High streets and town centres in 2030 Contents

4Central government action

60.At the 2018 Budget, the Government announced Our Plan for the High Street, comprising a welcome and timely acknowledgement of the significant challenges faced and a set of measures aimed at helping high streets and town centres to meet them.127 As previously noted in chapter one, the measures included a two-year long cut in business rates by a third for up to 90% of retail properties and a consultation proposing reforms to high street planning,128 as well as the Future High Streets Fund and Future High Streets Task Force. While this action by the Government is welcome, the evidence we received strongly suggested that more fundamental changes to the business rates system, to business taxation and to planning are required if local areas are to successfully effect structural transformation and the long-term vitality of high streets and town centres is to be ensured.

Business taxation

The business rates system

61.In addition to the burden of business rates on retailers, which we considered in chapter one, our witnesses identified other problems with the business rates system, often emphasising their dissatisfaction in very strong terms. We heard, for example, that the system was “broken […] It needs binning straightaway”129 and, highlighting the wide disparity in the rates payable across his different stores, Martin Foster of Lakeland Leathers said “it does not work”.130 The main issues raised were the complexity of the system, its failure to incentivise investment in property and issues arising from business rates retention.

Complexity

62.Over the years, the Government has introduced various permanent and temporary rate reliefs to ease the burden on ratepayers; the retail property relief announced in the 2018 Budget being the latest example. Tom Ironside of the British Retail Consortium said that the result of this was that:

These have layered on top of one another, almost like sediment, until you end up with a very complex system that is not transparent and where no one feels that they have a responsive feel for what they are paying and why.131

Andrew Goodacre of Bira, the independent retailers’ association, suggested that the reliefs, and the administrative burden they create for retailers, should be “stripped out […] and replace[d] with a straightforward and simple allowance”, similar to an income tax allowance for individuals.132 In addition, we heard the reliefs described as “sticking plasters” and “short-term fixes” to a system that needed to be completely reviewed.133 We note that, of the two million rateable hereditaments on the Valuation Office Agency’s (VOA) rateable list, over 50% of these were in receipt of mandatory, discretionary or small business rate relief (or a combination of all three) as at 31 December 2017.134

Incentivising investment in property

63.Another issue raised was the fact that the system does not encourage businesses to invest in their property to the extent that improvements lead to a rates rise. Brigid Simmonds, Chief Executive of the British Beer and Pub Association, said “If you make a capital investment in a pub, you immediately have a ratings officer standing on your doorstep wanting to put up your business rates”.135 This was described as “penalising success”,136 and was acknowledged by the Rt Hon Mel Stride MP, the Financial Secretary to the Treasury, who admitted there was “an inherent disincentive to improve business property”.137 Simon Emeny, Chief Executive of Fuller’s, pointed out: “If you were looking for areas to be regenerated, some sort of longer-term relief on capital developments on business rates would be a good idea”.138 We note with interest that the Scottish Government has recently introduced a ‘Growth Accelerator’ that enables businesses to delay increases in business rates bills for 12 months to help businesses to recoup their investments.139

Business rates retention and the high street

64.Business rates are an important source of income for local authorities. Since 2013, they have retained 50% of business rates revenue, as well as up to 50% of business rates growth raised during the retention period (2013–20) and, from 2020–21, this will increase to 75%. The system is intended to encourage local authorities to use local policy to grow their local economies and to be rewarded for doing so with extra revenue. However, significant growth in business rates can only be generated by constructing new buildings or increasing net floor space, which, as the Federation of Small Businesses explained, has implications for high streets and town centres:

The move towards increased local retention of business rates has somewhat altered the incentives for local authorities to protect small businesses in their high streets. There is a danger that local authorities will have a perverse incentive to support new large out of town developments, as the business rates generated […] is far greater compared to most small businesses located on high streets.140

Conversely, the system may also discourage local authorities from reconfiguring their high streets and town centres in a way that would encourage footfall and vitality but might reduce rateable value as a result of reductions in retail space. However, we were reassured to hear Richard Roe of Trafford Council say:

It is the type of debate we have […] all the time. We deal with it by ensuring that our colleagues in finance and in the business rates team are part of the team that is looking at regeneration and place-shaped activities so they are taking decisions in the round, so we understand if there is a business rates impact of a decision that we take, and we factor that into the business case. We also look at the upsides. There may be a business rates impact but you might have a council tax increase impact, because you are converting retail and office space into residential units.141

Tax reform

65.In chapter one we identified the differential impact of business rates on online and high street retailers as a systemic issue in need of a solution. Sir John Timpson, Chair of the Expert Panel and Chief Executive of the nationwide retailer Timpsons, reflected what we heard from many others when he said “It is quite clearly the right thing […] to do, to level the playing field between bricks-and-mortar retailers and internet retailers. There is far too much of an advantage for internet shopping”.142 As previously noted, when presented with the fact that Amazon UK’s business rates amount to 0.7% of its turnover, Jake Berry, the MHCLG Minister agreed that there was not a level playing field.143 “We received many suggestions for how this might be achieved.

66.The Association of Convenience Stores (ACS) suggested that a solution could be found through reform to the existing business rates system, saying that the Government should explore:

How the business rates system could recognise businesses which predominately trade online by applying a different rating methodology to the property they use, for example distribution centres delivering direct to consumers. The use of different rating methodologies to establish market rental value is common in other important sectors where the economic value of the business is not reflected in property values as traditionally determined in the rating system, such as pubs, restaurants and petrol forecourts, which are based on the receipts and expenditure model.144

And Matthew Griffiths, a retail chartered surveyor, suggested that the business rates of online distribution warehouses should be doubled.145

67.However, most often we received proposals for alternative taxes to business rates, including a 1%146 or 2% sales tax147 and an increase in VAT,148 or for measures which would supplement business rates, including a revenue-based tax for online retailers where 80% of turnover is generated online,149 a digital sales tax150 and “green taxes”, charges on deliveries and packaging.151 In addition, acknowledging that his own business would be affected, Mike Ashley of Sports Direct Group proposed a 20% tax on retailers which made more than 20% of their sales online, saying that this would encourage retailers to keep high street stores open or to open stores in the first place.152

68.The other retailers we spoke were less keen on a digital sales tax. Tom Ironside of the British Retail Consortium, whose members include both high street and online retailers, said:

Retail accounts for 5% of the economy, so 5% of GDP; we account for 10% of business taxation and we account for 25% of business rates. We fail to see how adding additional new taxes to the industry is really going to resolve the challenges we currently face.153

Clayton Hirst, Group Head of Corporate Affairs at the John Lewis Partnership, wrote to us to express concerns about an online sales tax, saying “Rather than helping the high street, this would actually have a detrimental effect. Our high streets need successful retailers with both a physical and online presence to meet consumer demand”.154 Further to this, we note the point made by Martin Foster of Lakeland Leathers that, for many independent retailers like himself, online trading widened the customer base and that care was needed to ensure it was not curbed as a result of taxation.155 We also note that Amazon’s marketplace (and others such as eBay) enables many small independent retailers to trade online and grow their businesses.156

69.We asked the Financial Secretary to the Treasury for his assessment of the proposal we had received from Mr Ashley for a digital sales tax and he wrote to us after the session with more information, saying that there was a “high risk” that it would breach EU State aid rules but that legal and factual analysis was required for a definitive assessment.157 After writing again to ask for more detail about the State aid implications of similar taxes, he replied saying “State aid assessments are dependent on the tax framework in that country and the facts and impacts at play with that particular tax”.158 We note that, upon the UK leaving the EU, the Government intends to introduce a domestic state aid regime and, at the end of the implementation period, EU State aid rules will no longer apply.159

70.In the 2018 Budget, the Government announced that a Digital Services Tax (DST) would be introduced in April 2020.160 Jake Berry, the MHCLG Minister, told us that the DST was “in some way, to try to ensure that we can level that playing field”. However, we note that the Treasury consultation on the DST states it is “not a tax on online sales” and that we understand it is a narrowly-targeted 2% tax on the UK revenues of digital businesses that are considered to derive significant value from the participation of their users, for example online marketplaces, social media platforms and search engines.161 The Financial Secretary to the Treasury explained that State aid compliance had been considered in the process of designing the DST and that the Government was confident that it was compliant.162

71.We heard many calls for a fundamental review of business rates and the wider business taxation system.163 For example, the opinion expressed by Clayton Hirst of John Lewis Partnership reflected the views of many: “there is a need to look at business taxation in the round […]. It is fair to say that the UK business taxation system is probably designed for an analogue era and we are now very much in a digital area”.164 However, the Government undertook such a review in 2015–16, finding that the majority of respondents were “in favour of retaining a property-based tax […] agree[ing] with the Government’s view that property-based taxes were easy to collect, difficult to avoid and that they had a clear link with local authority spending”.165 We note that the Treasury Committee recently launched an inquiry into the impact of business rates on businesses and will consider, among other things, alternatives to property-based business taxes.166 Furthermore, when we asked him whether a fundamental review was needed to look at alternatives tax bases, the Financial Secretary to the Treasury said:

We did have a fundamental review of business rates back in 2015–16. The conclusion from that was that there was no ideal way of taxing businesses. There are pros and cons to the current rates system […] In the short term, the likelihood that the Treasury is going to be looking at doing something radical of that nature [of a land value tax] is quite slim.167

Conclusion

72.Business rates, a property tax in a digital world, as currently designed are increasingly outdated and far from ideal, and we heard many calls for complete review and reform of the system. We note that the Government undertook a fundamental review of the business rates system in 2015–16, concluding that business rates should remain. However, given the rapid changing retail environment, we welcome the Treasury Committee’s timely inquiry into the impact of business rates on businesses.

73.Notwithstanding the forthcoming findings of the Treasury Committee’s inquiry and the Government’s response to it, we recommend that the complexity surrounding rate reliefs and the administrative burden they create for retailers should be addressed and the suggestion we received for an allowance, similar to an income tax allowance, should be considered.

74.The burden of business rates falls unfairly. High street retailers are paying more than their fair share of tax, while online retailers are not contributing enough. We welcome the fact the Government has attempted to reduce the burden with rates discounts for retailers and the move from RPI to CPI but more needs to be done.

75.The Government announced the introduction of a Digital Services Tax in April 2020 to address issues related to historic avoidance of corporation tax. However, this does not address the imbalance between online and high street retailers. The Government needs to go further and move faster to level the playing field between online and high street retailers. This is essential to securing the future of the high street and the retailers which will always be an important part of it.

76.We believe that a change in the current tax system is needed to do this and recommend that the Government conducts an assessment of the main proposals that we received in evidence:

In conducting this assessment, the Government should have particular regard to the connection between business rates and local areas and the Government’s wider devolution agenda. In addition, we note that each of these proposals would have the benefit of building on the existing business rates system, as opposed to requiring the wholesale reform of business taxation. We request that the Government reports to us with its findings by October 2019.

77.We recommend that the Government explores how an online sales tax could be designed, including undertaking the full legal and factual analysis needed, to ensure compliance with State Aid rules. Whatever tax solution is found, it is imperative that it is implemented at speed to provide fast relief to high street retailers.

78.We recommend that the revenue raised should be used to support the high streets in the following ways:

79.In due course, there may be a need for the Government to undertake a wider review of business rates and business taxation, which should consider complete alternatives to business rates.

Planning

80.As discussed at the beginning of this chapter, as part of Our Plan for the High Street, the Government published a consultation on planning reform setting out some specific proposals on permitted development rights and use classes in the high street and town centre context.168 The evidence we received, which we consider in this section, suggested that a more comprehensive government-led review of local authorities’ planning powers is needed.

Compulsory Purchase Orders

81.The Government has made it clear that funding from the Future High Streets Fund will be awarded to local areas planning “transformative, structural changes” to their high streets and town centres, involving among other things the acquisition and assembly of land. Key to this is the ability of local authorities to purchase sites compulsorily which are integral to transformation with ease and efficiency. As Jake Berry, the MHCLG Minister, noted Compulsory Purchase Orders (CPOs) are “the ultimate local tool to take control of estates”.169 As discussed in chapter one, such powers will be essential in many high streets and smaller towns where the fragmented nature of property ownership impedes regeneration.

82.However, much of the evidence we received suggested that the CPO process as it is currently operating is often hindering local authorities’ efforts to regenerate high streets and town centres. We were told that CPOs were “very cumbersome, expensive and time consuming”170 and “difficult, controversial and expensive”.171 Having recently considered this issue in our inquiry on land value capture, these criticisms were familiar to us.172 Given that the retail environment for high streets and town centres is changing so rapidly, the length of time needed to complete the process is of particular concern. Stockton Council told us that it took 2.5 years to CPO a property key to a wider redevelopment, and the Royal Town Planning Institute said that “embarking on a CPO-led city regeneration [is] a 10-year programme”.173 Given the shortcomings of the process, we were not surprised to be told by the Association of Town and City Management that local authorities use CPO powers sparingly.174

83.We were pleased to hear the Minister say the Government intended to review the CPO process175 and that it would look at whether it was “fit for purpose”,176 particularly as in our September 2018 land value capture report we recommended that the Government should consider ways in which the process can be further simplified to make it faster and less expensive for local authorities.177

‘Town centre first’

84.The National Planning Policy Framework (NPPF) sets out measures aimed at protecting town centres from the threat of out-of-town development.178 Known as ‘town centre first’, local authorities are required to apply two tests—a sequential test, and an impact assessment test—to planning applications for main town centre uses located out-of-town. Under the sequential test, local authorities should require such applications to be located first in town centres, then on the edge of centres. Only if suitable sites are not available (or expected to become available within a reasonable period) in these locations, should out-of-centre development be permitted. Under the impact assessment test, local authorities should require an impact assessment if a proposed development is over a locally-set floor space threshold.

85.While we heard broad support for the aims of the policy, for example, from Julian Dobson of Urban Pollinators who told us it was “right […] helpful and should stay”,179 criticisms were levelled at how effectively it was operating. For example, the Association of Convenience Stores referred to their research from 2014 which found that 76% of retail floor space was allocated out of town during the first two years of the NPPF.180 The Institute of Place Management said local authorities needed to do “much more” to make the policy work.181 Richard Roe of Trafford Council said he thought the policy’s original intention had been “watered down through case law”.182

86.The policy was first developed in the 1980s and 1990s in response to the growing trend for out-of-town retail development. We heard that there was potential for it to be updated to reflect more recent retail trends. The Institute of Place Management suggested that it should be applied to store rationalisation so that, as major retailers merge or consolidate, “the more peripheral store is closed and a more central one is kept trading”.183 In the same vein, Julian Dobson of Urban Pollinators, said that, as retail space in town centres shrinks:

The question then […] is about what other uses we need within the town centre to make it a viable place […] we should be thinking about the public facilities and public services that should be in town centres, what should be there in terms of health and education facilities, […] public space, and what other things that make up the town centre would give it viability and vitality in the future.184

We note the caution expressed by Craig Rowbottom of Birmingham City Council who pointed out that these new uses can be “land-hungry”, requiring playing fields, parking and drop-off, and therefore finding a suitable town centre site could potentially pose a challenge.185

87.Jake Berry, the MHCLG Minister, told us that town centre first was “quite a good protection” and local authorities were “best placed to determine, against their local plan, what appropriate development is in their area”.186 However, we were told by Richard Roe of Trafford Council that it was “quite difficult to defend […] against interested developers”187 and we note that the Minister himself said, when discussing resourcing in planning departments, “they may not have dealt with an application for a supermarket for five, 10, 15 or even 20 years. They then come up against a planning lawyer and barrister who were doing one a month on behalf of major supermarket chains”.188

The Use Class Order

88.The Government’s consultation, Planning Reform: Supporting the high street and increasing the delivery of new homes, is gathering views on how the use classes “could better support the high street in a changing retail environment” and “greater flexibility”, in particular whether the traditional high street A use class should be changed, simplified or merged.189 The consultation closed on 15 January 2019 and, at the time of writing, the response has not been published.

89.The evidence we received certainly revealed a desire for use classes to be updated and made more flexible. Tom Ironside of the British Retail Consortium explained why:

Bookshops want to be able to offer coffee at the back of the store and […] a yoga studio upstairs. In order to get to that stage, theoretically […] you need to satisfy the requirements of three use classes rather than a single one, and this is one of the areas where the planning system or regulatory framework is lacking what is required. You need greater flexibility.190

The Federation of Small Businesses said that “current planning conditions seek to regulate every type of floor space, from sale space to a gym floor [….] drastically reduc[ing] businesses flexibility and adaptability, reducing their ability to compete”.191 We note that the desire for more flexibility was also shared by local authorities, including London Councils who said use classes should “reflect the increasing multi-uses of high street premises”.192

90.However, Craig Rowbottom of Birmingham City Council made the important point that flexibility needed to be balanced against local authorities’ ability to control uses in line with the plans they had developed for their high streets and town centres:

Use classes are there to serve a purpose and there are different impacts from different uses […] like local amenity impacts or where you have over-concentrations of various uses. Those are the sorts of things that planning needs to make sure are being considered in appropriate ways. You would not want them grouped too widely; they have to have a focus where necessary.193

We were not confident that the Government fully appreciated this: Jake Berry, the MHCLG Minister, told us that, while he would not want to pre-judge the results of the consultation, “deregulation and merging of the use class orders seems to be the most appealing”.194 We note, however, that he confirmed that hot food takeaways “will always require planning applications”.195

91.Some of the planning experts we took evidence from expressed a desire for a more fundamental review of use classes than the approach taken in the consultation. Peter Geraghty, Chair of the Planning, Housing and Regeneration Board, ADEPT, said:

Use class orders have been in place since 1987 and have been amended slightly since then […] My personal view is that the use class order is due an overhaul, because the nature of the uses that we now find in the town centre is much different from what was originally intended. Therefore, it is right that we look at that again, to understand it in the modern context.196

He also noted that the complexity introduced to the system by permitted development rights and general permitted development orders further underlined the need for a broad review. Going further, Julian Dobson of Urban Pollinators suggested that the way to achieve the flexibility needed may in fact require “rewrite[ing] the use classes order from scratch”.197

Permitted development rights

92.Permitted development rights (PDRs) allow certain types of development, notably changes between the different use classes, to take place without the need for planning permission. The PDRs which feature in the high street and town centre context, and on which we received a substantial amount of evidence, allow a change of use from retail to residential and a change of use from offices to residential.

93.The Government consultation, Planning Reform: Supporting the high street and increasing the delivery of new homes, has proposed the introduction of three new PDRs and the extension of an existing PDR as follows:

The consultation highlights that PDRs have the dual role of “helping the high street adapt and meeting our housing aspiration”.198 Jake Berry, the MHCLG Minister, told us that PDRs had made a “significant contribution: 42,000 homes since April 2015”.199

94.The evidence we received revealed little support for PDRs, save for Richard Roe of Trafford Council who said that, in his local authority area, the conversion of offices to residential was “very positive”.200 Far more common were strongly worded submissions expressing concern about the impact of the existing PDRs on high streets and town centres, leading to recommendations that they should be “deleted”,201 “removed”202 or “amended immediately”.203 The LGA summed up the unintended consequences of PDRs:

Reduction in availability of commercial premises in town centres and no contributions towards infrastructure, housing that does not meet local need, housing in unsustainable locations, and reduced levels of affordable housing. Permitted development rights undermine communities’ trust in the planning system and can put communities off new development. This also has the effect of depopulating town centres during the day, which impacts on retail and service sector businesses.204

In addition, with particular reference to the high street and town centre setting, ADEPT said they had resulted in “loss of retail, community uses and employment that is harmful to the character and vitality of areas”.205 Although outside the scope of this inquiry, we note with concern the evidence we received relating to the poor quality of the housing being brought forward.206

95.We were often told that PDRs undermined the plans developed by the local authority in consultation with the community, that they did “not always have reference to the spatial element and what we are trying to achieve in these town centres”.207 In addition, Peter Geraghy of ADEPT said:

If you have a planning process, a planning team and a planning service […] that is where the matter should be considered […] The impacts of those changes are not adequately considered in terms of the permitted development process, understanding what residents or local citizens’ views may be, the impacts of car parking and perhaps environmental impacts […] Why not just consider an application as it comes forward? Look at it in its entirety […] What we should be doing is properly resourcing local planning departments with the right people with the right skills, and making it clear that they need to deliver in terms of making the decisions that the community wants to see.208

Jake Berry, the MHCLG Minister, would not accept our suggestion that permitted development risked undermining the ability of local areas to implement their community-led vision for a place,209 saying that they enabled the planning system to follow the dynamism of the market and vacant units to be filled.210

96.It is possible for local authorities to remove PDRs across an area of any size on a temporary or permanent basis by making an Article 4 Direction. Approval of the Secretary of State is not required, but he must be informed and can cancel or modify Directions at any time, and, for a period of 12 months, compensation is payable by the local authority to the developer for refusals of planning permission which would otherwise have been permitted development (unless 12 months’ notice of the impending Direction is given).

97.Wimbledon Business Improvement District said that their local authority, Merton Council, had protected its commercial space by very promptly making a Direction in the town centre.211 However, the evidence we received from local authorities suggested that the process was less efficient. London Councils said that it was “cumbersome” and that the requirement to give notice to avoid claims for compensation meant most boroughs had implemented Article 4 Directions “with a year’s delay, during which time more office space and more potential affordable housing contributions were lost”.212

Conclusion

98.Planning is crucial to high street and town centre transformation. Given this, the Government should ensure that planning powers are fit-for-purpose, sufficiently responsive and up-to-date. To this end, we recommend that the Government undertake a comprehensive review of planning as it pertains to the high street, focusing in particular on the following elements: Compulsory purchase orders, the ‘town centre first’ policy, use classes and permitted development rights.

We hope that the Government will take into account this report, the evidence we received and our recommendations in both its current planning reform consultation and the future review of the Compulsory Purchase Order process.


127 HM Treasury, Budget 2018: Our Plan for the High Street, October 2018

139 Association of Convenience Stores (HST0039)

140 The Federation of Small Businesses (HST0063)

144 Association of Convenience Stores (HST0039). See also Q102

145 Matthew Griffiths (HST0017)

146 Westminster City Council (HST0085)

149 New West End Company (HST0033)

151 Westminster City Council (HST0085); Abbotts DIY (HST0006)

160 HM Treasury, Budget 2018, October 2018

161 HM Treasury and Her Majesty’s Revenue and Customs, Digital Services Tax: Consultation, November 2018

166 New inquiry launched into the impact of Business Rates on business, Treasury Select Committee, 1 February 2019

171 Local Government Association (HST0056)

172 House of Commons Housing, Communities and Local Government Committee, Tenth Report of Session 2017–19, Land Value Capture, HC 776

173 Royal Town Planning Institute (HST0046)

174 Association of Town & City Management (HST0060)

177 House of Commons Housing, Communities and Local Government Committee, Tenth Report of Session 2017–19, Land Value Capture, HC 776

180 Association of Convenience Stores (HST0039)

181 Institute of Place Management (HST0061)

183 Institute of Place Management (HST0061)

191 The Federation of Small Businesses (HST0063)

192 London Councils (HST0071)

201 ADEPT (HST0057)

202 Local Government Association (HST0056)

203 Love Wimbledon BID (HST0038)

204 Local Government Association (HST0056)

205 ADEPT (HST0057)

206 Royal Town Planning Institute (HST0046); Q175

211 Love Wimbledon BID (HST0038)

212 London Councils (HST0071)




Published: 21 February 2019