This article was originally published in Property Investor News‘ Print Issue, published on 19 November 2021, and the publication’s website here.
Autumn Budget 2021: Commercial property owners left disappointed as government fails to provide business rates relief for those outside of the retail, leisure and hospitality sectors
Beyond the retail, leisure and hospitality sectors, many firms urgently need Government support following the pandemic. But those anticipating drastic reform in the autumn Budget were left sadly disappointed. No such targeted relief was forthcoming. Indeed, these businesses have yet to receive any of the £1.5 billion relief funds championed in the March Budget. By contrast, retail, leisure and hospitality firms had already received more than £16 billion in relief before the autumn Budget. Additional support was announced last week: a further 50% business rates discount for one year – a business tax cut of nearly £1.7 billion – but only for those in retail, hospitality and leisure. Whereas 400,000+ office occupiers had to pay their business rates in full, amounting to £7.89 million, throughout 16 months of the pandemic.
Appeals by 170,000 occupiers seeking reductions in assessment prompted a retrospective Government ban of all business rates appeals, to be replaced by the £1.5 billion relief fund. Relief would be based on economic impact, not falls in property values: ‘the fastest and fairest way of getting support to businesses’ according to the Government. However, the funding was labelled ‘wholly inadequate’ since it would cover only 30% of the estimated £5 billion in challenged business rates. Furthermore, this funding remains blocked by parliamentary procedure, leaving commercial occupiers in limbo.
The solution? The Government should deliver on their promise, getting relief to firms that need it most, and undertake a radical overhaul of the business rates regime, which the Budget largely ignored. Typically 50% of annual rent, UK business rates represent one of the biggest overheads that significantly affects business profitability. Based on economic circumstances in 2015, current rateable values will remain the same until 2023. The system therefore cannot respond to recent momentous market changes.
Although the Budget confirmed a new revaluation cycle from 2023, with revaluations of non-domestic properties occurring every three years rather than the current five, this is insufficient. Vivienne King, chair of the Shopkeepers’ Campaign, said there is disappointment ‘that there is no commitment to annual revaluations so that tax bills reflect the market property values’.
Despite endless talk of reform, the Conservatives’ manifesto commitment to cut business rates has delivered only minor adjustments. Altus Group estimates that business rates bills will rise by £1.04 billion in England from next April. Some rates have become so unaffordable that they are hampering town centres’ ability to prosper.
An open letter to the Chancellor from UK trade groups, including the CBI, British Retail Consortium and British Property Federation, demanded that the Government cut business rates substantially and overhaul the system, or risk further store closures, adding that rates were ‘uncompetitive, unproductive and unfair’. As a proportion of GDP, UK property taxes are four times higher than Germany and 50% higher than the G7 average. According to Rain Newton-Smith, CBI chief economist, up to half of business investment could be subject to business rates, which means they had ‘literally become a tax on investment’.
Radical reform is needed. The Valuation Office Agency suggests that the era of prosperity is over for commercial property. Total floorspace, key for calculating business rates, declined in 2021. Given the pandemic’s impact, this trend will continue. The decline in taxable floorspace and ongoing closures of major retailers serve to reduce total tax take. The Government faces a dilemma: keep raising the multiplier to stabilise revenues or find an alternative tax base. Nimesh Shah, chief executive of Blick Rothenberg, notes that governments have repeatedly ignored wholesale re-evaluation of business rates because it is ‘too difficult and too expensive’ to reform.
One solution is to bring online commerce into serious scope for taxation. Pre-Budget, there were reports of a potential 2% online sales tax; however, no such tax was announced. Scott Parsons, UK chief operating officer at Unibail-Rodamco-Westfield, said: ‘The decision by the Chancellor to continue to avoid imposing any kind of tax on the e-commerce sector is another blow, as bricks-and-mortar retailers continue to operate on an uneven playing field.’
The distortion that business rates cause between bricks-and-mortar and online retailers could be alleviated by an online sales tax, which could also compensate for a reduction in business rates, potentially enabling a 20% reduction in the retail sector alone. Parsons added: ‘Of the £7.9bn that was raised through retail business rates in 2019/20, just over 5% was raised from online retailers who at the time represented approximately 25% of sales. We challenge this government to be brave and smart enough to come up with a solution, so our high streets don’t have to shoulder virtually all of the tax burden for the retail industry and online pays its fair share.’
But there is some good news. The Budget contained a new ‘business rates improvement relief’ encouraging businesses to adopt green technologies. From 2023, firms can make property improvements, and, for 12 months, pay no extra business rates. Energy efficiency measures can produce a higher business rates bill because they are deemed to have increased the property’s value, which means that the current system disincentivises favourable change. From 2023, the disincentive to make ‘green’ investments will cease.
Property consultants Cluttons said the Budget announcement is ‘not as fundamental as hoped, and certainly not in line with ‘a fairer simpler tax system’ that the Chancellor promised at the beginning of his speech’. Although retail, hospitality and leisure businesses will be encouraged by his announcement of a 50% one-year discount on business rates, firms outside of those sectors remain without adequate support.