Navigating Business Rates:
- AuthorLiz O'Mahony
Navigating Business Rates: The demise of retail and effect on commercial property
It seems that more and more businesses, from small pubs to giant retailers, are closing down. I am sure there are many factors attributable to this phenomenon but certainly business rates are part of the problem. Business lobbyists have long opposed business rates in favour of a non-discriminatory land tax but with the current system garnering £26 billion a year, it seems unlikely the government will get rid of it anytime soon.
These business rates equate to about half of the business property’s projected annual rent. This is calculated by multiplying the ‘rateable value’ (projected annual rent) with the ‘multiplier’ (currently 49.3p or 0.493). Every five years, the government undertakes a revaluation of the rates. This was due to take place in 2015 but delayed until 1 April 2017, making the changes more dramatic.
From a legal perspective, this unrelenting increase in business rates, in conjunction with decreasing property values, will make investment in commercial property (a historically prudent choice) an unattractive proposition for many. As landlords end up shouldering much of the tax, this will lead to a downward trend in buy-to-let commercial properties and an inevitable increase in rent across the board.
Retail accounts for 5% of the economy, however, it foots a disproportionate 25% of the business rates bill (£6.5 billion of the total £26 billion). Behemoth retailers, such as House of Fraser, Debenhams and M&S, are clearly feeling the effect with all reporting reduced profits. House of Fraser is in administration and plans to close 31 of its 59 stores, unsurprising given its Oxford Street store paid £4.3m in business rates in 2017/18 (up from £2.96m in 2016/17). Debenhams pays more than £76m a year, and in June issued a third profit warning and entered into redundancy talks. M&S, which pays £295m a year in business rates, has reported the planned closure of 100 shops by 2022, as profits fell to £176.4m in 2017/8.
Some argue old-fashioned retail stores are just lagging behind modern retailers who do business more efficiently online. However, online retailers such as Amazon, are at a competitive advantage as they only pay business rates on warehouse properties, which are relatively low, in contrast to the higher rates levied on high-street store-fronts.
The introduction of a land tax and reduction of the ‘multiplier’ (nearer to the 1996 rate of 34p) have been touted as potential solutions. A freeze in further increases may help the situation in the short term but a more efficient system of checking/appealing business rates is clearly needed. The government will not be keen to diminish such a lucrative form of tax but unless they do, we could become a country bereft of businesses, which are unable, or unwilling, to pay.