Saving the high street: The £26bn question

Colliers International

How can we level the business rates playing field so that it’s fair for both online and bricks and mortar retailers? To save the high street, there are ways to shift the rates burden and still hit government targets.

Online or bricks and mortar? The debate surrounding the unfairness between online retailers and those with large bricks and mortar estates rages on.

Amazon’s model of taking a greater proportion of retail market share at the expense of the high street continues apace. But, while no-one believes that the direction of travel to online can be changed, the effect of an unfair business rates system, if left unchecked, will contribute to the acceleration of the decline in high streets. The government can and should act.

Physical retailers pay 25% of all business rates, even though the gross value added from retail is less than 10% (ONS 2018). The Centre for Retail Research estimates business rates cost bricks and mortar stores a total of £7.625bn in 2018/9. And these figures have been rising along with inflation, irrespective of whether the business is doing well.

For many, this has been a disaster, as the number of retailers reporting lower profits, or indeed losses, or going into CVA or administration shows. The unfair playing field becomes apparent if you look at the figures. Amazon admits it pays a business rates bill of £63.4m a year on sales of £8.77bn – so less than on 1% of its sales. Debenhams pays a bill of £80m on £2.3bn sales – that’s almost 3.5%. No wonder so many of its stores are closing or are under threat.

In February, the Treasury Select Committee announced the launch of an inquiry into the effect of government policy on business rates and how it has, in particular, impacted the high street. The Ministry of Housing, Communities and Local Government followed this by saying the government should consider taxing online deliveries and packaging while reducing business rates for retailers. We welcome any inquiry and recommendations but are sceptical as to how far the government will go to deal with some of the hard choices ahead.

What are business rates for?

Let’s start by considering what the £26bn annual pot of money collected from business rates pays for, as many just see it as another tax. In fact, a rate is different from a tax because a rate is levied to pay for specific items or services that have been pre-costed. A tax will levy a tax rate on income or gains and the amount collected can and often will vary considerably depending on the state of the economy or a particular part of the economy.

Business rates are used to pay for a contribution to the following, not exhaustive, list: local transport, education, housing, social service, fire and police. They are collected locally but redistributed from a national pot through various mechanisms. And here is the problem. There is a disconnect between what businesses pay and who is accountable for providing the services. In effect, many businesses are paying for something but are unclear what they will receive in return.

The online problem

So, let’s return to shopping online. A neighbour of mine rarely visits a physical high street shop. There is of course nothing wrong with this. We live 10 miles from the nearest large retail centre – it will cost him petrol money to get there and back; he will have to pay for his parking and, more importantly, when he visits the store there is no guarantee that it will have the particular item he wants. Five minutes spent on the internet and his item is on its way, and, if not delivered the same day, will arrive within 24 hours.

The problem if everyone did this – apart from the environmental issues of the roads being clogged up with delivery drivers – is that the near £8bn collected from retail property would eventually disappear as every high street retailer goes out of business. If my neighbour’s house is on fire or he is being burgled, he rightly expects a fire engine or police car to turn up. But, if there are no retailers left to pay a significant contribution to those services, he may have to make alternative arrangements. My neighbour is extremely intelligent, so he is either unaware of the fact that his change in shopping habits could affect the supply of such services or, more likely, expects the government to do something about making sure business rates keep pace with this change.

What can be done?

Here are some solutions for alternative ways to hit the £26bn target, which could keep my neighbour safe from fire and theft but still allow him to continue to shop how he pleases:

A £5 online delivery tax paid by the consumer but collected by the online retailer and paid in a similar way to VAT

This would still be cheaper than my neighbour’s journey into town and would make sure people considered multiple purchases in one journey rather than the convoy of delivery drivers. The environmental impact would therefore be significantly reduced. It would need to be made clear that this charge is a specific ring-fenced tax to fill the gap between the reduced amount collected from business rates and the continued provision of services.

A review of the plant and machinery regulations to capture big distribution warehouses

The Valuation for Rating (Plant and Machinery) (England) Regulations 2000 determine which items of plant and machinery are included in a rating assessment. This includes items such as air conditioning. From the very first review of plant and machinery, by the 1923 Shortt Committee, it was always the intention to have a regular review of what should be contained in the regulations and what should be excluded. Unfortunately, the last comprehensive review – by the Wood Committee – took place in 1991, reporting in 1993. There has been no major review since then, during a period of enormous change. No one had heard of Google, Amazon or Twitter in 1993 and the idea of shopping online was something out of science fiction, not a daily habit.

Large Amazon-style distribution warehouses have a significant amount of automated racking systems, which make use of the volume of the building. None of those systems attract business rates. Surely it is time for a review?

And for those retailers with bricks and mortar estates as well as large distribution sheds, there could be an offset if you have, say, 200-plus retail outlets.

Review of reliefs and exemptions

Small business rate relief costs the government in excess of £1bn per annum. A whole industry is geared to maximising this relief. While we accept that small and medium enterprises (SMEs) should be given encouragement to start and grow, just because you occupy a relatively small property doesn’t necessarily make you an SME. And it doesn’t mean that you don’t use local services. While a 50p multiplier might be excessive, a lower multiplier, which does not cripple the SME, would surely be fair? All businesses would be making a contribution towards the costs of the services mentioned above. This may be a difficult political decision but would hardly be fatal to business.

Agricultural relief has been in existence for nearly 100 years. While everyone accepts that those in the agricultural industry make an enormous contribution to the economy, they have escaped business rates for all too long – if we really are in this together then surely this should be reviewed. It is expected that more than £1bn could be raised from removing this relief.

Time is running out

It is becoming ever more clear that if people’s shopping habits continue to change, something needs to change in the world of business rates. If nothing is done, the remaining retailers with physical stores will continue to be squeezed, and will eventually disappear. And then who will pay to put my neighbour’s fire out? I just hope he’s invested in a very long hose – even if he did buy it online.

John Webber is head of business rates at Colliers International