The government has made a bold promise to replace the UK's business rates system.
Yet while the UK property industry, retailers and other businesses have been calling for reform for years, there is concern about what the Labour Party is proposing to replace the system with.
Labour has not signalled what it will say about business rates in its first Budget on 30 October and previous governments on both sides have pledged radical changes and then introduced disappointingly tame measures.
However, the Shopkeepers' Campaign, which lobbies on behalf of property-based retail, has got on the front foot and joined other key groups such as the Confederation of Business Industry and British Property Federation in submitting recommendations ahead of the Budget.
CoStar attended a roundtable hosted by the Shopkeepers' Campaign and attended by a leading retailer, retail landlord and lobbyist to discuss what Labour is likely to do and what they should do.
The panel comprised: Vivienne King, chair of the Shopkeepers’ Campaign; Emma Mackenzie, director for asset management at NewRiver Retail and a member of the High Streets Task Force; Philip Bier, portfolio director and founder of Flying Tiger Copenhagen; Alex Hagemann, account manager, Pepper Public Affairs.
Business rates are a property tax charged on essentially all commercial property across the UK, bringing in revenue of around £30 billion per year to the Treasury. Its very high collection rate, particularly compared with income tax, and that large chunk of revenue have meant successive governments' attempt to replace it with something more equitable is particularly problematic.
Flying Tiger Copenhagen founder Philip Bier says Prime Minister Keir Starmer has described rates to him as "a tax on existence", a comment that he said underlines how political leaders understand that creating a rates system that is fairer on business is critical to unlocking economic growth and to winning votes. In its manifesto Labour said the business rates system “disincentivises investment, creates uncertainty and places an undue burden on our high streets”.
But Labour's messaging on the economy since winning the Election has painted a picture of a catastrophic financial black hole inherited from the Conservatives. That does not suggest it is preparing an immediate overhaul of a system that is a major source of Treasury income and a tax largely hidden from the general public.
The current system has existed for 30 years and the Labour government has said what it replaces it with will be "revenue-neutral".
Other than that the party has given little clarity. It has suggested it will tackle the disparity between taxation on high street retailers and online retailers with some form of online sales tax. Whatever it chooses to do will be muddied by the increasingly omnichannel nature of most retailers' businesses.
Labour has also said it will tackle empty properties and support growth by encouraging entrepreneurs.
The Shopkeepers’ Campaign argues the system does not need to be ripped up, but it is in need of major surgery. Ahead of the Autumn Budget 2024, it says the business rates system has an unsustainably high multiplier and complex reliefs, and is stifling investment, particularly in the retail, hospitality and leisure sectors. It says there is an urgent need for reform to encourage economic growth, attract investment and revitalise struggling high streets.
Its chair Vivienne King says: "Our campaign began in 2020 for obvious reasons. Fundamentally the problem with the current system is it is too expensive and it is too complicated and its not responding to the market. Retail has had well-documented challenges, of course, but business rates are the biggest problem. And if retailers cannot trade in the high street and our town centres, we then see massive job losses and a huge impact on behaviour at a social level. It's important to note that retail is a sector that traditionally many more women work in than men so this disproportionately hits women. What we want ultimately is a level playing field all round."
Emma Mackenzie, director for asset management at leading UK shopping centre real estate investment trust NewRiver REIT, says at the most basic level two things need to happen – the multiplier for how much rates are paid in the pound needs to come down, and rates need to be revalued more regularly to keep pace with property values.
But the Shopkeepers' Campaign's immediate demands are for incremental improvements, as it is aware this is mostly likely to be successful.
The first thing it is calling for is for the Standard Multiplier to be reduced to 50p from 54.6p in the pound. It says this would go some way to alleviating the burden on business while providing a signal the government is reform. Over the long term it wants to see the multiplier reduced to 30p to "simplify the system, eliminate the need for complex reliefs, and attract both domestic and international investment".
It also wants Labour to extend the current retail, hospitality and leisure relief, which is 75% and was introduced as targeted relief for a sector hit hard by the pandemic. There is much concern that the relief will now be stopped. The Shopkeepers campaign says the "relief is essential for the survival of many businesses but does not support growing enterprises because the relief has a cash cap set at £110,000".
It says removing the cash cap would provide the certainty needed for long-term investment to take place on high streets. Its "optimum solution" would be to cut the multiplier for all businesses.
It also wants the three-month empty property relief applied to shops to extend to 12 months, describing the current relief as inadequate, given the way the commercial property market operates today.
It says extending the period to 12 months, with a 50% relief thereafter, would encourage property owners invest in bringing vacant properties back into use. This is because an owner needs time to upgrade a property and needs capital to do so, which is not available when they have to pay full rates on a property that is not generating any income.
It wants an extension of improvement relief to three years from the current one year. It says one year is insufficient to incentivise significant investment in upgrading properties.
King says the Shopkeepers Campaign has been all over the country taking MPs on site tours in their constituencies and talking to retailers about how business rates affect their businesses.
"I was in Mansfield recently with the MP Steve Yemm and we spoke to a superb retailer who made wonderful fudge and she wanted to open another store but could not because of business rates and the amount it adds to occupancy costs. We need the government to reduce the multiplier. A first reduction to 50p would throw a marker down."
Flying Tiger's Bier says business rates are "hugely disincentivising" for entrepreneurs looking to start or grow a business.
"As soon as you open a store you pay the full business rate. It's not a tax on the performance of the business. And then on top of that the impact of e-commerce is not addressed."
Alex Hagemann, account manager, Pepper Public Affairs, says James Murray, the Exchequer Secretary to the Treasury, has been given the business rates review remit and is proving receptive. He adds there has to be some form of online sales tax to help ensure the £600 million-plus tax loss from reducing the multiplier to 50p is replaced.
"All of the reliefs at present are a sticking plaster essentially and something much more long term has to be introduced."
NewRiver REIT's Mackenzie says more regular revaluation is vital. After many years of industry campaigning there has been a recent move to a three-year revaluation cycle from five years to ensure rateable values will more closely follow changes in the market and will avoid some of the imbalances experienced by sectors like retail. Mackenzie wants annual revaluations.
"Ultimately we don't think the bones of the system are broken and there is clearly no easy solutions given the black hole in tax it would create but there needs to be more regular valuation. We are suggesting annually. But it must be in tandem with the Uniform Business Rate."
Mackenzie says the current cycle is hugely offputting for investors as it makes negotiations that involve projecting total occupancy costs so difficult.
All agree that investment in digitising the system and the Valuation Office Agency is critical.
"The VOA is not moving with the industries serves business rates too," says King.
"These are very long-running campaigns," King adds. "Reform gives opportunity to make a real difference to improving the country in multiple ways."