Business rates: can a land value tax save the high street?

The business rates system is broken”. That’s the view of more than 50 major UK retail chiefs including the CEOs of Asda, Sainsbury’s, Morrisons, M&S and Greggs, who signed an open letter last month to the Chancellor calling for “fundamental reform”.

Another letter from 11 business improvement districts, representing 128,000 small businesses, said they were being “hammered by sky-high bills”, demanding an “overhaul” of the system.

The retail sector is struggling and business rates bills don’t help. According to latest figures from the Local Data Company, the overall store vacancy rate continues to rise, on high streets, in retail parks and in shopping centres. At 11.8%, it’s at its highest level since 2014.

Convenience stores have been badly hit, with 78 fewer overall last year. M&S, meanwhile, has shuttered 64 stores since 2017, 43 of which remain vacant, while a strategic review announced by new chairman Sharon White at John Lewis has warned that department store closures are likely.

Business rates generated £31bn income for the government in 2018/19, of which the retail sector paid 25.7%.

Big players are hit hard. According to Altus Group analysis, supermarkets will pay a total £1.82bn in business rates, some 6.8% of total rates revenue collected.

“Every year retail faces higher business rates bills, holding back much-needed investment in an industry transforming at a dramatic pace,” says BRC CEO Helen Dickinson, who organised the letter to the Treasury.

Last week, it appeared new Chancellor Rishi Sunak had heard the sector’s cries, with The Times reporting his first Budget would herald a “fundamental” review of the system, including consideration of plans to scrap rates in favour of a land value tax.

The concept is a tax levied on the value of land independent of the property upon it. But is it the right solution to retail’s woes? And can it come soon enough to save the high street?

A land value tax is not a new concept. It has been backed, or at least considered, by Labour, the Liberal Democrats and the Greens. There are different flavours - a site value tax, location value tax or landowner levy - but each moves the tax from property to the underlying land, and the tax base from occupiers to landowners.

Proponents, including the New Economics Foundation and the Institute of Economic Affairs, say it is a fairer and simpler tax system. It would encourage the best use of land and so encourage development, unlike the current system.

“Currently, if a local shop adds a food-to-go counter, a free-to-use ATM or other infrastructure, their rates bill goes up. Why? If a business makes more of its property, it shouldn’t affect their business rates,” argued ACS CEO James Lowman in a recent blog.

The top smaller format store rate bills

Source: Altus Group  

Moving the burden

But not everyone believes moving the burden to landlords can reduce the pain for retailers. The Institute of Fiscal Studies’ senior research economist Stuart Adam points out that “if business rates weren’t there, correspondingly higher rents would mean premises were still almost as expensive”.

There are fears the hurdles to making land value tax work in practice are too great.

There is no complete register of interests in land and figuring out who is the owner can get very complex very quickly, says Jerry Schurder, head of business rates at property consultancy Gerald Eve. “Is it the freeholder, who may have granted a 999-year lease 100 years ago and is possibly no longer traceable? Or the head leaseholder who granted a 125-year lease 30 years ago, the sub-leaseholder, or tenant who has granted a licence?” Since sales of bare land are few, there would be a “100% appeal rate given the lack of reliable market evidence” he adds.

The time needed to establish the new tax system doesn’t exist, others argue. Many in the sector would rather see swift reforms of the existing system and a reduction in the overall tax burden for retailers.

“While we welcome reform, any major change would take years to develop,” says Dominic Curran, property policy adviser at the BRC. “Immediate action is needed to support struggling high streets today and the rates burden must come down.”

The business rates multiplier, used to calculate rates, has risen sharply in England since its inception in 1990. For larger businesses, it’s gone from 0.348p in the pound to 0.504p as of April this year. The increase has been particularly steep in the past decade.

Revaluations are infrequent, meaning “the bills which businesses pay do not reflect current economic conditions” a 2018 Treasury Select Committee on Business Rates review noted. The most recent revaluation came into effect in April 2017, based on rateable values from April 2015. While the revaluation delay is being addressed - they will take place every three years instead of five - it still leaves retailers paying rates based on old rental values.

“Immediate action is needed to support struggling high streets”

To ease the shock of changes, transitional relief limits the speed at which a company’s business rates liability changes in response to a fall or rise in its rateable value.

As a result, areas in which rents are falling, where retailers are suffering the most, are subsidising those where rents are rising, argues Dickinson. “Northern high streets effectively subsidise London banks, forcing a £600m transfer of wealth to the capital,” she says.

Businesses often appeal changes to rateable value, but the process, administered by an under-resourced Valuation Office Agency, can be drawn out.

“For those properties where the rateable value is challenged, it can take up to 12 months for a check to be concluded, 18 months for the check stage, and then further time to appeal if appropriate,” wrote Sebastian James, MD of Boots UK, in Walgreens Boots Alliance’s submission to the 2018 review. The company was still waiting for appeals from 2010 to be heard, he claimed.

“In the current retail market, by the time a rateable value is likely to be amended to the correct value, decisions about viability of stores are very likely to have already concluded,” he added.

According to Altus Group’s head of business rates Robert Hayton, there is “nothing fundamentally wrong” with business rates, but improvements have come “too slowly and on a piecemeal basis”.

It is crucial, he says, that ratepayers get an “appeal system that works” and the “deeply unfair” transitional relief is changed. Something also must be done about the “relentless drip upwards” in rates.

Gerald Eve’s Schurder fears next week’s Budget will ultimately prove disappointing.

“Whilst at first blush this might sound like the Chancellor planning for a radical alternative to the much-criticised system of business rates, the intention to consider land value taxes is a less embarrassing way of admitting the government is bereft of fresh ideas,” he says.

“Launching another formal review so soon after its previous one in 2016, and close on the heels of last year’s Treasury inquiry, screams of a government playing for time, which struggling ratepayers simply do not have.”

What about an online sales tax?

While retail chains must pay rates across large estates of bricks and mortar stores, the rates burden for likes of Amazon, which operates a handful of vast warehouses, is far less.

That’s led some to back an online sales tax or levy. Tesco CEO Dave Lewis has called for a 2% levy on the online sale of physical goods, which he says would raise around £1.5bn. The cash should be used to fund a 20% cut in business rates for all retailers.

While the government is about to introduce a 2% tax on the revenues of search engines, social media platforms and online marketplaces, Lewis’ proposal would go further.

The British Retail Consortium has opposed the idea, saying: “We consider any further taxation on the sale of retail goods, whether offline or online, is in principle the wrong approach to an industry which is already overtaxed relative to its contribution to the UK economy.”