Select Committee retail report: business rates system in England "not fit for purpose"

Out-Law News | 04 Mar 2014 | 2:34 pm | 2 min. read

UK government should carry out a "wholesale review that goes beyond the administration" of the business rates system in England, a House of Commons select committee has said.

Reporting on the retail sector, the UK Parliament's business, innovation and skills (BIS) committee condemned the existing system as "not fit for purpose". It called for a six-month amnesty from rates for those businesses occupying empty properties, ahead of a fundamental review of the system which should consider whether business rates should be scrapped entirely and replaced with a sales-based tax or other sector-specific tax for retailers.

Retail expert Tom Johnson of Pinsent Masons, the law firm behind Out-Law.com, said the report was "significant", coming just weeks after retail industry executives set out potential alternatives to the current system. Lobbyists have claimed that the current system disadvantages high street retailers in relation to their online counterparts.

"The clamour of lobbying continues to increase against a tax that is patently not fit for purpose in the 21st century age where omni-channel retailing is growing and business rates represent a disproportionate burden for conventional bricks and mortar retailers," said Johnson.

"However, whilst the intervention of the select committee is significant and underlines the lobbying from industry bodies including the British Retail Consortium and British Property Federation, as ever, the conundrum remains – how to replace it with a system that does not materially diminish the government's £26 billion annual tax take whilst responding more equitably to the ebb and flow of the economy," he said.

The BIS committee also considered how frequently rate revaluations should take place, and whether inflation-based rate increases should be linked to the consumer price index (CPI) or to the retail price index (RPI). It also called on the government to provide information on how and how much of the £2.3 million allocated to the 'Portas Pilots' town centre regeneration scheme was being spent, following concerns that much of the money allocated to the programme has not yet been used.

Business rates are charged on most non-domestic premises including shops, offices, warehouses and factories and form the third biggest outgoing for small business after rent and staff costs. According to evidence provided to the BIS committee, approximately 25% of the government's annual tax take through business rates comes from the retail sector. The tax is based on the rateable value of the premises, which is set by the Valuation Office and usually updated every five years. The revaluation that was due to take place in 2015 was postponed until 2017 to provide "tax stability" to shops and businesses, but many retailers reacted angrily to the decision as it means that rates are still based on pre-recession property values.

As part of December's Autumn Statement, the chancellor of the exchequer announced a number of measures to ease the burden of business rates on retailers but declined to carry out a full review of the current system. However, the government has since published the terms of reference for a review of the "administration" of the regime post-2017.

In its report, the BIS committee accused the government of "tinkering around the edges" with the business rates system rather than carrying out the "wholesale review" which was "urgently needed". This review should include "whether retail taxes should be based on sales, rather than property; whether the retail sector should have its own form of taxation, calculated in a different way from other businesses; and how frequently the revaluation of business rates should take place", it said.

Commenting on the report, BIS committee chair Adrian Bailey said that the current system was "one of the highest forms of local property tax in the European Union".

"Business rates are the single biggest threat to the survival of retail businesses on the High Street," he said. "Since the system was created the retail environment has changed beyond all recognition. A system of business taxation based on physical property is simply no longer appropriate in an increasingly online retail world."

"Business rates are not fit for purpose and minor administrative changes will not alter that ... The government's retail strategies are full of warm words that fail to address the most debilitating levy on existing businesses and the most crucial deterrent to new businesses appearing on the high street," he said.