Budget 2025: how Rachel Reeves compromised on business rates

It was déjà vu all over again for deputy speaker Nusrat Ghani on Wednesday. In a rebuke before calling the Chancellor to deliver her budget, Ghani slammed the “premature disclosure of the contents of the budget” as a “supreme discourtesy to this House”.

“Weeks ago, we saw the Chancellor delivering a speech in Downing Street, setting the scene for the budget, as well as specific policy announcements being briefed out to the media in advance of today’s financial statements,” Ghani said.

“And just a moment ago, it seems the OBR analysis has also appeared online.”

It was a pattern of communications that meant supermarket chiefs would have already known of the blow coming.

Business rates were their “number one priority”, many of them had told the Chancellor in a meeting at 11 Downing Street in October.

They left that meeting upbeat, with the chiefs of Lidl GB and M&S among those to later publicly express confidence Reeves had listened.

The faith was misplaced, as Reeves confirmed she would introduce a business rates surtax on the largest properties to fund ‘permanently lower’ rates for smaller premises in retail, hospitality and leisure (RHL). Crucially, there will be no exemption for large shops, despite BRC warnings in September that the move could force 400 closures.

The issue had split the industry. On the one hand, the BRC had argued small shops could be given a rates cut without larger ones being included in the surtax that is supposed to pay for it. On the other, the convenience sector including Co-op and the ACS had been more focused on obtaining the biggest discount possible for smaller shops.

But it was the FWD that perhaps most directly torpedoed supermarket chiefs’ work, telling the Treasury in October that exempting supermarkets but not wholesalers would widen the price gap between local shops and big retail. As FWD CEO James Bielby reflected: “We welcome the government’s u-turn on exempting the major supermarkets from this cost, which we told HM Treasury would be dangerously anti-competitive and give a deeply unfair advantage to one sector of the market.”

Big retail whammy

However, it wasn’t as bad for major supermarkets as it could have been. The surtax on larger properties will add 2.8p to the standard business rates multiplier – far below the 10p Reeves could have imposed under legislation. From April next year, the new ‘high-value multiplier’ will be 50.8p, above the new standard multiplier of 48p.

It will pay for smaller RHL premises to have a 5p lower multiplier than non-RHL equivalents. The threshold for an RHL property to qualify for that discount – or be classed as a shop that pays the surtax – is a rateable value of £500,000.

That threshold is no neat dividing line between small local shops and supermarket giants, with the discounters also having many stores that will fall below it.

“Although Aldi and Lidl may be impacted via their distribution centres, we expect the vast majority of their stores will be below the £500k threshold,” says a Barclays budget note.

B&M is also unlikely to have many shops above the threshold, “given store sizes and locations”.

One the other hand, “looking at Tesco and Sainsbury’s, we think the changes will tend to push up the business rates bill for both of them – with Sainsbury’s perhaps impacted more in relative terms (given its weighting towards the south)”.

M&S also has “a lot of large stores in its portfolio, which would suggest the potential for it to see a relatively large increase”.

John Webber, head of business rates at Colliers, says: “Tesco, Asda and Sainsbury’s all have at least 90% of their properties in the higher multiplier range. Such increased costs are effectively a stealth tax and will only lead to food inflation. It will do nothing to stimulate investment and expansion.”

BRC CEO Helen Dickinson argues: “This budget offered much-needed relief for some retailers, but fell short of the bold action needed to secure the long-term future of our high streets and mitigate the inflationary pressures which are currently pushing up prices for households.

“Including supermarkets and anchor stores in the new surtax is a retrograde step that does little to mitigate the rising cost of food and essentials.”

Small shops also hit

But did it really help even smaller retailers?

The reforms replace temporary 40% business rates relief for RHL properties. Because that relief was capped at £110,000 per business, it made limited impact on the rates bills of major retailers, including those operating through smaller stores that fall under the new threshold.

Ironically, the smaller retail businesses who’d been able to claim the full 40% relief against their bill will be worse off from next year, ­according to analysis by tax firm Ryan.

Based on a draft list of 2026 rateable values published on budget day, the total support for RHL will be £965m thanks to the 5p lower multiplier for smaller operators – compared with £1.4bn previously available through RHL relief.

So the business rates bill for the average small shop will rise from £5,140 to £7,313, according to the analysis.

This is because the un-unified calls from across retail led Reeves to make a compromise. While the 2.8p added to the high-value multiplier was modest, the 5p discount for smaller shops was also a long way from the maximum 20p Reeves could have stretched to under legislation, as called for by Co-op and the ACS.

“The decision to limit the high-value surtax significantly reduces the funding available for high street support given the transfer in funding,” notes Ryan property tax expert Alex Probyn.

The ACS also notes the 5p discount “fails to offset the removal of the remaining 40% relief that was first introduced during the pandemic”.

ACS chief James Lowman says the changes “provide nowhere near enough support and are a major disappointment”.

“Small shops will see their rates bills increase in April, and many will see further increases as a result of the revaluation.”

Distribution centres clobbered

It is not the only way the reforms may harm small shops. They were pitched from the outset as a way to level the playing field between the high street and online giants.

Determined that a square peg should fit the round hole made by the legislation, Reeves said the high-value multiplier would be payable on large properties “like the warehouses used by online giants”. As a further concession to “support a level playing field in retail”, customs duty will apply on parcels of any value.

But it is not just the likes of Amazon that run big warehouses. The supply chain to shops depends on them too.

“Claiming that the business rates surcharge is justified as a tax on the warehouses of ‘online giants’ was a cheap shot,” says UK Warehousing Association CEO Clare Bottle.

“The Chancellor must know that warehouses store everything from medicines to food, as well as the goods that are sold in high street shops.”

Retail makes up 5% of the economy but pays over 20% of all business rates, according to the BRC. Calls for permanent reform to address that imbalance have been ringing in Chancellors’ ears for years. If Reeves was hoping to silence them with these changes, she will be disappointed.