To help save the high street, the government must not turn a deaf ear to business rates reform, argues John Webber head of business rates at Colliers International.
The destruction of the high street across the UK is now becoming a reality. Barely a day goes by without some bad news – first the pain was experienced by the independent retailers, then the bigger chains and later the casual dining market.
Colliers has calculated that 23 sizeable retail/restaurant chains (of 10 stores or more) have gone into CVA or administration since the beginning of the year: Toys R Us, Maplin, Carpet Right, Warren Evans, Poundworld, House of Fraser, Mothercare, Prezzo, Byron and more are either no longer with us, or struggling to survive.
And this does not include the number of big names which, while not in CVA themselves, have been closing stores. Marks & Spencer has already axed 22 outlets, and plans to shut 14 more next year and 100-plus stores by 2022.
Even the supermarkets are not immune, with Sainsbury and Tesco announcing big job cuts. According to figures recently published by the Office for National Statistics, retailers have had their worst start to the year for five years. Observers claim 50,000 jobs are at risk.
Retail pain is obviously not solely down to the business rate hike many retailers saw in the 2017 revaluation. Poor management structures (in some cases an over-sell to private equity), rising costs of goods and workers (with the apprenticeship levy and introduction of the national living wage), falling consumer confidence and footfall and, of course, the rise of internet sales, have all contributed to the difficulties.
The revaluation effect
But property costs and business rate rises have played their part. Because rates are linked to rents, the government decision to delay the 2015 revaluation to 2017 meant some retailers are now experiencing the second year of massive business rate hikes (tied to seven-year rent rises between 2008 and 2015).
House of Fraser, for example, faced a business rates bill of around £38m in 2017/8, due to rise to £40.3m in 2018/9, before it announced its CVA. Some of its stores, such as at London Westfield, saw rises of more than 100% in the revaluation, and its Oxford street store saw its rateable value (RV) increase by more than 57%, translating into a rates bill of £4.3m in 2017/8, up from £2.96m in 2016/7: a rise of nearly 46%. And this figure was increasing: by 2021/22, House of Fraser Oxford Street would have been paying rates of more than £5m a year – a massive bill for one store alone. Unsurprisingly, it’s one of the stores the company’s management has decided to close.
Other retailers are showing similar patterns. Debenhams’ rates bill is more than £76m a year, M&S’ is £295m (or £315m including Scotland) and New Look’s is more than £58m – big bills on top of all the other costs retailers are facing.
The situation is only going to get worse. A company which saw a 125% rise on its RV following the revaluation in 2017 would have seen a 42% rise in its actual bill in year one, a 32% additional increase in year two (2018/9) and a massive further 49% increase next year (2019/20). On top of that is inflation. For many, these increases are unsustainable.
Retail in the regions
Despite these hikes, it is not generally central London stores that the retail chains seem to be closing. The real pain is in other parts of the country – areas which should have seen a decrease in their rates bill following the revaluation, as rental values have fallen. The four-year downward phasing for rates to find their true level has meant some retailers are still paying more than they expected or can afford.
Take M&S. When it announced its initial 14 store closures, all of the stores named had seen a reduction in their RV following the revaluation. But when Colliers looked at these stores in depth, the revaluation delay and four-year downward phasing meant the 13 English shops on the list were paying more than £2m in rates than they should have been.
Or take House of Fraser in Altrincham – its rates bill should have been reduced by 52% following the revaluation, but because of phasing little reduction has come through. Colliers calculated that it would have paid £450,000 more in business rates than it should have done over the period. No wonder this headed the closure list too.
This is a pattern repeated across the UK. Restaurants and hotels have also been hit. Malmaison blamed its recent drop in profit on business rates. So did Raymond Blanc’s Brasserie Bar chain. The declining fortunes of Jamie Oliver’s Jamie’s Italian chain has also been well chronicled.
Rallying for reform
So, what can be done? So far, the government’s response to all this has been derisory. Announcing three-year revaluations and linking business rate rises to consumer price index inflation figures is all very good, but is it enough? Of course, everyone has a view. Bring in a land tax say some; replace business rates with a tax on internet sales say others; abolish business rates entirely claim others.
The issue to bear in mind is that the current system provides funds of £26bn net to the UK government. It would be naïve to think it would abolish this much needed funding without a proper replacement – and that will be hard to guarantee.
Colliers’ solution is a twofold one – addressing both immediate concerns and the longer term. Our new manifesto suggests six actions the government needs to implement now. Timing could impact on several decisions currently being made by retailers on whether to close or keep open stores in a number of regional high streets.
We have devised this action list because we see the pain experienced by a number of retailers following the 2017 revaluation is only going to get worse and we need to spread the load. Retail is the UK’s largest private sector employer and makes up 5% of the economy. Yet it pays nearly 25% of the business rates bill. This is unsustainable.
Reform won’t be easy – but as the alternative could be a country of charity shops and empty units, where marginally successful towns go into terminal decline, it’s a path that must be taken. Let’s hope the government spares some of its Brexit-filled days looking at these very real issues right under its nose: the time for talking has passed
Colliers International’s six-point manifesto for rates reform
1. Immediately freeze any business rate increases next year – not the unsustainable 49% for top rises, as currently planned. Such businesses will have already had to swallow a rise of 74% plus inflation in the past two years.
2. Immediately remove downward phasing of business rates payments, enabling rate-payers to meet their true rates liability now and not wait four years to do so. This could well affect several decisions to either close or keep open stores in a number of regional high streets.
3. Review and implement a policy to reduce the multiplier (the uniform business rate against which the rateable value of the property is multiplied to give the final rates bill). This multiplier is currently around 50p in the £1 – so is an effective 50% tax. If it could be reduced to, say, 34p in the £1, as it was in 1990, many of the extremely high rating bills would be diminished into something businesses
could meet.
4. Look at the whole systems of reliefs. The current relief system is incredibly complex and has created business rate deserts in the country where, due to the system of small businesses reliefs, some businesses are paying no business rates at all for the services they receive.
5. Introduce a fairer system of how the business rates tax take is funded. Rebasing the multiplier could be paid for by asking all small businesses to pay a minimum contribution to the system and looking at other reliefs, such as agricultural, which may need reforming, therefore spreading the load more evenly across the UK economy.
6. Reform the appeals system to provide more support to the Valuation Office Agency. “Check, challenge, appeal” (the new business rates appeals system) introduced last year is a “car crash” – an overcomplicated appeal system that few can navigate. Only around 23,700 properties have begun to check and challenge their rating assessments, ie 1.3% of the 1.85m rateable properties in England. It is essential that businesses have a true and fit-for-purpose appeal system, if they believe they have been assessed unfairly.
