning the rates system is hurting both retailers and landlords alike. With rates and service charges representing fixed costs, rent has become the only point of negotiation, passing the pain onto landlords too and leaving them with less income to reinvest into their properties and for much-needed regeneration projects.

Rather perversely, rates are also hitting retailers’ and landlords’ abilities to make environmentally friendly store improvements. Currently, works such as the installation of solar panels or heat pumps lead to immediate rates rises, but the payback for such enhancements tends to be spread over many years.  

So, what is the answer?

The government’s consultation has focused on plans to reduce the time between revaluations from five years to three years, but with the antecedent period before any revaluation changes are implemented being kept at two years.

We think, however, the government needs to go much further and seize the opportunity to break new ground and reset the dial on retail tax.

Whilst MMX welcomes the move to make revaluations more regular, we think this could be reduced even further to every two years. Every year would be ideal, but we appreciate this would be difficult to implement. The antecedent date, however, must be reduced to just one year to ensure the effects of revaluations can be felt as quickly as possible.

An even bolder step would be to move away from the traditional and out-dated zoning system, where rates are set for specific localities, and instead opt for an overall rate per square foot. If this was weighted by type of retailer – for example 25% higher for national occupiers and 25% lower for independents and local operators – this could then help encourage more diverse tenant mixes across retail destinations. We all know, after all, that a one-size-fits-all approach just doesn’t work for retail.

We fear, however, that this could prove too revolutionary a move for our government to consider.

A more likely option would be to scrap business rates altogether and instead apply a more-targeted retail or corporation tax.

The Labour Party suggested at its party conference last month that this is the route it would follow should it win power, with business rates to be replaced by a new “modern” business tax, which it is yet to define.

In the time that business rates have increased from 35p in the pound to 51p in the pound, directly hitting retailers with physical stores and their landlords, the rate of corporation tax has fallen from 30% to 19%, clearing the way for continued growth for online retailers.

By applying a new form of corporation tax – that would see any business selling goods direct to consumers paying an enhanced levy compared to other corporates – the government would be able to spread the tax burden more evenly across all retail operators, both bricks-and-mortar and online.

But to make this work, the government must also commit to tightening up regulations around corporation tax to ensure all sales by retail businesses in the UK are captured. Legal loopholes enabling retailers to use clever accounting to reduce their tax bill in the UK must be countered if the playing field is ever to be fairly levelled.

On top of this, a tax relief should also be offered to those making eco-friendly store improvements. A tax system that penalises those trying to improve their environmental impact is surely not fit for the future?

The retail property industry has such potential to not only support the UK’s sustainability agenda but also to help level-up the economy, with new store openings creating jobs, and wages for these jobs rising as trade is allowed to flourish. But with business rates remaining such an unrelenting burden, opportunities to fulfil this potential are being severely restricted.

With the future prosperity of UK retail very much hinging on the government’s next move with regards to business rates, we need bold and systemic change now, before it’s too late for many retailers, landlords and retail environments.