Co-op, Morrisons and Sainsbury's join calls to freeze rates

Source: PhotoFusion/ Rex Features

Raw deal: at over 47p in the pound, the decline of the high street has been accelerated by one of the highest levels of local property tax in the EU

Even by recent standards the prognosis is grim. By 2018 the number of stores on the UK high street will fall by almost a quarter, with 22,600 closures and 140,000 employees lost, reads a report this week by The Centre for Retail Research.

The report calls for urgent government action to tackle the soaring costs faced by traditional retailers compared with their online counterparts.

“The problem with the overall impact of business rates on the retail sector in high streets has not been addressed,” says the report’s author, centre founder Professor Joshua Bamfield.

So is it time for the government to remove the obvious £175m millstone hanging around retailers’ necks - or are there alternative measures?

Last week, as an inquiry hearing by the BIS Select Committee into high street retail got under way, the influential Conservative think tank, Policy Exchange, led a rallying call for a two-year freeze on business rates to level the playing field while further work was done to look at ways to help retailers adjust their business models to the new reality of clicks rather than bricks.

Should retailers get a two- year business rates holiday?

Helen Dickinson

Helen Dickinson

Helen Dickinson, director general, BRC

As I told last week’s BIS Select Committee Retail Inquiry, business rates are playing a bigger role in retailers’ decision-making processes than ever before. Relentlessly steep successive rises have added £700m to retailers’ costs since 2011, and they’re an all-too significant obstacle to expansion, investment and job creation for many.

Retailers’ operating costs have increased by a fifth since 2006 and its centrally driven costs that have risen most rapidly. At a time when shop vacancy rates have reached a record high, household incomes continue to feel the squeeze and the sector is evolving more rapidly than ever to keep pace with changing consumer habits, the sums just don’t add up.

We campaigned hard for a business rates freeze in the lead-up to this year’s Budget, and it was disappointing the Chancellor didn’t seize the moment on an issue sparking so much concern and uncertainty across retail. Halting rates rises for a period is a comparatively small step that would make a real difference.

We’ll continue to push the longer-term call for a fairer and more affordable formula for determining rates increases in the future. In these tough times, the focus must be on alleviating the burden and supporting growth wherever possible, not piling on extra pressures.

James Lowman

James Lowman

James Lowman, chief executive, ACS:

The business rates system is broken. It is an immovable overhead that increases year-on-year and stymies investment, innovation and job creation.

The way rates have increased in recent years has compounded the problem and we understand the call for a freeze. Our concern is simply about what would have the most impact. We need radical reform and we fear that simply freezing rates (at a cost of more than half a billion pounds to the Treasury) would not make a substantial enough difference to the thousands of retailers, especially independents, who need a more significant reduction.

Our priorities for government are:

Provide immediate financial support to local authorities to drive a large-scale new programme of rate relief, halving or eradicating rates for existing and new businesses in areas of most need.

Redistribute the rates burden through a new approach to valuations that recognises the changing nature of retail provision and fairly distributes rates between online, in-town and out-of town retailers.

Commit to a permanent cap on annual increases in rate at 2%. End the unpredictable fluctuations in rate bills. A freeze would make a small difference to everyone. What we need is a reduction for businesses and areas in most need.

The CRR report contrasts the raw deal for high street retailers with online companies, for whom the tax burden, or lack of it, has become infamous. “Online retailers pay much less per square foot in rents and business rates than conventional retailers, because their main spaces are low-cost warehouses in inexpensive parts of the country rather than costly high streets and retail parks,” says Bamfield, who claims the average rates for a high-street retailer are likely to be 15 times higher than for online operators.

So far the government has not only resisted calls to halt rising rates but has increased the angst of retailers and landlords alike by postponing the scheduled 2015 revaluation of rates until 2017. Based on average property values, retailers, with the exception of central London, could have been looking at reductions of up to 20%.

Instead, the annual uplift in rates, linked to RPI, has seen bills in most parts of the country outstrip rent rises by over 200% since 1991, according to the British Property Foundation. In its evidence to the BIS committee, Morrisons says it has now reached the point where rates levels risk becoming “counterproductive” , warning they could “deter capital investment and deprive local economies of the tens of millions of pounds that the construction of a new store (or other site) can bring”.

The Co-operative Group adds that government inaction on rates is a huge factor in the decline of the high street.

“We are concerned the government has not sought to do more,” it says in its evidence to BIS. “From April this year, retailers have been facing an estimated 2.6% increase in business rates, adding £175m to their bills on top of increases of more than £500m in rates over the past two years.”

Researchers at Oxford Economics estimate the overall costs of operating retail businesses increased by a massive £20bn between 2006 and 2012, while over the same period, retail sales have grown by an average of only 12%.

“The government’s decision to postpone the revaluation of business rates will unfairly penalise hundreds of thousands of businesses by requiring them to pay excessive levels of tax for an additional two years in order to subsidise those businesses in more prosperous areas,” says the British Council of Shopping Centres.

It carried out a study among 15 of the so-called Portas Pilots towns, which found nearly 90% would be worse off as a result.

“The business rate multiplier has risen to over 47p in the pound this year, making it the highest level of corporate tax in the UK, and among the highest levels of local property tax in the EU,” says the BCSC.

Yet some believe a freeze in business rates misses the need for greater action to take into account the structural shift in retail being caused by the online migration.

“We are concerned the government has not sought to do more”

The Co-operative Group

“A business rate holiday is not going to deal with the deeper and more fundamental issues facing retailers in the UK today,” says high street entrepreneur Dan Wagner, CEO of Powa Technologies, which has created e-commerce technology solutions for the likes of Tesco and Superdrug. “Rapid advances in technology mean companies need radical reinvention. If jobs are to be saved, then the government must make it easy for companies to invest in the new platforms where their fast-moving market is going. Failure to do so will result in [further] turmoil.”

Head of housing and planning at the Policy Exchange, Alex Morton, agrees a rates holiday will not cure the problem in isolation. “This only makes sense in the context of giving breathing space for further changes to retail policy to bring it into the 21st century,” he says.

“Policy needs to give high streets the best chance to reinvent or renew themselves, but it should primarily focus on removing barriers to consumer choice that push up the cost of living. It must not assume all high streets can, or should, remain as shopping centres.”

Sainsbury’s CEO Justin King, another high-profile critic of the government’s policy on rates, says an urgent “rebalance” the tax system is needed given the contrast between online and bricks-and-mortar retailers. But retail leaders privately express little hope of any immediate action and sadly, a two year holiday, even if it comes, won’t be enough for many retailers.