Business Rates Reform – Response to COVID-19 and the 2020 outlook
This year's budget, announced by Chancellor Rishi Sunak on 11 March, attracted particularly high levels of attention from the media and business community. The spread of COVID-19 has put enormous pressure on British businesses in the short-to-medium-term and bricks-and-mortar retailers are especially strained, having come into the crisis on the back of their worst trading conditions for a decade.Pandemics aside, retailers have long been looking to the Government to provide much needed support with regards to fixed property costs such as business rates. The Government's announcements on business rates come after their widespread condemnation as a major culprit in the continued demise of bricks-and-mortar retail. Although the tax affects all businesses with property interests, retailers have been paying disproportionate sums - around 25% of all business rates, despite only accounting for 5% of the UK economy (sales as % of GDP) (Retail Economics).
In August 2019, 50 British retailers signed a letter calling on the Government to "fix the broken business rates system" in light of the rapid evolution of the retail industry. Footfall has steadily declined and online sales as a proportion of total UK retail sales rose from 7.3% in 2010 to almost 20% at the end of 2019 (Office of National Statistics).
The Chancellor's budget increased the retail discount for properties with a rateable value of less than £51,000 to 100% and expanded it to include properties used for hospitality and leisure. It was also announced that the existing rates discount for pubs with a rateable value of less than £100,000 would be increased from £1,000 to £5,000. Sunak went further on 17 March to announce that as part of an "unprecedented" bailout package to support the economy, the discount on rates previously announced in the budget would be extended to all businesses within retail, hospitality and leisure, irrespective of rateable value. This means that no businesses within these sectors will pay any business rates for 12 months from 1 April 2020. £2.2 billion of funding has also been provided to local authorities to assist small businesses that do not pay business rates due to Small Business Rates Relief.
The Chancellor said the above measures are temporary to support businesses in the immediate wake of the Covid-19 outbreak. A fundamental review of the business rates system is expected to be concluded before the Autumn budget.
While these "temporary" changes are welcome news to retailers and other businesses across the country, the delay of a review has been seen by some as "kicking it into the long grass" (Colliers). The Conservatives' announcements in the Queen's Speech at Christmas may provide the best indication of what to expect in the long-term. In addition to increasing the retail discount on rates to 50% (currently 100% under the temporary measures), the only other measures proposed were to bring forward the next revaluation date from 2022 to 2021 and move business rates revaluations from a 5-yearly cycle to a 3-yearly cycle to ensure they better reflect properties' current rental values. These measures were criticised at the time as likely to have no "meaningful impact" (Altus Group) and as being merely a "sticking plaster" (BRC) rather than an effective way of dealing with the real underlying problems with business rates.
We wait to see whether there will be the dramatic overhaul to business rates that is needed. Many suggest the system should be replaced with entirely new taxes. For example, the Labour Party, Liberal Democrats and Green Party, amongst others, are pushing for the system to be replaced with a "land value tax" levied against landowners rather than occupiers on the intrinsic value of the land.
Overall, while the emergency measures are welcomed by businesses trying to weather the Covid-19 storm, we remain mostly in the dark as to if, how and when the underlying issues with the business rates system will be dealt with. This is a complex, important issue that must not be allowed to drop down the Government's priority list.
In the meantime, the budget did include a new Digital Services Tax to apply to revenue earned from 1 April by certain online operators. This is a tax of 2% on the revenues generated by UK social networks, search engines and online marketplaces which may at least help in part to level the tax playing field for more traditional retailers.