Out-Law Analysis | 02 Sep 2013 | 9:33 am | 4 min. read
The Government faces a stark choice: to continue to collect billions of pounds of punitive business rates, or stand behind its growth agenda and make the business rates system fit for purpose in today's fragile economy. This much is needed to give businesses, and high street retailers in particular, a much better chance of success in an environment where every pound of extra cost is keenly felt.
So, what is stopping the Government? It's simple – the Treasury is reluctant to see any reduction in the whopping £25 billion it generates each year from business rates. But, if action is focused on those aspects of the rates system that operate to the greatest detriment of struggling businesses, this could transform the economy without making too much of a dent in the tax take.
Business rates are unfair because the property valuations they are based on date from 2008, the peak of the boom. That means that retailers need to generate sufficient income in today's austere economic climate to pay a tax set at the height of the market. To add insult to injury, the Government has postponed the rating re-valuation scheduled for 2015 until 2017, giving retailers no imminent prospect of a reduction to reflect diminished economic circumstances.
What's more, retailers are also paying annual increases based on the retail price increase (RPI), which has entailed rates increases of 4.6% in 2011, 5.6% in 2012 and 2.6% this year – that translates into an additional £175 million or so this year and more than a £500m increase over the last three years for bricks and mortar retailers. This comes at a time when rental values (another barometer of economic growth) in many cases have been going in the opposite direction, giving the lie to the growth implicit in the RPI statistics.
There is simply no allowance in the current rating system for underlying economic performance or profitability, as there is with other taxes such as corporation tax. A Uniform Business Rate multiplier is set each year which fixes the total payment to the Treasury at the same value each year.
Influential voices from the worlds of policy and business agree that business rates are a significant issue. As long ago as 2007, in his review of local Government, Sir Michael Lyons advocated fixing the rates multiplier at a set percentage and conducting more frequent property valuations, particularly in times of recession.
This is the “core issue for UK retail” according to British Retail Consortium head Helen Dickinson, while Liz Peace of the influential British Property Federation has called the system "distinctly creaky". Investor Andrew Perloff of Panther Securities has said that exemptions for people moving into empty properties would revitalise struggling high streets.
The business rates system, with its inflexibility and its application to businesses that can ill afford it is now a serious impediment to growth. The artificially high costs to business of occupying physical space on the high street have undoubtedly played their part in the demise of a number of retailers, with many businesses now perversely paying more in rates than rent. It is also now bringing into sharp focus the imbalance between conventional retailers and online operators.
In light of this it is deeply ironic that the Government should have spent significant time and effort trying to revitalise high streets and claiming to back local regeneration through projects such as the Portas Pilots scheme and a 'town centres first' planning regime.
These initiatives are important, but cannot work unless the business rates system is changed to adapt to the needs of struggling retailers, start-ups and communities faced with empty shop-fronts.
Perloff's idea of a two year exemption from rates for new businesses moving into empty shops would be a start. He claims it would create 150,000 jobs from 30,000 newly-leased shops.
Others echo this suggestion as well as calling for more direct action. The Grimsey Review, the independent high street study by former Wickes and Iceland chief executive Bill Grimsey, paints a damning picture of high streets in "deep decline", is highly critical of the Portas review as having "promised the earth but delivered little" and among its various proposals calls for an immediate reversal of the plan to delay the rating re-valuation.
The Government has not been completely silent on the issue. There was some tinkering at the edges in the 2012 Autumn Statement when it was announced that all newly built commercial property completed between 1 October 2013 and 30 September 2016 would be exempt from empty property rates for the first 18 months, up to the state aid limit subject to consultation.
Given that the relevant limit is around £56,000 a year per property and is projected to cost the Treasury only around £140m, it will simply not go far enough and, all in all, is a pretty cosmetic measure. Under the current empty rates regime, aside from this limited relief proposed for new build, the tax applies in full after three months to commercial properties, which has previously been described by Business Secretary Vince Cable as “a ludicrous situation, completely counterproductive and economically very damaging”.
The BCSC will gather together the players in the retail property industry at its annual conference on 11 and 12 September, and one of the major issues under discussion amongst delegates will undoubtedly be the business rates system. The Government should listen to the calls that will inevitably surround and follow this pivotal meeting of the retail property sector and act now to demonstrate that its pro-growth agenda is backed up by action, and is not just spin. With a general election now on the horizon, some votes might just turn on this.
Tom Johnson is a retail property expert at Pinsent Masons, the law firm behind Out-Law.com