Four months have passed since Labour made its manifesto pledge to replace business rates with a “fairer” system, and the retail sector is still waiting to find out what it will be.

In the absence of specific detail, retail leaders were today specific about what they want: a 20% discount for shops, demanded in a letter to Chancellor Rachel Reeves ahead of the budget. Chiefs of Tesco, Sainsbury’s, Asda, Morrisons, Aldi and Lidl are among 70 signatories.

But the problem of business rates is complex, and the BRC – which orchestrated the letter – has not said how the government should make up the lost tax revenue.

So, how could it be paid for? And how likely is Reeves to listen anyway?

Among the scant information available on the government’s intentions, one thing that has been made clear is that the changes need to be revenue neutral.

The intention was reiterated by Exchequer secretary James Murray last month, when he told parliament: “The government is committed to a business rates system which raises the same revenue but in a fairer way.”

The BRC could be expecting the government to redistribute the 75% discount which currently benefits smaller retail premises, thinks Paul Turner-Mitchell, business rates expert at real estate intelligence firm Altus Group.

The discount – which was extended for a year by the Conservative government in the 2023 autumn budget – is capped at £110,000 per business. So, replacing it with a 20% across-the-board discount would be great news for national chains whose tax bill is far higher. But it would lead to “massive tax rises” for the roughly 250,0000 smaller retail, leisure and hospitality premises that currently claim the 75% discount, says Turner-Mitchell.

In any event, the 75% discount has not been factored into 2025/26 forecasts from the Office for Budget Responsibility, so “either an extension of it or even a replacement 20% ‘corrector’ would require new money”, adds Turner-Mitchell.

Online sales tax

Labour’s manifesto also said its new system would “level the playing field between the high street and online giants”.

John Webber, head of business rates at property consultancy Colliers, suggests this could involve increasing the digital services tax – a 2% tax on social media platforms, search engines and online marketplaces, introduced from 2020 – or “some other form of online sales tax”.

But separating online from physical retail is notoriously problematic. “Many high street retailers also have an online presence and for many this is growing,” notes Webber.

“It would be giving with one hand and taking with another.”

Nik Moore, head of business rates at Rapleys, notes: “Previous Chancellors have looked at an online sales tax and even gone as far as to consult on it.

“But, with the distinction between physical and online retail blurred,” the 2022 consultation achieved little agreement and the plans were scrapped, Moore adds.

Webber says the government could also “consider landlords making a contribution to the business rates bill” or even “reforming council tax, looking at a pooling system, so that some funds can be redistributed nationally”.

“The new government needs to be imaginative and help spread the load, so we don’t end up with a small number of contributors, increasingly squeezed and ultimately unsustainable,” he adds.

But we probably shouldn’t hope for too much imagination in a budget so early in the first term of a new government, thinks Moore.

Rather than a grant a 20% discount, “it is highly likely the Chancellor will instead announce another consultation on business rates, buying more time”, he predicts.

“Who’s to say the Chancellor won’t take her time and blame her predecessors for the fallout in the meantime?” Moore adds.

Webber is also pessimistic. “Labour’s policy on business rates seems to be backtracking, despite their pre-election pledges,” he says.

“Now in government, politicians may have realised getting rid of a tax that raises £30bn and provides fundamental funding for local authorities might not be such a good idea, particularly considering the £22bn black hole that also needs to be filled.”

The 20% discount called for by the 70 retail leaders looks simple enough on paper. But the solution in practice is anything but. Whether Reeves has the political motivation to “save the High Street” when she delivers her budget at the end of this month will surely rest on her having sympathy for the major multiples, or a particular axe to grind with the online retailers. 

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