Polls would suggest that the Conservatives' 14 years of power is ending and we will see a Labour government formed at the upcoming General Election.
With the new, comes the unknown and we wanted to take a look at what a Labour government could mean for business rates.
Today, Labour published its manifesto which states the following:
"The current business rates system disincentivises investment, creates uncertainty and places an undue burden on our high streets. In England, Labour will replace the business rates system, so we can raise the same revenue but in a fairer way. This new system will level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship."
This continues from their prior statement made as part of their 5-point plan to breathe life into Britain's high street:
This statement lacks clarity and fails to detail what specific action will be taken to replace the business rates system. Replacing the business rates system would be a bold and decisive move; business rates have existed in some capacity for over 450 years.
If they are to replace business rates, it will take a significant amount of time and cost to implement a new system. There is not a ready made solution that can be swiftly introduced and any replacement would be almost certainly be subject to consultations.
It could be that they do in fact have genuine intentions to replace business rates or they could intend to supplement business rates with new or expanded reliefs. We have analysed Labour's public statements and historic plans to try and understand what they might do and have explained some of their potential routes below:
Supplement: Online Sales Tax
The terminology used and the talk of levelling "the playing field between the high street and online giants" is reminiscent of the Online Sales Tax (OST), which was subject to a government consultation in early 2022. A summary of responses to the consultation was published in February 2023. The exact manifestation of an official OST has not been detailed but the basic concept is to impose an additional tax on online sales or services to fund relief for businesses with physical shops.
An OST is unlikely to replace business rates and would more likely be a supplementary tax that would mitigate select business rates burdens.
Whilst there is no official outline for an OST, an unofficial quasi-OST has in fact existed since April 2023. With the 2023 revaluation, properties within the retail sector saw their rateable values fall by 10% on average. Whilst industrial properties, including the large warehouses used as distribution centres for online giants, rose on average by 27.1%. The 2023 revaluation was purposely based on rental evidence from 1st April 2021 with the intention that rateable values would be reflective of a Covid-19 economy, where the high street was particularly hard hit.
On surface, this should have gone some ways to achieving the goals set out by any OST and analysis of the 2023 revaluation's impact could have provided insight into how any formal policy could take effect. The issue with any forming any sort of predictive basis comes from the skewed manifestation that the revaluation took.
Any tax reform needs to be focused on helping small businesses and not providing around £7,000,000 in tax relief to Harrods
The revaluation, despite advertising a headline decrease of 10% for retail property, was only favourable to large shops and, in fact, harmed small shops which make up the heart of the high street. Retail properties with a rateable value above £51,000 did indeed see reductions of 17.3%. However, properties with rateable values between £6,001 to £12,000 actually increased by 5.8% and it has been even worse for those between £12,001 and £15,000, which saw increases of 13.7%.
Any tax reform needs to be focused on helping small businesses and not providing around £7,000,000 in tax relief to Harrods, which saw it's rateable value fall by almost 45% at the 2023 revaluation.
Further, the 27.1% increase to industrial property, driven by increased rental demand for distribution centres, was applied indiscriminately to property across the country. This has meant small businesses have seen their bill for their workshops increase by 27.1% as their property just happens to fall within a class that is of interest to an online giant.
Whilst it's hard to take much away from how an OST will look from this, its clear this early iteration did not save the high street. Lessons can certainly be learnt of what must be avoided to achieve the results Labour has promised. This example highlights the need for specific, thought-out action, conscious of who will benefit from the policy and who may be inadvertently affected.
The current government has also provided business rates reliefs targeted at properties used for retail purposes for the past five years. These reliefs are not available to distribution warehouses. The reliefs are welcome but are presently announced on an annual basis with no assurances further reliefs will be provided in the following years, in effect acting as short term plasters to a wider problem.
Clever utilisation of social media and web platforms should be encouraged not kneecapped
Looking beyond current balancing attempts, a tax on online sales needs to be cognizant of the modern day's retail environment which is becoming more intrinsically entwinned with technology. Within the 2022 OST consultation, many retailers identified that online sales were a clear growth opportunity - clever utilisation of social media and web platforms should be encouraged not kneecapped.
The International Trade Administration published statistics showing that eCommerce accounts for 36.3% of the total retail market in the UK and in 2022, UK online sales saw its highest annual growth since 2007 with sales increasing by 36%.
The public's intoxication with online shopping is clearly not just a hangover from Covid-19. A Labour government must ensure that by taking measures to replace business rates in the name of saving the high street, that they are not taking actions akin to swimming against the current.
Supplement: New Shop Bonus
Labour have also publicly called for a new shop bonus; a three month rates exemption applied between the seventh and ninth month of the first year of occupation in a new retail premises. This would be funded by removing the three month empty exemption offered to landlords when a retail property first goes empty.
This would speak to their manifesto promise to "tackle empty properties and support entrepreneurship."
By applying the exemption seven months into the occupation it means viable, proven business are the ones receiving the relief. It would also further limit the ability to conduct unethical empty rates avoidance and encourage ethical solutions to filling empty space.
For our full thoughts on empty relief, please read our insight post: "Empty Property Opens New Possibilities".
Safeguarding would need to be included to avoid shops cycling between sister companies on a nine month basis to routinely claim the three month exemption.
Supplement: A Permanent Retail Discount
As touched on above, presently retail properties benefit from substantial discounts and have done since 2019. Introducing a more fixed discount rather than one that is annually renewed would go a long way to allowing businesses to forecast. Within the Conservative manifesto, they have promised to continue all existing business rates reliefs and one must assume the retail discount is a flagship relief they would keep.
A retail discount which is better fleshed out and more solidified would go some ways to helping the high street.
There hasn't been any suggestion that this is something Labour have considered, although it would prove to be politically very unpopular to remove the discount.
There are issues with the present retail discounts; they are applied at local authorities' discretion and the government guidance leaves a large grey area for interpretation. A business can be viewed as retail in one council and not retail in another despite operating in the same way.
This can create real issues with businesses vying for market share in the same vicinity but based in neighbouring authorities with distinct intrepretations; there is a clear competitive advantage to be gained by simply operating in an authority with a more generous application of the discount.
A retail discount which is better fleshed out and more solidified would go some ways to helping the high street.
Supplement: Increase the Small Business Rates Relief threshold
Labour has previously stated they would increase the threshold for small business rates relief (SBRR) from £15,000 to £25,000. The Federation of Small Business has stated this would remove more than 250,000 small businesses from the rates system.
The effective of this would depend entirely on the taper of the relief. Presently, businesses with a single property with a rateable value under £12,000 receive 100% relief, dropping by 8.33% every £250 of rateable value up from £12,000, eventually meaning businesses with rateable values of £15,000 or higher receive 0%.
If the taper is from £15,000 being 100% relief and £25,000 being 0% relief, this would provide considerable benefits to a huge numbers of businesses.
Further support could be provided by being more forgiving with additional properties. Under the current system, additional properties will typically remove eligibility for the relief, creating a large punishment for business expansion.
In Wales, companies can receive SBRR on two qualifying properties per local authority. This protects local authorities from fraudulent claims as they will hold all the information needed to judge eligibility and encourages businesses to expand into new areas.
Supplement: A new multiplier for distribution warehouses
Within their manifesto, the Conservatives and have pledged to "ease the burden of business rates for high street, leisure and hospitality businesses by increasing the multiplier on distribution warehouses that support online shopping over time."
This is not something that has been hinted at by Labour but marries with their plans to "level the playing field between the high street and online giants".
The multiplier is already extremely high at 54.6p for every £1 of rateable value. If this is something that is considered, instead of raising the multiplier for distribution warehouses, why not lower the multiplier for everyone else?
Replace: Land Value Tax
In 2019, Labour were considering proposals to replace business rates with a Land Value Tax (LVT) as an official policy. It's a very different Labour now to the one in 2019 but we do know its an idea that they have considered internally and it's still a relevant idea within discourse around business rates reform with some political appetite. The Liberal Democrats have pledged in their manifesto to introduce what is effectively a Land Value Tax via the Commercial Landowner Levy if they come into power and have long be infatuated with LVT and its principles.
The basic concept is to tax the land based not on what is actually built but on its prospective value; as explained by the Liberal Democrats ALTER group (Action for Land Tax and Economic Reform): "A vacant plot in a row of houses would be taxed the same as a similar built-on plot". Another departure from the current business rates system is the tax would be levied against the landowner rather than the occupier. This could be what Labour is referring to when stating "so we can raise the same revenue but in a fairer way."
The idea behind LVT being that the current system punishes development and a tax based purely on the value of the plot of land would encourage efficient usage of the land, as you are being taxed the same if you are using the land productively or not. This would again speak to Labour's intention to "better incentivise investment".
The current government has taken steps to incorporate some of these principles with the new Improvement Relief. This relief protects businesses from increased rates resulting from qualifying improvements for a year. Improvement Relief is a good starting step but does not go far enough, particularly as figures published by the VOA today show that in the year since the 2023 revaluation, over a quarter of a billion pounds in rateable value has been added to the list.
Scrapping business rates to balance the playing field for a system in equal need of supplementary taxes would seem to be counterproductive.
Encouraging efficient usage of land would certainly conflict with Labour's commitment for parity between the high street and online giants. Amazon's warehouse based away from traditional high value land spaces would be a far more efficient use of land than a middling shop in a city centre. This was acknowledged by Labour in 2019 where they state "supplementary taxes may be required to ensure that some highly successful businesses situated in low land value areas are not given an unfair advantage". Scrapping business rates to balance the playing field for a system in equal need of supplementary taxes would seem to be counterproductive.
The acknowledgement that online giants can be using land and property more efficiently than the high street highlights that attempts to balance the playfield aren't for purely financial reasons. They are also to recapture a feeling of community felt lost. If that is truly the goal then reworking the entire property tax system that has existed for 450 years is not the best use of time and the public purse.
Could the money required to rework business rates instead be provided to support community based interests such as our friends at Esports Youth Club? Subsidies for rental costs and property tax of initiatives aiming to create community hubs to our high streets would achieve the underlying, ultimate goal of bringing life to the high street.
Beyond questions of efficiency, LVT has been criticised for the new burden it creates on land owners, with the suggestion the new cost would be passed on to tenants and reflected in their rent; which lacks an official, regulated appeals process in the way business rates does. LVT supporters argue that the market will not allow for this outcome, with supply and demand forcing the landowners to accept the increase or face paying property taxes with no rental income.
If a LVT is introduced it would almost certainly have to be phased in gradually due not only to the time it would take to create a new system, but also due to the almost desired effect LVT would have on property prices. A swift introduction would cause property prices to crash dramatically due to the new financial burdens attached to property ownership.
Our view:
Given the unwillingness to provide a clear plan or strategy, it seems Labour have acknowledged there is a problem but don't have a solution. There are two things every stakeholder wants with business rates; certainty and transparency. Unfortunately, the manifesto offers neither.
There are two things every stakeholder wants with business rates; certainty and transparency. Unfortunately, the manifesto offers neither.
The time and money spent deliberating and consulting on a new commercial property tax system could be better spent providing fleshed out, targeted reliefs at businesses that are struggling, or for community interests that deserve support.
It could be better spent increasing the level of transparency and disclosure at the Valuation Office Agency.
It could be better spent making business rates more accessible and simple to the consumer by removing the arduous burdens imposed by the Check, Challenge Appeal system and reversing the planned additional burdens imposed on the ratepayer by the Non-Domestic Rating Act 2023.
If you have any questions about any of the concepts raised above or would like to discuss your business rates both moving forward and historically, please do get in touch with us on 0208 0950 990 or info@hollowaybond.co.uk.
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