It is broken so let's fix it

One of the biggest challenges that the high street has always faced is the liability of business rates.  Business rates are calculated based on a property’s rateable value which is connected to the open market rental value for the specific property.

The traditional business rates model is becoming increasingly unpopular for a number of reasons:

1. Rates are set on property value rather than looking at the success or profitability of the occupier.
2.  Disproportionately high business rates mean for many retailers they are unable to grow their business and they resist investing for fear of further outgoings.
3.  Business rates are not distributed equally among businesses and are paid predominantly by businesses that intensively use property in the sense of bricks and mortar.
4.  Businesses find it hard to make effective long term plans owing to sharp changes in cost every 5 years when the business rates multiplier is reviewed.
5.  The UK has one of the highest property taxes as a share of output in the developed world.
6. A huge backlog of appeals against business rates decisions and an understaffed valuation office creates a lack of confidence in the system.
7. For big businesses, like supermarket group J Sainsbury, business rates are a bigger expense than corporation tax.
8. There are regional inequalities because struggling local authorities tend to have higher social costs but cannot charge as much for space.
9. Rates have a negative impact on the ability of stores-based businesses to sell at low prices in comparison to their online counterparts and this forces them to charge higher prices.
10. Many retailers have achieved rent reductions of an average of 30% as leases come up for renewal or tenants are using a rescue type device such as corporate voluntary arrangements but yet they are (a) still hit by business rates and (b) changes in business rates are too slow to reflect this.

The government knows the system is far from perfect.  In the foreseeable future the government has announced that revaluations will occur every 3 years and that inflation proofing of business rates is to be done using CPI rather than the outdated RPI mechanism.  This goes someway to addressing the huge number of concerns listed above, but is it enough?

There are increasing demands for the government to initiate an independent review considering how we put in place a fair and sustainable business rates system.  There are many ideas for reform including the following:

1. Implement new measures to tax the digital economy with relief for business rates.
2. Provide targeted relief to address local issues or to capture growth opportunities.
3. Continue with business rates but with a significant change to the current multiplier.
4. Introduce a turnover tax on all retailers.
5. Exempt new investment in plant and machinery from business rates to boost investment.
6. Rather that patch up the existing system replace business rates with a new land value tax.

Whilst business rates may not be single handedly destroying the high street they are certainly not helping to keep it alive.  The general consensus among retailers is that the current system is not fit for purpose.  We are continually hearing in the news about another casualty of the high street and if significant steps are not taken soon then landlords will be forced to consider redeveloping existing assets into alternative uses such as housing, leisure and education.  The government must help to weather the choppy waters of retail by taking the business rates concern seriously.  Surely reform is inevitable?