How UK business rates shake-up is deepening high street gloom

Posted by Anna.Svandova at 2:17 PM on Jul 5, 2018


Department stores hit by 26% rates rise as online rivals benefit from tax cut.

High street retailers struggling with shaky UK consumer confidence, the popularity of online shopping and increasing wage bills are also being hit with higher business rates — while online retailers see their rates drop.
Business rates across the UK increased by 3 per cent in April, in line with inflation. However, research by Altus Group, a rates adviser, found the average rates bill for department stores in England and Wales was up 26.6 per cent in 2018/19, compared with 2016/17; large high street shops saw average rises of 10.8 per cent.

Rates for some online retailers dropped during the same period. Asos, the clothes seller, and Shop Direct, the former Littlewoods empire, are paying less on their distribution centres this year than last, while Amazon paid just 0.7 per cent more, Altus Group’s analysis showed.

Retailers say that without urgent reform, the higher rates could kill the high street. A number of retail stalwarts, including Maplin, Toys ‘R’ Us and Poundworld, have gone into administration this year, while others — including Carpetright and Waitrose — have closed stores. According to the Office for National Statistics, while total retail sales grew 1.4 per cent in 2017, online sales were up 12.1 per cent.

Winners and losers in revaluation

Business rates changed in 2017 after the government revalued property for the first time in seven years. But while the revaluation led to higher rates in busy city centres, it reduced them in rural areas and poorer towns, where online retailers tend to have their warehouses.

Steve Rowe, chief executive of Marks and Spencer, said the company opted to close its Covent Garden store after it faced an “untenable” rate rise of almost £500,000 in a year. He described rates as “an unfair burden of taxation directly contributing to the challenges the high street is facing”. M&S is closing 100 stores and paid £184m in rates in 2017/18.

“These challenges will continue until the system is reformed to create a level playing field between high street and online retailers,” he said.

Ministers promise reform

The government has promised to reform the levy but retail bosses say time is running out as the difference between operating from out-of-town warehouses and expensive town centres widens, and high street retailers see profits plummet.

House of Fraser, the retailer founded in 1849, may not last long enough to see the reforms. It is fighting for its survival and faces a 4.4 per cent rates rise this year. In an effort prevent a collapse, it has agreed with landlords to shut 31 of its 59 stores and is cutting 6,000 jobs. The company said its rates bill had increased 13.6 per cent since the revaluation, from £30m in 2016/17 to £32.8m last year and £34.3m this year.

By contrast, rates have dropped for some online retailers. Fast-fashion retailer Asos has seen its business rates bill fall by 0.8 per cent since 2016/17, according to Altus Group.

It also found that rates at Shop Direct’s three warehouses in Greater Manchester fell by 2.5 per cent in 2017/18 and 2.4 per cent in 2018/19. The company declined to comment.

Altus used government databases to estimate rates bills, focusing on warehouses and stores. As well as Asos and Shop Direct it assessed rates paid on the 11 distribution centres owned by Amazon, the US retailer, that have been revalued. It found that rates for the centres rose by just 0.7 per cent in 2018/19 compared with 2016/17.

Amazon dismissed the findings and said the figures did not take into account rates paid on other premises, such as software development offices. “The research is inaccurate and incomplete, only including 11 of our 100 plus sites across England and Wales we operate to run our website and deliver parcels to customers.

“Amazon pays tens of millions of pounds more in business rates in England and Wales than suggested by the research and our business rates bill has increased significantly in 2018,” the company said.

Profit warnings and job fears

However, traditional retail bosses say high street retailers need an urgent change to their rates. Debenhams, which has issued a profits warning, said its £80m annual rates bill has risen since the revaluation. Sergio Bucher, chief executive, said: “business rates create distortions and we look to government to ensure the system is fair to safeguard against a negative impact on both businesses and communities.”

Dave Lewis, the chief executive of Tesco, has also called for reform. The retail group is the UK’s highest rate payer, with a £700m bill in 2017/2018.

“UK retail is the most employment-dense sector of the economy, so constantly losing businesses in the way we are will have an economic impact. And so if they’re not careful the government risks taking too much out of business rates and then losing in the medium term also in terms of revenue,” he warned

Robert Hayton, head of business rates at Altus, said: “Traditional bricks and mortar retailing is property intensive, leading to a larger tax to turnover ratio and, if left unchecked, could lead to the substantial extinction of the high street.”

Andrew Griffiths, the business minister, told MPs in the House of Commons last month that the rapid rise in online retail sales last year was a “challenge for government and business”.

“That is why we are looking at the business rates structure and also at what we can do to help business to transition during this difficult period.”

The Treasury said: “To ensure our tax system is fair for all businesses — whether bricks and mortar, or online — we are reviewing corporate taxation of the digital economy.”

By Andy Bounds at Financial Times