The Retail Sector - Business, Innovation and Skills Committee Contents


5  Business Rates

The debate about Business Rates is essentially the debate about the future shape of our cities, our town centres, our high streets and our communities. [British Retail Consortium][85]

Introduction

56. As we said at the start of this Report, the issue of Business Rates was highlighted as the main threat to the survival of existing retail businesses in the High Street, and the biggest obstacle to entrepreneurial, new retail businesses starting up.[86] Boots UK wrote that "Business Rates represent the highest level of corporate tax in the UK and one of the highest forms of local property tax in the EU".[87] Tim Fallowfield, Corporate Services Director at Sainsbury's, said that "the UK's proportion of property-related taxes as a proportion of GDP is significantly higher than that in any other country in Europe".[88]

57. Business Rates, also known as non-domestic rates, are a tax on non-domestic property, and, according to Brandon Lewis, Minister for DCLG, the Retail Sector accounts for approximately 25% of this tax.[89] Business Rates are calculated by multiplying the rateable value of the premises (currently as at 1 April 2008) by the multiplier (pence per pound of rateable value). The rateable value of the premises is set by the Valuation Office Agency, an executive agency of HM Revenue and Customs (HMRC)[90], and the multiplier is set by the Government.[91] At the beginning of each financial year, the Government may raise the multiplier by a maximum equivalent to the Retail Price Index (RPI) from the previous September. Local authorities have the responsibility of billing and collecting Business Rates from businesses in their area. They are also responsible for implementing different rate relief measures, some of which are mandatory and others discretionary. The occupier of the property is liable for Business Rates, and when the property is unoccupied, the owner is liable.

58. The Local Government Finance Act 2012 introduced the Business Rates Retention Scheme in England, which made alterations to the distribution of Business Rates between local authorities and Central Government. While the job of billing and collecting the tax from businesses remains with local authorities, 50% of rate revenue is now retained by local authorities, while 50% goes to Central Government, where previously Central Government kept all Business Rates revenue. Within the Government, there are three Departments that are concerned with Business Rates: the Treasury; the Department of Communities and Local Government; and the Department for Business, Innovation and Skills. The BIS Retail Strategy paper states that "the Government position on Business Rates is that it is committed to review the use of the Retail Price Index for Business Rates once its fiscal consolidation plans have been implemented".[92]

59. The Association of Town and City Management described the current Business Rates system:

    The original rationale behind a system that will only ever increase revenue to the Government in line with inflation (measured by RPI) was that land and property were price inelastic as there were few suitable alternatives to undertake trade. Trading without property was virtually impossible, meaning taxation had little impact on investment decisions. However, years of increasing the land available for main town centre uses, coupled with the growth of the internet means commercial property, while critical to the UK economy, is not the attraction it once was.[93]

60. Our written and oral evidence predominantly concentrated on the burden of Business Rates on the retail sector, especially the burden of the tax on 'bricks and mortar' shops on the High Street. Morrisons wrote about this excessive tax burden carried by the retail sector:

    Among the FTSE 100, only the banking sector and oil and gas sector contribute more in tax than the retail sector. We are happy to pay our fair share of tax to help fund the services on which we all depend, and to do so in a transparent way. But as one of the few drivers of growth in today's economy, the Government should be looking to deliver greater certainty for the retail sector in the tax system as a way to promote further growth and investment.[94]

61. Many small businesses are paying more in Business Rates than they do in rents.[95] F Hinds—a family-owned and run retail jeweller, trading for over 150 years with 110 shops across England and Wales—wrote of the practical repercussions of the high level of Business Rates on their business:

    It is frustrating that we have had to turn down several shops because the rates bill is unrealistically high, often in excess of the rent we would have been required to pay. This has meant that we have not employed several staff in each of these locations nor made an investment of the order of £400,000-£500,000 each time. So far as we are aware, in the vast majority of cases, these shops are still sitting empty. What makes it worse is that these are generally the medium sized towns which are most at risk from retail collapse due to a tipping point being reached in the number of empty shops. Since 2007, every shop we have opened (eight) has been in a shopping centre and every shop we have closed (five) has been on a High Street. This has not been a strategy or even a desire but the inevitable effect of increasing costs without increasing the revenues in these locations and a worsening surrounding environment.[96]

62. Rodney Atkinson, an author and High Street landlord in the North East of England, also wrote about the incongruity of rents stagnating or falling, while Business Rates keep increasing:

    While rents stagnated Business Rates kept rising. Now that shop rents are actually falling (by up to 30%) Business Rates (which are supposed to be related to rentable value) are still going up. This is a massive and inexcusable burden on landlords, tenants and consumers.[97]

63. The crucial point about the current Business Rate tax system is that it is fiscally neutral, which means that the tax is not set or changed by the Government in order to promote or discourage certain practices. Brandon Lewis, Minister of State at the Department of Communities and Local Government, told us that "the business rate levels overall stay the same. If one sector or one geographic area drops, everything else is covering the cost of that, so the multiplier has that impact".[98] When asked whether the current system should change because of its unfairness to individual premises, Brandon Lewis replied:

    The problem with that is you are then also altering the overall tax take, which means you are dealing with the problem that this Government is having to deal with: the deficit that it inherited and the debt we inherited. There is a fiscal consideration we have to take into account as well.[99]

64. Bill Grimsey, retailer and author of The Grimsey Review, also highlighted the inflexibility of the Business Rates system:

    If we look at the issue of business rates and the reliability that Government has on this tax, it is quite frightening. It is the only tax that does not flex with economic conditions and, therefore, it is relentlessly going upwards and onwards. It is £26 billion this year, as a total number. It is going to break through the £30 billion mark in the next couple of years under the current methodology, but it is not likely to get changed very quickly.[100]

Helen Dickinson, Director General of the British Retail Consortium (BRC), highlighted the benefits of reviewing the way in which Business Rates is calculated, which has the potential for generating more revenue for the Government:

    If there are about 300,000 stores across the whole of the country and the vacancy rate is 12%, if that was moved by 1% then that is about 3,000 stores. If between five and 10 people are employed in each store, that [equates to] 15,000 to 30,000 jobs. Then you have a knock-on effect from a Treasury point of view of corporation tax and national insurance from that particular store. That is before you get into the beneficial impact on the local economy. My point there is that perhaps we need to look at it in a different way.[101]

65. Both Business Rates and the high costs of rents are issues that affect the Retail Sector. The cost of Business Rates is increasing disproportionately to the cost of rents. The result is causing critical financial difficulties for many retail businesses, especially SMEs. This means that not only are those businesses suffering, and in danger of closing, but that some High Streets are becoming littered with shops that have closed down. This problem is exacerbated when rents do not reflect the economic realities.

Revaluation

66. In the context of Business Rates, revaluation means that the tax paid is based on up-to-date property values. The Grimsey Review outlined this point:

    The purpose of a rating revaluation is to achieve fairness of tax liabilities by ensuring rateable values are based upon up-to-date rental values and therefore to redistribute liability in line with relative movements in property values since the previous revaluation.[102]

Revaluation normally occurs every five years. The rental value is based on rental values two years before the revaluation comes into effect. In other words, the 2010 revaluation came into force on 1 April 2010, using the rental value of properties on 1 April 2008.

67. In October 2012, the Government announced a delay of the anticipated 2015 revaluation—which would have been based on rental values in 2013—until 2017. This delay meant that the 2008 rental value of properties will continue to be used to calculate Business Rates until 2017. Brandon Lewis, DCLG Minister, told us the reasons for the delay in revaluation, and that many more businesses would benefit from the delay than would lose out:

    The reason that the Government decided to postpone the revaluation was to avoid the volatility that would have happened for a lot of businesses. They had that certainty of planning through […] the very volatile economic period that we have been through. Hopefully, we are now coming out the other side of that, but it meant that there was that stability for companies to be able to plan and look at their plans, going forward, without the concern about what might happen in 18 months' time. […] A lot of those businesses would have been within [the] 800,000 losers, as opposed to 300,000 winners, because of the scale and size of the change in the property value and the rentable value, particularly for London office space. This is where there is simply no basis for the argument around the north-south divide. Actually, it is London that probably would have benefited, particularly London office space.[103]

68. In contrast to the Minister's views, much of our evidence stated that the delay had resulted in unfair discrepancies both across the country and within the retail sector, specifically because the rateable value in 2008 did not reflect the impact of the financial crisis on rateable value of properties.[104] Those businesses whose property value had increased since 2008 were being subsidised by those whose premises value had decreased. This tax burden is added to the fact that, according to PWC, "profit margins and volume of UK retail sales have stagnated since the onset of the financial crisis, after a period of sustained growth. Sales in March 2013 were only 2.0% higher than in March 2008".[105] Bill Grimsey described the effects of the delay of revaluation:

    It is causing no end of distress out there, and the beneficiaries of this move are the large supermarkets, so we are perpetuating a consumer drift to out of town and to different models, away from the independents, by economically favouring the supermarkets, which will benefit to the tune of £1.3 billion over two years by the delay of this revaluation.[106]

69. When this concern was put to the DCLG Minister, Brandon Lewis, he said that the Government wanted to "avoid the volatility that would have happened for a lot of businesses" had the revaluation gone ahead.[107] Then both he and Michael Fallon, Minister of State at the Department for Business, Innovation and Skills, defended the Government's decision to postpone the revaluation, by citing the high level estimates paper commissioned by the Government and written by the Valuation Office Agency (VOA). Brandon Lewis told us:

    One of the things that was really clear from the work that was done—the only independent work that has been done—on whether we did the revaluation or not, showed that the biggest beneficiary would have been London office space. Everybody else effectively would have been paying for that. Retail would have gone up.[108]

Michael Fallon agreed with this point, and described the debates during the passage of the Growth and Infrastructure Bill (which contained the legislative provision to postpone the revaluation):

    When we debated this during the passage of the Bill, it was very clear to me, as the Minister in charge of the Bill, from the only hard evidence we had, which was the analysis done by the Valuation Office Agency, was that the biggest winners of all would have been in London. They would have been Canary Wharf offices and, indeed, Oxford Street premises. It is really not clear to me why we should have given them the benefit and penalised, for example, petrol stations or premises in suburban areas or on outer ring roads of town centres right across the country.[109]

70. A number of those who submitted evidence were unconvinced that the VOA paper differentiated so markedly between the potential winners and losers of a revaluation. According to Paul Turner-Mitchell, a retailer and co-author of The Grimsey Review:

    Even on its own terms, the VOA data contains no justification or support for the claim that 800,000 premises would have seen increases. Based on what can reasonably be inferred from the VOA's estimates and the evidence it says it has collected, about 350,000 premises would see their bills fall, and about 377,400 premises would see their bills rise. Table 2 of the VOA high level estimates identifies that a revaluation in 2015 would have reduced tax liability for London offices by £440,000. Although not explained in the accompanying report, a reduction in liability would require total Rateable Values for London offices to have fallen by some 28% at a 2015 revaluation, i.e. there would have to have been a fall in rental values between April 2008 and April 2013 of 28%.[110]

71. Furthermore, a number of contributors to our Inquiry questioned the factual basis of the VOA paper as reliable evidence on which to justify a delay in revaluation. Boots UK wrote that "Independent evidence suggests that the Valuations Office Authority (VOA) estimations for many High Streets are unduly high. As such this is compounding economic challenges that many areas are already facing".[111] The British Council of Shopping Centres was also sceptical about the Government's reliance on the VOA estimations:

    The Government has attempted to justify postponement by claiming that '800,000 premises would see a real-term rise in their rates bill, where only 300,000 premises would see their bill fall', and further alleges, without any evidence, that 'smaller and medium firms are likely to be harder hit'. Independent evidence and the work of rating specialists outside the VOA cause us to be extremely sceptical about the Government's statements.[112]

72. The Valuation Office Agency is an executive agency of HM Revenue and Customs (HMRC). We therefore question the claim made by Brandon Lewis, who described the Report as "independent research".[113] It should also be noted that the evidence used in the VOA paper came with various caveats by the VOA itself. At various parts of the paper, the VOA wrote that its professional judgement was based on limited rental evidence (our italics):

    The Valuation Office Agency (VOA) provided its high level aggregate estimates of rental and rating assessment movement in England since the last revaluation, based upon it professional valuation judgement informed by the limited rental data held as at the end of January 2012. [...] The indicative aggregate estimates of movement in rental values, and therefore implied tax changes (estimated changes to business rates liability) in this document were compiled as a result of a specific, one-off, exercise by the VOA. The high level estimates of rental value movement were based on a combination of limited available rental data and best valuation judgements by VOA, as at the end of January 2012. They are not forecasts; at this stage of the revaluation cycle and process it was only possible to provide high level estimates as at January 2012 and are not a projection to the assumed 2015 revaluation Antecedent Valuation Date (AVD) of 1 April 2013.

    The estimates are based on limited rental evidence and informed by professional judgement of the movement in property values since the last revaluation in 2010 as at January 2012. These were provided well ahead of any detailed work, which the VOA would not do at this early stage in a revaluation cycle. To do the full, detailed calculation VOA would need to go through the full revaluation procedure. Neither the rental data nor the judgements have been subjected to the rigour of moderation and validation that we would expect to apply during a normal revaluation exercise. It has been assumed that the statutory rate used in contractor's basis valuations would remain unchanged. In making our high level estimates we have not had regard to those properties which appear in the Central Rating List for England and as such any movement in the value of these properties is not reflected.[114]

73. These qualifications suggest to us that the VOA advised caution when considering the conclusions of its Report. This point was raised by Edward Cooke, from the British Council of Shopping Centres, who argued that the VOA appeared to acknowledge that its figures were "cobbled together" and that they were "not sufficiently well tested".[115] Mark Williams, Chairman of the Distressed Town Centre Taskforce, gave a forthright opinion of the reasons why the Government chose to delay revaluation:

    It is political. I cannot see any other possible answer, because the rating system, for all its faults, on a five-year annual revaluation allows for fairness to come into it. You now have this ridiculous situation where the most distressed towns, like Bromsgrove, are supporting Bond Street, Walsall supporting the West End. We have not yet come across someone who has benefited.[116]

The Government acknowledged the need for limited reform of Business Rates in its Autumn Statement 2013, and published the terms of reference for the review of the Business Rates administration in February 2014.[117]

74. The delay in the planned 2015 Revaluation of Business Rates until 2017 has been severely criticised by many in the retail sector. The Government based its decision to delay the Revaluation on a 'high level estimate paper' written by Valuation Office Agency, which many organisations have criticised for its lack of firm evidence. Indeed the VOA itself littered the paper with caveats. The delay in the 2015 Revaluation of Business Rates means that, until April 2017, Business Rates will continue to be calculated on property rents set in 2008, before the recession took hold. In justifying the delay in revaluation, the Government referred to the fact that the retail sector represents only around a quarter of the businesses covered by Business Rates. This may be so, but it is a key quarter for driving the recovery. We urge the Government to ensure that during the time before the next revaluation, it works towards the complete reform of the revaluation system, one of the ambitions of which should be the annual review of Business Rates.

Business Rate link to RPI

75. The annual linking of rises in Business Rates to the Retail Price Index was overwhelmingly criticised by our evidence. The British Independent Retailers Association described it as "damaging",[118] while the British Property Federation said that it represented "a severe compounding effect on what businesses pay, with rates bills in most parts of the country increasing far more rapidly than rents and by over 200% since 1991 overall".[119] Indeed, the Government-praised Portas Review made the recommendation that it should be linked to the Consumer Price Index (CPI) rather than the RPI.[120]

76. The Association of Convenience Stores (ACS) echoed this recommendation, writing that the linking of annual rate increases with the value of RPI inflation:

    is an arbitrary mechanic that in recent years has been particularly damaging. ACS advocates that the indicator for setting business rates increases should be a 12-month average of CPI in the previous year with a cap at 2%. The same as council tax increases and in line with the Bank of England inflation target".[121]

The British Retail Consortium also agreed that the rate should be linked to CPI:

    The existing approach of using a single month's RPI snapshot creates uncertainty for property-intensive sectors such as retail. Moving to a CPI-based escalator using a longer run average will provide greater affordability and certainty.[122]

77. The Autumn statement announced various measures to alleviate the impact of Business Rates, including capping the Retail Price Index increase of Business Rates in 2014-15 to 2% (which was due to rise by 3.2% this April, based on the September RPI measure of inflation).[123] The British Council of Shopping Centres advocated just such a capping, "in line with that Bank of England's target for inflation of 2% as measured by the Consumer Price Index (CPI)".[124]

78. We welcome the Government's capping of the inflationary limit of Business Rates to 2% for 2014-15. However, because of the small business multiplier, those businesses in the retail sector that do not qualify for small business relief will see their business rates bills rise by 2.3% next financial year. Furthermore, this cap will apply for one year only. We urge the Government to reconsider this limited timeframe, and to stop permanently the linking of Business Rates to a single month snapshot of the Retail Price Index (RPI). Furthermore, the Government should carry out a review to ascertain whether RPI or CPI is the more appropriate index to which Business Rates should be linked. The 12-month average of the CPI or the RPI in the previous year, with a cap at 2%, is a far more appropriate level at which to set the annual Business Rate increase. This would be consistent with the recent limits on council tax increases, and in line with the Bank of England inflation target.

Business Rates relief

LOCAL AUTHORITY DISCRETION

79. Reductions in liability for Business Rates are available for certain retail businesses; some relief is mandatory and others are given at the local authority's discretion. Local authorities have powers under Section 69 of the Localism Act 2011 to grant Business Rate relief, but "the local authority may only grant relief if it would be reasonable to do so having regard to the interests of council taxpayers in its area".[125] Brandon Lewis highlighted the power that local authorities have in discounting business rates: "They can use it in a really targeted way that is appropriate to their local area, because they will know best—they will know what High Street, what part of business in their area, needs that extra bit of boost that that kind of discount can give".[126] He later repeated this point:

    Small business rate relief is a hugely important part of that, but I would come back to [the point] that the onus has to be on those local authorities to understand that their long-term benefit, as a community and as a financial institution as a council, relies on the business rates retention scheme.[127]

80. However, many local authorities are not in a financial position to discount business rates. As Martyn Hulme, Managing Director, Co-operative Estates, told us, "There is this tension for local authorities in terms of raising revenue and the choices they have. It starts a downward spiral, in my opinion".[128] A Parliamentary Written Answer for 31 October 2013 revealed that only 59 out of 326 local authorities had granted relief since April 2012, totalling £8,234,500.[129]

SMALL BUSINESS REDUCTIONS

81. One of two multipliers is applied to the rateable value of the property when calculating Business Rates: the small business multiplier; or the standard multiplier. The standard multiplier is calculated after the small business multiplier to ensure that the small business multiplier does not lead to a reduction in revenue. In 2003, the Government introduced Small Business Rate Relief, which introduced the following help for small businesses:

·  Properties with a rateable value of below £6,000 would subject to a 50% discount. This has been increased to a 100% discount from September 2010 until April 2014;

·  Properties with a rateable value of between £6,001 and £12,000 would be subject to a tapering discount, ranging from 0% to 50%, on the basis of 1% relief for every £120 of rateable value. A taper to 100% relief has been in place since September 2012, applying until April 2014;

·  Properties with a rateable value of between £12,000 and £17,999 (£25,499 in London) would be subject to the small business multiplier only.[130]

82. The Autumn Statement gave further welcome relief specifically aimed at small businesses, with the Chancellor announcing the following measures:

·  The doubling of the Small Business Rate Relief to be extended for a further 12 months until 31 March 2015, which means that properties with rateable value of below £6,000 are not subject to any Business Rates;

·  Properties with a rateable value of between £6,001 and £12,000 are subject to a tapering discount ranging from 0% to 50%, on the basis of 1% relief for every £120 of rateable value. A taper to 100% relief is in place until 1 April 2015;

·  A discount of up to £1,000 against Business Rates bills for retail premises (including pubs, cafes, restaurants and charity shops) with a rateable value of up to £50,000 in 2014-15 and 2015-16;

·  Ratepayers receiving Small Business Rate Relief who take on an additional property that would currently disqualify them from receiving relief will continue to receive the Small Business Rate Relief for a further 12 months.[131]

83. Much of our evidence highlighted the plight of small businesses, due to the fact that business rates are disproportionately high compared with rent. Bank Machine—a wholly-owned subsidiary of Cardtronics Inc—wrote that the rating of Automated Teller Machines (ATM) cash machines disproportionately impacted on the operational costs of independent ATM operators:

    There has in recent years been a trend towards some Councils imposing Business Rates on cash machines. […] If Business Rates were extended to all cash machines, 20% of Bank Machine's 4,300 machines would become uneconomic and would have to be removed, and/or the cost of accessing cash would have to be significantly increased. Imposing Business Rates on cash machines is like imposing a tax on people accessing their cash. A tax on cash will have far reaching consequences, some on individual citizens, some on local businesses and some for the economy as a whole.[132]

Evidence from Bank Machine called for local authorities to be placed under a duty to identify small businesses:

    Local authorities need to be placed under a duty to identify eligible small businesses, to make this fully automatic and ensure all are awarded Small Business Rate Relief (SBRR). Councils should make greater use of the wide range of reliefs they are able to offer to small rural firms. In a nutshell, lowering business rates on ATMs would stimulate economic activity.[133]

84. What is clear is that the Government is keen to help small businesses, and the measures set out in the Autumn Statement are a testament to that. However, the piecemeal approach to helping small businesses does not address the more fundamentally unequal basis of the tax. As the British Property Federation wrote:

    The constant tweaks Government has to make to relieve the burden on small businesses also raises questions about the basis of this tax. To some extent the rates burden should self-adjust at times of revaluation, redistributing the load between those prospering and those suffering decline.[134]

The Autumn Statement came after the conclusion of our evidence sessions, and we were therefore unable to question witnesses on it.

85. While we welcome the measures introduced in the Autumn Statement 2013 to help small businesses further in relation to Business Rates, the Government is not addressing fundamental flaws in the way in which Business Rates are calculated. The short-term tweaking of the Business Rates system is building up problems for the future and, instead, the Business Rates system need fundamental reform.

86. As a start, the Government must study the level of taxation placed on small and medium retail businesses compared with the level of taxation placed on large retail companies. It should also provide clear guidance that Councils are able to, and should be encouraged to, exempt ATM cash machines, in line with arrangements for small business rate relief.

EMPTY PROPERTY RATES

87. Until April 2008, an empty property was subject to three months' exemption from Business Rates from the date of becoming empty. After this period, owners of an empty property paid 50% of the Business Rates liability arising on the property. This was raised to 100% liability from 1 April 2008. The British Property Federation highlighted the problem of empty properties, with the accompanying empty property rates:

    Empty rates ultimately drive money away from where it is most needed in helping to maintain and regenerate the high street and is instead steered to fund other Government spending. Empty units not only mean lost revenue for landlords but the double costs of empty rates with loss of rent has meant that savings, which otherwise would have been reinvested back into units, are being eroded away to pay this tax. Research conducted by RICS indicated that 89% of their membership felt that empty property rates was restrictive to economic growth and had a negative effect on investment across the sector.[135]

Pilot scheme for empty shops on the High Street

88. When giving evidence, Professor Bamfield, Director of the Centre for Retail Research, told us that "business rates are horrific in some areas. We should consider financial incentives for new entrants, i.e. new people who want to practise retailing and perhaps will be the new Tesco or Sainsbury's in 20 years' time".[136] While we welcome the Autumn Statement 2013 attempt to regenerate the High Street, by giving a 50% discount on Business Rates for 18 months—between 1 April 2014 and 31 March 2016—to traders moving into a vacant property on the High Street, this does not go far enough.[137]

89. We are Pop Up is a company that helps businesses to find short-term commercial space for different uses, including retail. In the Autumn of 2013, it organised a petition to promote 100% small business rates relief. Roger Wade, Chief Executive of Boxpark—the first PopUp mall in the country—submitted written evidence, which explained the proposal:

    The Government should be encouraging PopUp units across Britain and offering business rates relief for qualifying small business tenants. This is potentially a sustainable solution to revitalising our empty High Streets. PopUps are the future breeding ground for the next generation of independent Retailers. We recommend a qualifying small business tenant can claim up to three months rates relief once per calendar year. The qualifying business could be administered by an Independent Pop Up organisation like We Are Pop Up, Pop Up Britain or similar body.[138]

He went on to describe the benefits of such a proposal:

    The small business tenant can test out business concepts at relatively low set up costs. The landlord can fill empty units and qualify for up to three months Business Rates relief and hopefully develop a long-term tenant. The Government can fill empty stores and hopefully after three months generate long-term business rates.[139]

90. The PopUp campaign was signed by 665 supporters, many of whom posted comments. The following quotes are a selection of these:[140]

    I want to see more independent and creative projects taking root across the UK. The Government's support is critical for a sustainable initiative to work.

    We need to enliven out high street and open it up to more independents and see less monopoly within our shopping centres. How we shop is changing, our shopping centres and high streets need to adapt.

    As an owner and director of a small business, I think pop-up and temporary stores are a great way of encouraging more entrepreneurism especially amongst young people. Anything that can be done to make entry into retail business more accessible can only be a good thing.

    Small businesses are the jobs engine of the British economy. This initiative will help businesses start-up, survive and thrive.

    Vital for small business to get off the ground and stop the high streets becoming charity only shops.

    Many of our Shoreditch Works members are small businesses who work in large shared offices, thereby making the small business relief unavailable. This 3-month discount would bring down the costs of working in shared facilities further, allowing more companies to work in these collaborative and start up-friendly environments.

    It seems to be an economically cost-free initiative to use currently unused assets and encourage new businesses and employers. What's not to like?

91. The current initiative to help bring empty shops back into use is not working, as shown by the poor take up of the £10 million Government fund set up in 2012 set up specifically for this aim.[141] A 100% discount on Business Rates for three months for businesses occupying empty premises has the potential to revitalise areas by encouraging innovation and independent businesses. Such periods of non-payment could have a stimulating effect on a specific area.

92. The high costs of Business Rates are preventing new entrepreneurial businesses from appearing on the High Street. We welcome the Autumn Statement's announcement that businesses moving into high street properties that have been vacant for a year or more will have their rates cut by 50% for 18 months. However, we believe that the Government must go further. We recommend a six months' Business Rates amnesty on businesses occupying empty properties. This support would be an economically viable model for the Government, as it would not only support those small businesses, but could also regenerate the High Street by occupying empty shops, and by giving local areas renewed vibrancy as community hubs.

93. We support the emergence of PopUp shops; they are an excellent example of innovation in the retail sector, but are adversely affected by an inflexible Business Rates structure. In any review of Business Rates, specific attention should be given to PopUp shops, and ways in which more can be encouraged to participate in the High Street.

Other rate reliefs

94. Charity shops benefit from an 80% reduction in business rates, which can be increased to 100% at the local authority's discretion. Meryl Halls, Head of Membership Services at the Booksellers Association, told us:

    I put charity shops on my list of concerns for bookshops, because Oxfam actually has more outlets selling books than Waterstones, and they are benefiting from a fantastic range of relief. It would be great to have the business rate system looked at, because often our members are teetering on the edge, and the rates can make all the difference between tipping them over and not.[142]

95. Bill Grimsey outlined the flaws in the current rate relief for charities, using his own example of Focus DIY's empty premises being transformed into a charity for two weeks out of every six months, thereby avoiding the need to pay the full business rates. He said that "there are loopholes out there and the charity one needs buttoning up a bit, because it has allowed charities to morph into retail chains and it has allowed landlords to exploit other charities to get rate relief, and that should stop".[143] Rodney Atkinson went further, writing: "Charity shops with their lowly or non-paid workers and freedom from Business Rates (paid for by other shop keepers) must pay proper wages and rates so that other retailers are not burdened to finance their subsidies".[144]

96. The Charity Retail Association, defended the current reduction in Business Rates for charity shops:

    Charity shops rely on business rate relief to remain profitable and raise over £220 million every year for charity. This ability to raise unrestricted income is particularly critical at a time when grants and other public sector funding for the voluntary sector is being reduced. It also helps maintain occupied units on the high street, with charity shops often investing considerably in re-fitting shops and investing in neglected shopping parades. This is turn can attract both shoppers and other retail tenants.[145]

    The DCLG Minister, Brandon Lewis, also upheld this view:

    I think it is right that we give advantages and discounts to charity shops, but equally I think—to an extent, I suppose it could be seen to be politically incorrect to say this—that actually we undervalue charity shops. In some areas, they get quite a bad press when, in reality, they can be a huge part in bringing footfall back in. [...] What we are also seeing starting to grow now through charity shops is they are not just shops; some of them in themselves are becoming a community hub, where they will have tea and coffee or where people meet. That in itself is also very important.[146]

97. Charity shops play an important part in our High Streets, by raising much-needed revenue for good causes and by providing a community space for local shoppers and volunteers. However, charity shops benefit from 80% relief on business rates, and this blanket reduction has loopholes which can be abused by businesses purporting to be charities. It also has the potential for charities to threaten other shops, especially bookshops, which have to pay the full amount of business rates. The Government needs to outline tighter definitions on what constitutes a charity shop, and to report on its findings by the Autumn of 2014.

Wholesale Reform

98. In the previous section we highlighted specific changes which would alleviate the burden of Business Rates on the retail sector. While these changes were supported by the retail sector, a number of our witnesses argued for structural reform of this element of taxation.

99. Edward Cooke, Director of Policy at the British Council of Shopping Centres, told us which parts of the Business Rates were in need of reform: "[T]he revaluation needs to be looked at, the way that business rates are uplifted needs to be looked at, the whole system for retail needs to be considered".[147] Martin Blackwell, Chief Executive of the Association of Town and City Management (ATCM) went further: "Fundamentally, the system is no longer fit for purpose. To have a system that is based on fixed capital and fixed premises is no longer current in today's world. The world has changed hugely in the five years since the last revaluation in 2008".[148] The ATCM's evidence stated that "The first step for creating the right conditions for adequate investment is a complete overhaul of the business rates system. We fear that the current system has a perverse effect on commercial investment in town and city centres".[149]

100. The Association of Convenience Stores also highlighted the inequality embedded in Business Rates on the retail sector:

    The relationship between cost of property and business viability in retail (especially in town centres) is increasingly unsustainable and radical reform is required. Business rates continue to be a significant barrier to growth.

101. The changing nature of the retail sector was described at the start of this Report, and Mark Lewis, Online Director at John Lewis, highlighted this changing nature as the reason why a review was necessary:

    We are seeing an industry that is in a period of dramatic change: in operations within the country, shifts of patterns from one channel to another, the blending of channels, and, then, also the breakdown of geographical barriers to trade. This creates great opportunities for retailers to trade internationally and also for overseas retailers to trade into the UK. From our perspective, a review of the taxation structure in the round would be very welcome.[150]

Martyn Hulme, Managing Director, Co-operative Estates agreed that "it would be worth having a clear look at that form of taxation in a more enlightened way of business, as it stands today".[151] Liz Peace, Chief Executive of the British Property Federation, stressed the need "for a fundamental rebalancing of Business Rates between traditional retail and the less traditional forms of retail. I know it is not easy, but if you were to look at the turnover per pound of Business Rate paid in a little high-street shop compared with an ASOS warehouse or something like that, it would be fundamentally different".[152]

102. Intu Properties plc, shopping centre owner and operator, suggested the following issues that could be addressed:

    Reviewing the impact of the 2008 changes to empty rate relief and assessment of the merits of reinstating the previous system;

    Examining the link between the business rates multiplier and the Retail Price Index;

    Consideration of the impact of transitional relief, which at present acts effectively as a subsidy to businesses in London and the South-East at the expense of business in less wealthy regions;

    Assessment of alternatives to business rates.[153]

R Hinds suggested a reduction in the rates burden borne by the retail sector, by the following means:

    Simplest would be a reduction in retail rates, which might not cost anything in the long run if it helped to increase economic activity, but we understand that the books have to be balanced in the short term so, at the very least, a rebalancing—town centre retail rates reduced, while edge of town, retail warehouse and out of town shopping rates remain the same or increase. At the same time, town centre office space might remain the same while other office and warehouse space would increase.[154]

103. The latest Strategy for Future Retail, published by BIS in October 2013, stated that:

    Business rates have an impact on both retail and non-retail sectors. The needs and concerns of retailers on the business rates system are well expressed across many forums, many consultations and many arenas, and this strategy does not seek to duplicate this.[155]

Brandon Lewis, DCLG Minister, reiterated the fact that Business Rates are for retail and non-retail businesses, and that "about 25% of all business rates is retail".[156] But this is not sufficient reason to resist a review of the system. The current system was established when the High Street was a different trading place than what it is today. The Government has praised the Portas Review, yet has not implemented its recommendations that relate to Business Rates:

    Government should consider whether business rates can better support small businesses and independent retailers;

    Local authorities should use their new discretionary powers to give business rate concessions to new local businesses;

    Make business rates work for business by reviewing the use of RPI with a view to changing the calculation to CPI.[157]

104. The weight of our evidence stressed the importance of a fundamental review of Business Rates, including the method of revaluation. Unlike corporation tax or income tax, it is not modified or amended in response to underlying economic conditions. Ken Parsons, Chief Executive of the Rural Shops Alliance, agreed:

    For a lot of people, you look at the accounts and the rates bill does not actually seem to be a very big figure, but the key thing is it is a fixed cost. It is there whatever your profit, whatever your business, is doing that year. If one were going to revise the system, then I would very much argue for something that was much more related to the performance of the business, rather than being a fixed cost year after year, irrespective of trading conditions.[158]

ALTERNATIVE WAYS OF CALCULATING BUSINESS RATES

105. With the increasing use of the Internet for retail transactions, another alternative way of calculating Business Rates would be to base the tax on sales, rather than on rents or rateable value. Helen Dickson, Director General of the British Retail Consortium, made the following point to us:

    We need to take into account the Treasury's need to balance its books in the current economic climate. What we perhaps need to bring more effectively into the equation is looking at a closer link to how well a particular store is trading. At the moment there is no link between business rates and that.[159]

106. Business rates are a tax on property, and some questioned the fairness of such a system. Tim Fallowfield, Corporate Services Director at Sainsbury's, told us the following:

    You can look at the existing system and decide whether you need to change the component parts of business rates, or you can do a fundamental review of the business-rates system itself. In the United States, for instance, they have introduced a main-street fairness tax, which is redistributing the tax burden by applying effectively a local sales tax, which would obviously apply equally to online retailers and bricks-and-mortar retail. We would suggest that would be a very worthwhile review by Government—to try to make sure there is a level playing field.[160]

107. It was argued that revaluation should be more frequent that the current five years. Edward Cooke, from the British Council of Shopping Centres, told us that "the five-year quinquennial review should be shorter".[161] The National Franchised Dealers Association (NFDA) said of Business Rates:

    In 2011 and 2012, business rates rose sharply, resulting in an increased revenue for the Treasury of over half a billion pounds. Business rates are one concern common to all retailers whereby action would support businesses across all sectors. Business rates are calculated regardless of turnover and in a climate where consumer spending is falling these taxes are huge burdens to struggling organisations. Given that the planned 2015 business rates revaluation has now been deferred to 2017, NFDA recommends that any increase in line with inflation is cancelled until the 2017 revaluation.[162]

108. Written evidence from the British Retail Consortium (BRC) stated that:

    The debate about business rates is essentially the debate about the future shape of our cities, our town centres, our high streets and our communities. Whilst retailers are a central player in all of these, there are many partners, large and small, and all have views about what needs to be done. The BRC believes it is essential to identify the barriers to future growth and development and the drivers for decline, and then offer proposals and solutions—backed up by sound research, evidence and data—to central and local government that can be delivered together. To this end, the BRC has recently appointed tax experts EY to support a rigorous process of examining the options for reform of the business rates system.[163]

The BRC published its discussion paper, The Road to Reform, in February 2014, which outlined possible options for reviewing the Business Rate system. It is due to publish the results of its options assessment in May 2014.[164]

109. This BRC-commissioned, Ernst & Young research into the Business Rates system was discussed in our final oral evidence session. When asked about this review, the DCLG Minister Brandon Lewis told us that "when anybody comes forward with any research, it is always interesting to have a look at it".[165]

110. In his Autumn Statement 2013, the Chancellor finished his announcement of help to alleviate the pressure of Business Rates with a promise of "reform of Business Rates on the agenda for 2017 revaluation".[166] However, when the DCLG Minister, Brandon Lewis, was questioned at the CLG Select Committee on 9 December 2013, he explained that 'reform' meant 'administrative reform':

    The review in terms of improving administration is looking at reforms to appeals and how we change it so businesses can pay over 12 rather than 10 months, which helps cash flow somewhat, as we have done for council tax.[167]

He repeated the phrase he used at our Committee: "The Treasury keep all taxes under review at all times", and went on to say:

    I know that the British Retail Consortium has some work of its own going on at the moment. If anybody wants to make suggestions we can feed through and have a look at, I am always interested.[168]

111. Rather than being 'always interested' in suggestions, as the DCLG Minister told us in relation to a review of Business Rates, we feel that—given the widespread discontent among retailers about the blatantly unfair tax imposed upon them—it is incumbent on the Government to take the initiative and to carry out its own review. Indeed, the Prime Minister has said that longer-term reform of Business Rates needed to be looked at:

    I think we do need to look at longer-term reform. It's not going to be easy, because rates raise, whatever it is—around £24 billion—and I don't think there is any one solution that is going to make everybody happy. But I think we've got to start addressing this issue and understanding—particularly this issue about internet retailing and High Street retailing. […] It's going to be a growing issue, and I think it needs more work.[169]

112. Longer-term reform has to be addressed, given the fact that the United Kingdom has the highest property taxes in the world, as shown by the table below:

OECD taxes on property, as a percentage of gross domestic product[170]

Rank

(in 2012)
 
2011
2012
1
United Kingdom
4.2
4.2
2
France
3.7
3.9
3
Canada
3.3
3.3
4
Belgium
3.2
3.4
5
Israel
3.1
2.9
6
United States
3
3
7
Korea
3
2.8
8
Japan
2.8
2.7
9
Luxembourg
2.6
2.7
10
Iceland
2.4
2.5
11
Australia
2.3
..
12
Italy
2.2
2.7
13
New Zealand
2.1
2.1
14
Switzerland
2
2
15
Spain
1.9
2
16
Denmark
1.9
1.8
17
Ireland
1.9
1.8
18
Greece
1.8
2
19
Netherlands
1.3
..
20
Poland
1.2
..
21
Norway
1.2
1.2
22
Finland
1.1
1.2
23
Turkey
1.1
1.2
24
Hungary
1.1
0.9
25
Portugal
1
1.3
26
Sweden
1
1
27
Germany
0.9
0.9
28
Chile
0.8
0.9
29
Slovenia
0.6
0.7
30
Austria
0.5
0.6
31
Czech Republic
0.5
0.5
32
Slovak Republic
0.4
0.4
33
Mexico
0.3
..
34
Estonia
0.3
0.3
OECD-Total
1.8
..

OECD, last updated 17 January 2014

113. The pace of change in the Retail Sector means that the Business Rate system, in its current form, is not fit for purpose. The Government must act by carrying out a wholesale review of the current Business Rate system, which is urgently needed not only for the Retail Sector, but for other business sectors that are also being affected. The Department for Business, Innovation and Skills needs to initiate urgent discussions with the Treasury and DCLG, to prepare the ground for a full scale review and reform of Business Rates, which will allow retail businesses, especially small and medium-sized businesses, not only to survive, but to flourish in the current economic climate. The Government has widely praised the Portas Review, yet has not acted on what we believe is a vital recommendation—a review of the basis of the calculation of Business Rates. The Government must review the whole system—involving local government and retail sector organisations—and not simply tinker around edges by reviewing the administrative details of collecting Business Rates. Indeed, the Prime Minister has agreed that a longer-term reform of Business Rates needs to be looked at. The Government's review must 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.


85   Ev 177 Back

86   The taxation system differs across the United Kingdom, and Business Rates are a devolved matter. However, the system in Scotland and Wales is very similar to that in England. Back

87   Ev 165 Back

88   Q229 Back

89   Qq 376 and 378  Back

90   In Scotland, the rateable value of the premises is set by the Scottish Assessors, and in Northern Ireland it is set by Land and Property Services. Back

91   The multiplier is set by the Scottish Parliament for Scotland and by the National Assembly for Wales. Back

92   BIS Retail Strategy, page 3 Back

93   Ev 159 Back

94   Ev w63 Back

95   Around 30% more, according to the Federation of Small Businesses (Ev 171) Back

96   Ev w45 Back

97   Ev w16 Back

98   Q392 Back

99   Q392 Back

100   Q368 Back

101   Q22 Back

102   Grimsey Review, section 2, page 26 Back

103   Q387 Back

104   According to The Grimsey Review, (page 27), at the time of writing, rents had fallen by an average of 14% across the country, according to the Valuation Office Agency. Back

105   PWC, The contribution of retailers to the UK public finances: Total Tax Contribution, p 4 Back

106   Q354 Back

107   Q387 Back

108   Q384 Back

109   Q389 Back

110   Ev w84 Back

111   Ev 161 Back

112   Ev 167 Back

113   Q382 Back

114   Valuation Office Agency's high level estimates of non-domestic rental and rating assessment movements for England.  Back

115   Q100 Back

116   Q99 Back

117   Department for Communities and Local Government, Business rates administration review: terms of reference, 13 February 2014 Back

118   Ev w26 Back

119   Ev 171 Back

120   Portas Review, recommendation 7 Back

121   Ev 152 Back

122   Ev 173 Back

123   HM Treasury, The Autumn Statement 2013, p 45 Back

124   Ev 165 Back

125   Localism Act 2011, explanatory notes, para 159 Back

126   Q376 Back

127   Q394 Back

128   Q229 Back

129   HC Deb, 31 October 2013, col 568W  Back

130   House of Commons Library standard note, Business Rates, September 2013, page 5 Back

131   HM Treasury, Autumn Statement, 2013, pp 45 and 46 Back

132   Ev w20 Back

133   Ev w20 Back

134   Ev 171 Back

135   Ev 171 Back

136   Q234 Back

137   HM Treasury, Autumn Statement 2013, pp 45-46 Back

138   Ev w21 Back

139   Ev w21 Back

140   Unprinted Paper, We are PopUp: Boxpark Rates Relief Proposals-Comments sent to Committee Back

141   Ev 194 Back

142   Q280 Back

143   Q373 Back

144   Ev w16 Back

145   Ev w37 Back

146   Q403 Back

147   Q101 Back

148   Q173 Back

149   Ev 159 Back

150   Q207 Back

151   Q229 Back

152   Q249 Back

153   Ev w53 Back

154   Ev w45 Back

155   BIS, A Strategy for Future Retail, October 2013, p 25 Back

156   Q380 and Q376 Back

157   Portas Review, recommendations 6, 7, and 8 Back

158   Q283 Back

159   Q22 Back

160   Q228 Back

161   Q101 Back

162   Ev w73 Back

163   Ev 177 Back

164   British Retail Consortium, Business Rates: the Road to Reform, February 2014 Back

165   Q377 Back

166   Autumn Statement 2013, Hansard, 5 December 2013, c 1111 Back

167   CLG Committee oral evidence session, 9 December 2013, Q145 and Q146 Back

168   Q182 Back

169   Supporting small businesses: David Cameron's Q&A at the Federation of Small Businesses, 27 January 2014 Back

170   http://www.oecd-ilibrary.org/taxation/taxes-on-property_20758510-table7 Back


 
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