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Government promises to tackle business rates anomalies

High Street

Government promise to tackle business rates anomalies

Following years of lobbying, Labour has promised to act on what is generally agreed is an unfair UK business rates system.

The government has promised to reform Britain’s business rating system to “bring about a decade of renewal”.  

The stated plan is that over the course of this Parliament, the government will “create a fairer business rates system that protects the high street, supports investment, and is fit for the 21st century”.

The Autumn Budget 2024 made the first step, announcing the government’s intention to introduce “permanently lower business rates for retail, hospitality and leisure properties from 2026-27, to level the playing field for the high-street.”

An unfair system

There’s been a long-running argument made by Britain’s traditional high street retailers that the system is unfair, favouring online over bricks and mortar. According to findings published by provider of asset and fund intelligence for commercial real estate, the Altus Group, for every £100 earned by shops in Britain, £2.91 is payable in business rates, while for online retailers this figure is just 34p. 

If this is correct, it means that traditional bricks and mortar retailers, many of which are small independents, are paying a staggering eight times more than the likes of online retail giants such as Amazon.

In her Autumn Budget 2024, Rachel Reeves said the government is taking the first step in the process through its consultation exercise:  “Transforming Business Rates”. 

Reeves announced the government’s intention of achieving permanently lower multipliers for the Retail, Hospitality and Leisure industry, properties that make up the bulk of Britain’s high streets, from 2026-27.  

The Government’s paper invites businesses and other stakeholders into a conversation over how it can best deliver a fairer and transformed system. The government request welcomes stakeholders’ engagement in this consultation process on identifying the priority areas for reform set out in its paper.  It wants all parties to work together to co-design measures to help fix the foundations of the new business rates system. 

Permanently lower multipliers

The Budget announcement referred to several possible changes to business rates, including lower rates for retail, hospitality, and leisure. The plan is that from 2026-27, these types of properties will have permanently lower business rates. Currently, eligible businesses in these sectors receive a 75% relief on their business rate bills. 

The multiplier for small properties is to be frozen, currently affecting those buildings valued at under £51,000, so will remain at 49.9p until 2025-26.  The standard multiplier will increase to 55.5p in September 2024, based on the CPI rate. 

Also announced was the removal of charitable business rates relief for private schools from April 2025, with exemptions for those schools providing full-time education to pupils with special needs, those with an Education, Health and Care Plan (EHCP). 

Business rates assessment

 The Valuation Office Agency (VOA) is the government body that regularly reassesses the rateable values of business properties, usually every five years. This is called a rates revaluation and is done to redistribute the total amount payable in business rates. 

The business rating system is applied to business premises, a fixed-rate system. Current rateable values are based on 2015 valuations, and this usually rises annually with inflation. It is not based on the ability to pay.

Profit margins squeezed 

One survey carried out by Deloitte for that in 2017 profit margins in retail were being squeezed. It didn’t matter so much to the big retailers when profit margins were higher at around 6% of sales as they were in 2007-08, but they are now down to 4.0% in 2014-15.  

When profits were higher business rates represented a much smaller proportion of sales, but now the unfairness of the system is really being felt on the high street with a tax that is disproportionately high for most bricks and mortar retail businesses, while the ecommerce retail sector pays hardly any of the tax at all.

Research by PWC finds that business rates represented 42% of all taxes paid by the large retailers. So, in comparison, the current (2023-24) corporation tax payable at 25%, up from 19% the year before, looks modest indeed.

What are business rates, how do they work

Business rates in England and Wales are based on a building’s rateable value, a figure arrived at after an estimation by the Valuation Office Agency (a section of HMRC) of how the current rent valuation – how much it would cost to rent the property for a year period from the 1st of April.

Her is guidance on how to estimate your business rates and your business rates bill could be reduced if your property’s eligible for business rates relief.

How do business rates discriminate against bricks-and-mortar retailers?

Online retailers started small but now have around 20% of total retail sales. That’s a big hit for high street retailers, and although some of them have joined the online route to customers, they still rely on walk-in customers to a great extent, they still need a presence on the high street.

It is therefore sensible to ask the question, are business rates proportional? Are they fair and do they support an efficient marketplace? 

Bricks and mortar retailers may still have circa 80% of sales, but they are paying 94% of all business rates.

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