The CEO of Sainsburys recently stated that unless business rates are reformed more than 17,000 shops are at risk of closure over the next decade.
In this insight post we wanted to explain how business rates and high street properties interact so you can understand exactly why your rates are what they are.
How are rateable values for retail properties calculated?
All rateable values are an attempt to reflect the rental value of a property at a certain date (currently 1st April 2021). Consequently, the way retail properties are valued are unique compared to offices and industrial properties, reflecting what hypothetical tenants look for in a shop and deciding how much rent to pay.
Generally speaking, retail properties are rated on a zoned basis. The first 6.1 metres (20 feet) from the shop window is called Zone A and is the most expensive. The subsequent 6.1 metres is Zone B and is typically half the price of Zone A, this then continues in the same fashion to Zone C. After Zone C the remaining space is called the remainder and is half the price of Zone C.
The reasoning behind this is the space closest to the window is the most valuable to retailers; it serves as eye catching marketing space to entice potential passerby trade through the door and, further, typically customers spend greater time in the entry area of the shop as opposed to the rear areas.
This can create situations where shops of the same total size can have drastically different values. For example, if one shop is long and narrow and the other is wide and short, the wide shop will have a much bigger Zone A and subsequently, a significantly large rateable value.
In these scenarios, the Valuation Office Agency (VOA) will often apply an adjustment to reflect the peculiar shape. Other common reasons for the VOA to adjust the value would be split levels within the shop or obstructed shop frontage.
The price per square metre of shops is typically dictated by its general location and other factors that could affect the footfall of potential custom it receives. Examples being proximity to local attractions or anchor stores (large shops occupied by household names that naturally drive custom to the area).
What next for business rates and the High Street?
Sainsburys CEO is just one voice in a chorus stating reform of business rates is necessary for the survival of the high street. Labour heard these warnings and made it a manifesto pledge to "replace the business rates system" and "level the playing field between the high street and online giants".
We provided full analysis of this statement and what it could mean in our Manifesto insight post.
To briefly summarise that post, suggestions as to what potential business rates reform could be is; an online sales tax, a new shop bonus, a permanent retail discount, an increase to the Small Business Rates Relief threshold, or a Land Value Tax. Each would have their own merits and potential pitfalls and we would encourage anyone interested to read the full post.
A more recent suggestion made since that we published the article is bespoke multipliers depending on property class and business type; for example, it has been proposed charities would have a fixed multiplier of 0.3 of their rateable value, whilst large businesses would pay 0.5 of their rateable value. Under this framework, it is often stated retail properties would also have a fixed multiplier of 0.3.
There is similar infrastructure in place where properties under a certain rateable have reduced multiplier compared with properties over that threshold. There are also location specific supplements to the multiplier with properties within London paying more to fund the cross rail project.
The Welsh Government have recently legislated to allow their own bespoke multipliers if needs be, detailed in our article here.
Whilst this suggestion is certainly interesting and worth consideration; retail properties currently benefit from a 75% discount after the multiplier has been applied to their rateable value. So for a shop with a rateable value of 10,000, they would pay £4,990 before any relief and £1,247.50 after relief. This is the equivalent of a multiplier of circa 0.125 so this proposal would actually be an increase for the business rates of retail premises.
Presently, there doesn't appear to be a fix all solution and it'll be extremely interesting to see Labour's plans expanded upon more in the upcoming Autumn Budget.
How can I reduce my shop's business rates?
There a number of ways to reduce your liabilities. Your rateable value can be contested with the VOA. Reliefs targeted at supporting small, independent businesses exist and can provide crucial help for your business.
If you would like to discuss your options with experts, please call us on 0208 0950 990 or email info@hollowaybond.co.uk.
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