Business rates – tax or subsidy?

This week has seen another report on our high streets, this one from Ken Shuttleworth (The Gherkin architect) and others along with the BIS Select Committee stating that business rates are ‘not fit for purpose and need a complete overhaul’. This follows on from other reports of which the Grimsey Review, through solid evidence based research, in its 12th recommendation stated The business rates system needs a root and branch review to establish a flexible system that will reflect changes in economic conditions as they occur’. The facts as detailed in the Grimsey Review are as follows;

In England there are 471,000 shops in the rating list with a total Rateable Value of £12.778bn giving an average Rateable Value of £27,130 meaning business rates payable of circa £12,750 pa. In 2012 before reliefs, the total yield was £25.730bn. Bricks and mortar retailers, therefore, account for approximately 23.34% of the total business rate yield.

Mary Portas’ review of the high street in December 2011 also highlighted the issue of business rates in three of her recommendations;

6. Government should consider whether business rates could better support small businesses and independent retailers 7. Local authorities should use their new discretionary powers to give business rate concessions to new local businesses 8. Make business rates work for business by reviewing the use of the RPI with a view to changing the calculation to CPI

The BRC commissioned E&Y to carry out a review which also recommended fundamental review. So to say that there is a groundswell of opinion in favour of change in business rates would be an understatement.

You may be thinking by now what a bizarre title I have given to these thoughts. Business rates – tax or subsidy? All will become clear later when I look at other sectors and the thorny issues that lie behind such an established and antiquated revenue generator for government. In addition whilst little has changed with the business rates system it should not be forgotten that c. £25m has been spent on town centre initiatives but the big question to what effect. The BIS Select Committee highlighted how government has been unable to provide details for how much of the £2.3m allocated in support of Mary Portas’ review has been spent and to what effect. For those shouting back Percy Pig (Dartford) I think we need more solid evidence across the whole grant. Was this money for the people to be spent by the people or for the people but to be spent by the council?

Various issues lie at the heart of business rates and I hope to set out a few of them in layman’s terms below as otherwise it is very easy to get lost in the detail and the numbers;

  1. It is a five-year taxation system based on property. The last review was effective as of 2010 but with values based on 2008 data. As you will be aware a lot has happened since 2008 including a fourfold increase in vacancy rates along with thousands of retail administrations. Five years is a long time in retail and the market has rebalanced significantly towards shorter lease lengths, more incentives so less clarity around the real rents being paid along with the birth of the omni-channel environment (bricks and clicks).
  2. The issues that we face today are long-term structural issues that many should have seen coming back in the 1980s let alone since 2008. Many organisations have witnessed the declining footfall in our town centres and for whatever reason chose not to publicise the fact that many towns were in decline. I am not here to allocate blame but you only have to look at the reaction we (The Local Data Company) had when we first started publishing shop vacancy rates by town back in 2009.  Many thought this was a blip and were like ostriches with their head in the sand. Attempts to rubbish the LDC data were soon proved to be impossible based on our physical verification in the field and the use of the Government’s retail core definitions.  Some of these organisations ‘watched the fire burn for many years and then have sold themselves into government as the best fire brigade to out it out!’ Some of the key facts are;

–       the growth of large shopping centres and retail parks starting back in the 1980s with Brent Cross and followed by many others – Lakeside, Trinity Leeds, Liverpool One, Trafford Centre, Cribbs Causeway. There are now circa 80 of these mega ‘new’ centres.

–       Rise of outlet centres in out of town locations. Bicester Village is the most successful example.

–       For every 1m built in town 4m has been built out of town

–       Thousands of new homes have been and continue to be built on greenfield (out of town) locations away from existing town centre services.

–       Rise of the internet to over 13% of retail sales

–       Rise of pure online players such as ASOS, Amazon and Ebay.

–       Dominance of supermarkets in terms of retail spend and their growing dominance in the non-food retail sector.

  1. Cost. What is the true cost of administering this tax?  There are hundreds of Valuation Office surveyors and offices employed to deliver the rateable values. On top of this many firms make a living from challenging these values so what is the real cost of administering business rates when you take into account administration, reviews and appeals?
  2. North v South divide. If you track the LDC data trends or attend our summits you will see that there is a north v south divide when you look at vacancy rates (a key factor, along with rents, when calculating the rateable value at a point in time). As such the recent government initiatives could be argued to accentuate this further. For example I may be a shop owner in the north of England with a rateable value £51,000 (or £13,000 if I want business rate relief which starts below £12,000) but the values that these incentives are based on are flawed as they are based on the 2010 data which may mean that my true business rates value should be £49,000 (qualifies for the recent £1,000 relief) or £11,000 (qualifies for small business rates relief). The opposite may be true in an affluent town in the south of England where my business rates may be £49,000 but should actually by £59,000 or £15,000 instead of £11,000. This is the reality in terms of vacancy rates and rents and you can therefore see why those struggling most may not see these incentives.
  3. Councils. Councils have the authority to reduce business rates but many have chosen not to do so. You cannot blame them as at the end of the day they are cutting their income, which will have impact elsewhere. Where many are already cutting c.20% of their budgets they are keen not to cut further. This is where politics gets in the way further and will be more apparent as we head into local elections in May and the general election next year.

The question I have is ‘how can anyone attempt to change or review a system without a comprehensive and credible evidence base that details down to each shop what has changed since 2008?’ Rents, a key part of the business rates calculation, are based on supply and demand. In my world I look at this from analysis of vacancy (volume and persistency) and occupational change. The work we have done with University of Oxford (http://localdata.squarespace.com/storage/The_State_Of_UK_Retail_Places_Summary2.pdf) University of Liverpool (http://localdata.squarespace.com/storage/VOA_Rate_Change_LDC_Sep13%20copy.pdf) and University of Stirling (http://localdata.squarespace.com/storage/Scotland%20Top%20100%20Cities%20%20Towns_Exec_Summary_Final.pdf) shows the significant changes in diversity and tone which ultimately are creating the issues many, if not all, have with the current business rates system.

Coming back to my title the provocative thoughts to leave you with are that basic economics drives consolidation of production and distribution to fewer locations. This has been the case with industry for a long time but it is only now that we have seen this with the consumer as technology for both the consumer and the retailer have reached a level of capability not seen before. The future of our towns is therefore at a crossroads and for many there are not many economic factors currently in their favour especially business rates. With farming we have subsidies and with new residential development we have affordable housing so is now the time to introduce some similar subsidies to keep businesses and life in our town centres or is it just natural progression where survival of the fittest is all that matters?

 

2 thoughts on “Business rates – tax or subsidy?

  1. Matthew

    Many good points in here, but I do notice that (perhaps understandably) in your key facts section you focus on the retail that has been built and is off-centre. This is clearly the case, but do you go far enough? As I have commented in various presentations (and you can see some of them at http://www.stirlingretail.com) our decentralisation has involved far more than retailing and has drained footfall from urban centres. Examples locally include the football ground, the leisure center, hotels and schools (all in one cluster on a ringroad), but we also have local authority offices, hospitals, cinemas, bingo halls and so on well outside the town centre, where they used to be. And then we can consider housing and accommodation.

    Leigh

  2. I agree with Leigh in that you make many valid and accurate points, especially your question about “how can anyone attempt to change or review a system without a comprehensive and credible evidence base” . The evidence, however, needs to be drawn from factors other than simply analysing comparative statistics relating to vacancy levels, the state of the retailing economy and the levels of relief.

    When I have carried out detailed whole town centre analysis I have been constantly amazed and disturbed by other factors, some of which feed directly into the statistics mentioned above. The underpinning issues that I have identified relate to complexity, to subjective decision making and the clear evidence that the system is simply unmanageable by the VOA.

    You mention about the antiquated system, many commentators pick up on that point, but being long established is not in itself a reason for failure – and it is my belief that this is the case here too! The problem is that non-domestic rates are not an antiquated system at all because the Local Government Finance Act 1988, the primary legislation, simply created or enabled the tax and it created the authority for the revamping of the valuation office, from being locally based to a national system. What the Act did not do was to state the means by which the valuations ought to be conducted.

    The precursor pieces of legislation, going right back to 1601, stipulated that the ‘rates’ be based upon property, and for the most part even up to the Rates Act of 1967, this did not change. The individual hereditament was measured and a rate set based upon a set amount of money per square area. Reasonably simple. The variations that existed came because the valuations were carried out through county or sub-regional offices based on norms in that area. Variations were accepted for those premises in occupation by economic activities deemed useful to society – such as manufacturing or farming. As for the rest, if it was a building, then it was measured and rated, neighbour the same as neighbour with a proportionate rateable value depending on the floor space.

    It is now impossible to predict the valuation of a property because of the complexity of the sub-divisions of uses that each seem to attract a different valuation. In Barnsley, for example, the town centre rateable values apply to a precise area, which may or may not correspond to the planning area of the town centre. Within that area there are six different rating schemes just for retail or retail related properties. Within each of the schemes there are anything up to eleven different sub-groups based entirely upon the type of retail business being carried out. I am sure that when the bright spark who dreamed this up thought it would be an easy thing to do – after all, you can tell a bank from a fish shop, can’t you? What is not explained is why you would need to. The antiquated system would have treated them as premises with a particular area of floor space.

    The current system allows larger shops to be measured under their GIA (gross internal area), whereas the neighbouring shop, much smaller, is on a NIA (net internal area) measurement scheme. The effect is that larger shops consistently enjoy lower valuations per square metre overall – disadvantaging the smaller independent. The sub-groups are not even logically or consistently applied, part of the subjectivity in decision making that I observed. You can get many of the same sub-groups in different schemes, but again without any rhyme or reason.

    Even where the tone of the rateable values, the base value for a group of premises is set, there is no high likelihood that all of the premises will actually be on those base values, and again the decisions to give a higher or lower value appears to be entirely arbitrary. Some then attract a discount off of the final valuation, the reasons being given vary but they are usually inconsistent – for example, there were eleven banks in this sample in Barnsley. Of those, just one was given a valuation that was above the tone for its site. Nine were given valuations below their tone, and several of these were given further discounts. Just one was given a simple valuation with no discounts or additions. The banking sector, incidentally fared best in Barnsley, with a far higher than average reduction in their rateable values compared to others. One bank was given a discount because of the slope in the street outside the door, yet the newsagent next door, with the same level of slope, was given no such consideration.

    The complexities of the system make it bewildering and challengeable, which is why it is so very often challenged. The Public Accounts Committee in the House of Commons identified that the appeals procedures operated through the DCLG were one of two agencies under that department that had seriously overspent from their budget. The appeals procedure is simply overloaded because it is systemically inherent that appeals will be made. This is fuelled by the inconsistencies in the discount and variations from the norm as applied by valuers. Inconsistencies include the application of an additional rate for such things as air-conditioning units, some schemes treat it as an add-on whereas in others it is included – again without reason.

    The most laughable thing about the whole system is the VOAs claim that the valuations are based on a notional annual rental. That was certainly the historic method, but presumably because the huge number of surveyors that the VAO claims to employ is busy looking at the minutiae of which sub-group a shop ought to be classified under within one of the many schemes available, or perhaps dealing with the case work of yet another appeal, they simply do not have the time to maintain a database of rentals – because thy don’t!

    It is entirely right that the BIS committee criticise the tax as it is currently administered, but rather than throwing the baby out with the bath-water, let us just think about simplification. A property tax is not inherently bad, indeed one of its age old advantages is that it is difficult to hide the building, – the worst thing for a retailer is not to be able to predict costs, a simple rate is fairly predictable, and if it is the same rate applied to all premises, then it is also fair. The difference between in and out of town would be minimised or eradicated, and the only job a valuation officer would need to concern themselves with would be accurately measuring the building.

    The argument that internet retailers are advantaged is a moot point. The current debate has been hijacked by the retail industry, and the politicians are happily joining in. However, the rate is properly the non-domestic rate, applicable to all non-domestic premises. With this in mind, and a fair and equitable measured valuation, it would matter not whether you had a shop in the high street, one in the retail park or a warehouse in a field ten mile s away. I live close to the main ASOS centre – it is large, and has recently been enlarged still further. If they were paying the same basic rate per square metre as the post office in nearby Grimethorpe, then it would be fair and equitable. The argument that has raged frequently ignores that internet traders are generally either bricks and mortar retailers and are therefore in exactly the same boat as other retailers of their size, or they are wholly internet but nonetheless operating out of substantial buildings – for which rates are payable.

    I have been a retailer for forty years, so I have some insights into the issues of retailers, but I have real difficulties considering them as a special case for which they ought to have a taxation system especially geared exclusively to them. Let us have simplicity instead!

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