UK business rates: toll tale

Whodunnit? Business rates are a prime suspect when it comes to the death of the UK high street. With an election imminent, Conservatives and Labour have both promised to tackle the system’s failing. But for all the clamour for reform, do not expect big changes. Business rates reliably raise about £30bn a year. The mischief they cause is exaggerated.

Admittedly, there are ample grounds for suspicion. Business rates, which are a tax on property, have risen from about a third of rents in the 1990s to more than half. The burden is the highest in Europe, as a share of tax take. One example: the UK accounts for 8 per cent of Vauxhall’s European floor space but two-thirds of its European property taxes.

Retailers are particularly exposed. They represent 5 per cent of the economy but pay a quarter of all business rates. For bricks-and-mortar retailers, rates bills can be 2 per cent of sales — not much below their operating profit margins. To add salt to the wound, their online competitors typically pay just 0.5 per cent of sales, says Tesco.

The supermarket group is pushing for a shift in the burden with a new online levy and a 20 per cent business rates cut for bricks-and-mortar retailers. That reduction, applied to its own £700m rates bill, would boost net income by 8 per cent, before taking account of reinvested savings and its share of the online levy. The plan would tackle the perceived unfairness of rates. But it would be tricky to implement and could soon be overtaken by global reforms to digital taxation.

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The main cause of the high street’s woes is that the UK has far too many shops. Business rates are a red herring. Cutting them leads to higher rents and vice versa in markets where the supply is fixed. Between 1990 and 2010, business rates increases were entirely capitalised into rental values after three to four years, one study found. There are caveats: rents do not always adjust and even a temporary lag can inflict severe pain. Still, it is hard to escape the conclusion that the biggest winners from business rate reductions would be large landlords. The case for cuts to the levy is far from open-and-shut.

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