New Business Rates Reforms are Still Behind the Times on Supporting Brick & Mortar Businesses over E-commerce

A recent article by the Evening Standard has passed on a warning from a Government source in regard to the 2017 Budget. According to the source, “There needs to be longer term reform that addresses the bricks and mortar versus online shopping”. With supermarkets such as Sainsbury’s facing an increase in business rates of almost £120m—to a new total of £500m—many argue that the rates changes will only benefit online retailers like Amazon..

With the coming business rates revaluation, physical store owners are set to suffer disproportionate rises compared to their online counterparts. How can reforms level the playing field in order to allow brick and mortar stores to compete with online retailers?

Sainsbury's Local grocery store
Sainsbury’s Local grocery store in Sheffield, Yorkshire, UK. Retail sales generate 5 percent of UK GDP, amounting to 339 billion GBP annually

Online retailers are getting off lightly in the latest business rates revaluation

On April 1st, the average UK shop will see an increase of 8.4 per cent in business rates. London and the South East face the biggest business rates increase in a generation, with rates for some businesses operating inside Zone 1 set to rise by forty per cent or more. Across the capital, the 2017 business rates revaluation threatens to increase business rates by an estimated £7.5 billion.

Comparatively, warehouses and distribution centres for online retailers are expected to pay just 1.6 per cent more. According to calculations from the CVS, a business rates and rents consultancy, online fashion retailer Asos’s main warehouse in Barnsley is expected to see no change in rates; Boohoo, whose facility is located in Burnley, will benefit from a 13 per cent reduction.

The current business rates system, calculated on the rateable value (RV) or annual market rent of a business property, fails to adequately account for the different infrastructures required for brick and mortar and online retailers to function.

The latest business rates revaluation puts the high street at risk

According to a recent report from the Confederation of British Industry, the high tax rate makes investment in commercial property unattractive. Meanwhile, as retailers attempt to satisfy consumer demand with increased speed and efficiently, demand for logistics warehouses is increasing.

According to a recent Prime Logistics report by leading real estate consultancy firm Gerald Eve—which analyses the UK’s 50,000 sq ft plus warehouse market—eCommerce giant Amazon signed leases for some seven million sq ft of space in 2016. Despite this huge uptake, Amazon’s business rates bill is expected to fall slightly.

High streets up and down the country have seen considerable regeneration over the past five years, but “we are at risk of losing it all,” says Mary Portas. The retail expert, who conducted a government review on the high street, has warned that one of the biggest threats that continues to ail the high street is the mounting cost of maintaining physical premises.

If the system of business rates continues as is, we could see high streets face serious challenges and ultimately, more closures. Many small London retailers are eligible for business rates relief this year, and a government bailout fund might just help many stay afloat, but business rates must better support small businesses and independent retailers in future revaluations, Portas has suggested.

Business tax woes

It’s not just about business rates, it’s about the way businesses are taxed

Sainsbury’s director Coupe has been joined by the CBI, the British Retail Consortium and the Federation of Small Businesses to call for ministers to undertake a wide-ranging review of the way businesses are taxed. This, they hope, will put the retail sector on a level playing field and account for the rise of online-only players.

It’s hoped bringing in updated criteria upon which the Valuation Office (VO) calculates rateable values can help level the disparity between brick and mortar and online retailers, the former being subject to far greater overheads simply in order to maintain high street premises.

British Council of Shopping Centres (BCSC) Director of Policy and Public Affairs, Edward Cooke has similarly called upon the government to create a system that better reflects the changing market:

“Now [the] government has a chance to show business that it believes in great British retailers and vibrant places as a key part of a multi channel retail future. The market in which these businesses operate is changing faster than ever and a tax system that reflects these fluctuations is critical.”

The mounting business rates debate should convince retailers of the importance of maximising the impact of physical stores.