Insight & Analysis

Rates realism required

Published: Jul 2021

The business rates regime is a major problem for bricks-and-mortar businesses trying to compete with online-only enterprises.

Red balloons and one is rising higher than others

The way rates are calculated puts bricks-and-mortar businesses at a significant disadvantage and has also spawned a cottage industry of firms set up to help these businesses negotiate the lengthy relief and appeals process.

Earlier this year, the CEO of one of the UK’s largest retailers suggested that business rates for high street stores should be reduced by more than a third and stated that if rates were not set at a fairer level, many viable businesses would be forced to close.

Lord Simon Wolfson said rates did not reflect the fall in the value of retail properties and suggested the reduced revenue from lower rates could be offset by increasing the charge on warehouses and online fulfilment centres.

The scale of the problem was revealed in research published by Metro Bank at the end of June, which found that almost half (46%) of the 1,000 small businesses surveyed said they could not afford to pay any business rates following the reduction in rate relief from 100% to 66% at the end of June.

The majority of the SMEs that responded to the survey (71%) said the business rate holiday had kept their business afloat during the height of lockdown restrictions.

Sally-Anne Watkiss is Treasurer of Homebaked Bakery, a community-run bakery in Liverpool. Homebaked doesn’t pay business rates because of the small business exemption, but Watkiss agrees that larger businesses who do have to pay rates are placed at a competitive disadvantage. “This acts as a disincentive to have a physical presence,” she adds.

The problem with rates is that they are a fixed cost based on square meterage – they are not proportionate to footfall for retail premises sales or the diminished size of machinery or occupied space, for example.

That is the view of Len Jones, a Chartered Accountant who has worked at senior levels in businesses from listed PLCs to SMEs and is currently Senior Accountant at Wincham Group.

“With the pandemic we have seen severe downsizing with no corresponding reduction in rates,” he says. “If a radical overhaul is required it is to make these rates variable and more aligned with individual business models requirements. Rates holidays are a short-term solution – councils need to alter their ‘pricing’ model.”

Lord Wolfson made a similar point, noting that in-store sales at Next have fallen by a quarter over the last five years yet rates on those properties have increased by 9% over the same period.

When asked how easy it would be for local authorities to align rates with individual business models given that they are already underfunded, Jones says they would need an understanding of fixed and variable costs as well as some mechanism whereby sales or other variables could be monitored on a regular basis.

HMRC has an open consultation on revaluating business rates every three years rather than the current five year cycle and says it will publish a report on its review of business rates in the autumn with ‘final conclusions’ expected in spring 2022.

However, businesses that challenge their valuations already face a long wait for a decision. With the Valuation Office Agency – which handles business rates appeals – currently taking up to two and a half years to process revaluations and public sector spending facing a further squeeze, it is safe to assume that appeals would become more commonplace and take even longer to process if revaluations took place on a more regular basis.

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