Why taxing internet sales isn’t simple answer to Business Rates crisis

Colliers International

Calls by Tesco chief executive Dave Lewis to save the High Street by suggesting the Chancellor introduces a 2% levy on goods sold via the internet illustrates the anguish experienced by many high street retailers operating from physical stores. The punitive rise in business rates bills for many UK retailers following the 2017 Revaluation has been well chronicled. According to latest figures published by ONS, retailers have had their worst start to the year for five years. Stores such as Toys R Us, Carpetright and House of Fraser have gone into CVA or administration- not just due to their business rate bills of course, but certainly these have added to their strains.  Observers claim 50,000 jobs are at risk in the sector.

The theory is that taxing internet providers such as Amazon who currently pay modest business rates bills, compared to the physical owners of stores, could, Lewis claims, level the playing field and raise £1.25 billion in tax that could be used to help traditional retail businesses.

Whilst I have sympathy with the retailers' plight, I am not sure this is the answer. The Government can’t afford to reduce the £25 billion pot it receives from the business rates levy- so for a start there are limits on what it can re-distribute. And even if it raised revenues by taxing on-line retailers, this could very well backfire and hit some of those it is meant to help. Amazon would probably shrug off the pain, but there would be a negative impact for those many retailers who sell both on line and in stores, particularly those, such as John Lewis, who have profited from the click and collect service. Moreover, any extra sales tax would also most probably be passed onto the consumer, who would be the ultimate loser. 

It's also difficult to see if the UK could introduce this in isolation from what the rest of the world is doing in any case- it might just mean Amazon and the like pull away from the UK, taking jobs and opportunities with them

But above all that, I also believe that business rates reform needs to go much wider than purely retail alone. Independent businesses, food and beverage, pubs, industrials all have been hit by the calamitous 2017 Revaluation which has led for many to big business rates rises. For others a policy of downward phasing over four years has meant rates have not been allowed to get to their true lower levels. And the situation is only going to get worse. This year unsustainable 49% for top rises are currently planned. Such businesses will have already have had to swallow a rise of 74% plus inflation in the last two years. This may be the last straw.

At Colliers we therefore believe we need overall business rates reform and a spreading of the load of who pays business rates. On the immediate front we would immediately freeze any business rates increases next year and we would tackle the multiplier (the UBR against which the rateable value of the property is multiplied to give the final rates bill.) This multiplier is currently around 50p in the £1- so is an effective 50% tax.  Yet in 1990 it was 34 p in the £1. If we carry on at the present rate we could be seeing it rise to 60p in 2021, which is not sustainable. If it could be reduced back to this former level, many of the extremely high rating bills would be diminished into something businesses could meet. 

And how would we finance this? By looking at the whole systems of reliefs. The current relief system is incredibly complex and has created business rate deserts in the country, where due to the system of small businesses reliefs, some businesses are paying no business rates at all for the services they receive. We therefore need to introduce a fairer system of funding and spread the load. We should ask all small businesses to pay a minimum contribution to the system and look at other reliefs, such as agricultural reliefs which may need reforming. Most businesses are happy to pay towards the services they use - and it is only fair that they pay something. They just object to paying a 50p tax given the massive rises. Rebasing of the multiplier would make such payments more palatable.

The Chancellor has a great opportunity in the forthcoming Budget to start the process for Business Rate reform. Listening to the demands from the Retailer sector is only the beginning.

John Webber
Head of Business Rates
Colliers International

This article appeared on Property Week in October 2018