Business Rates Exposed - the Curse of an Archaic, Broken System

The Injustices of Business Rates: An Unfair Taxation System in the UK that impacts especially on retailers, big or small

In this episode, host Gary Marshall discusses the inequalities and inefficiencies of the business rates taxation system in the UK. Highlighting its archaic foundation and complex bureaucracy, the episode exposes how businesses, particularly retailers, face an unjust financial burden. Should this system be abandoned for a fairer, more modern alternative? The episode also covers historical context, recent government interventions, and the impact on different business sizes and locations, concluding with a call for a fiscal system based on business operations rather than building values.

00:00 Introduction to Business Rates

00:41 The Complexity and Unfairness of Business Rates

01:53 Impact on Retailers and High Streets

03:23 The Basis of Business Rates

05:33 Online vs. Bricks and Mortar Retailers

08:46 Government Relief Schemes and Their Limitations

15:20 Historical Context of Business Rates

20:45 The Bureaucratic Nightmare of Appeals

24:49 Conclusion and Call for Change

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Transcript

0:00

Welcome to That Retail Property Guy with your host, Gary Marshall. In each episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. Sharing stories and insights through Gary's unique lens, we hope you'll be entertained, enlightened, and maybe a little inspired. In general, for most of my episodes, I try to follow a median line from an unbiased perspective, pointing out the pros and the cons. But when it comes to the subject of business rates, I really struggle to see any pros. The whole underlying process seems to me to be a curse of inequality in taxation. It's based on an archaic system that has never worked, and is so broken and unfixable as to be absurd. To explain this viewpoint, I probably need to share some background. But business rating is a complex area, and even the briefest of discussions can be, let's say, thought provoking. So let's dive straight in. Business rates is a tax, pure and simple. It's an exceedingly complex process, and in my humble opinion, it's an unfair process, with fundamentally flawed concepts, and it's Kafka esque in its bureaucracy. It is unwieldy. It's a bit like that game of whack a mole, where a critter pops up. You whack it with a mallet, but it pops up somewhere else. When successive governments have tried to tweak one area, perhaps to correct a perceived failing, a consequence pops up somewhere else. The administration of the process requires a bureaucratic monster consuming bucket loads of taxpayer funds, what our American friends call tax dollars, while chasing itself around in never ending circles. So it begs the question, does it in fact work at all? Is it time to abandon it like a white elephant and adopt a different approach that's easier to administer and fairer in application? A change that is fiscally neutral for the Chancellor and cost effective for the taxpayers in general, while hopefully saving our high streets from dereliction and restoring the town centres, which are the heart and soul of our communities. Because after all, isn't that what government for the people is all about? And the business rating process is absolutely biased against retailers. According to Business Matters magazine online, in 2019, retailers were paying seven billion pounds a year in business rates, which equated to more than a quarter of all business rates across the UK. So why should retailers be picking up the lion's share of this tax compared to, say, big industry? Warehouses, offices, and so on. In 2022, the independent reported statistics from Altus, a property advisor, that in the preceding year, 3, 165 businesses, including shops, pubs, restaurants, offices, factories had gone into insolvency while awaiting the results of a rating appeal. Now who can say whether rates were the only contributor, but they were a contributor. Possibly these businesses had been overpaying rates due to an excessive assessment. And might have been due a sizable refund, but it simply didn't come in time. The legislation, the process, the machinery to appeal against unfair or unreasonable or incorrect assessments is just too unwieldy, biased against the taxpayer. More on that later. And as this burden nudges more and more retailers towards shutting up shop and going online only, or even going bust, meaning that retailers will stop paying into the process, does it risk being the author of its own demise? At this point, let's clarify that business rates is a tax based on the properties that businesses do business from. It's nothing to do with the business itself. It's not commensurate with the profits a business makes. It is quite simply based on a perception of the value of the building which houses the business. And that perception might be wrong by a small or a large percentage factor. There are huge location based variances in the perception of value. depending where and what the property is. This can be reflected in a north south divide or city centre versus suburbs, and affluent areas versus impoverished areas. And in many ways, retailer locations are a barometer, an indicator of those location based variances, where the business rates, and remember it's a tax, on a typical retail space in, say, the north west or the north east of England, could be absurdly out of kilter with the business rates. Tax on identical space in proximity of the M25 in South East England, just a few hundred miles away. How is that fair and just? I hear you cry. Why should the affluence of a locality have any bearing on the tax that a business pays for the privilege of doing business there? And of course, bear in mind that the size of a business and the size of its property and the level of its rateable value don't go hand in hand. Scale and success and profitability depend on output and business margin, not the presumed value of a building. Okay, we understand that the government needs funds, taxpayer pounds. They don't have a money tree. But could they be fiscally neutral with an alternative scheme? Should it in fact be based on the business we do? Not the building we do it from. Could the abandonment of this archaic process level the playing field for bricks and mortar business against online retailers, whether these are super large enterprises or bedroom based crafters? And could a fairer system breathe new life into town centres and other retail locations and make us all feel better about where we live and where we shop? And not all retailers are treated equally. We gained a lot of clarity in this from the COVID pandemic. We can measure a lot of things by pre and post pandemic. That period changed our lives. It certainly saw a massive boost in online retail to the likely detriment of bricks and mortar retail. As retail businesses, these two aspects are wildly diverse. Online retailers range from Amazon to an army of cottage industries with people selling online from their bedrooms or sheds. It includes lots of stockists, who traditionally supplied retailers, but now have an opportunity for an online shop selling directly from their warehouse to the end user. By comparison, bricks and mortar retailers have actual shops. And massive overheads at the point of sale. They have rent. They have service charge. Insurance and maintenance and repairs. They have sky high utility costs. And of course, loads of frontline staff, all acting as ambassadors for the brand and helping to drive profit. And they also have business rates. Okay. A big online retailer like Amazon also has premises and also pays business rates, but measured on a different scale, an onliner. Operating solely out of a warehouse, even if that's a massive warehouse, might carry a total lower rates burden than a bricks and mortar retailer operating out of a number of retail locations in high streets and retail parks, and of course still having a distribution warehouse to support them, with rates payable on the warehouse as well. It's a double whammy. Take an example of Amazon's Fulfillment Centre in the East Midlands at Castle Donington. According to sources, it's around a million square feet. And I'd hazard a guess that the rating cost per average square foot, or square metre, is considerably less than might apply to the average square foot or square metre of a bricks and mortar retailer, such as Next, also based in the East Midlands a few miles down the road. When you consider the total square footage and rates bills of all their high street and retail park and shopping centre stores, As well as their distribution warehouses. And compare it to the rates burden of the online competition. This seems like an unfair bias in favor of online only. And once again, it could in part be driving retailers out of town centers and other customer accessible locations. That could then mean a negative impact on our town centres, with more empty shops and more boarded up windows, and consequently, a drop in the actual rates sums being paid to the local authority. So again I ask, is this a self fulfilling drive to the bottom? And political attempts to juggle the eventual bills that businesses pay, rather than modify the system itself, also causes issues and consequences. Particularly if they are not equal for all end users. One example, while the pandemic boosted online retail, it drove a mega change in customer patterns for bricks and mortar retailers. Not surprisingly, with shops and pubs and other venues shuttered and customers kept at home, many operators faced real cash flow difficulties. So the government, conservative at that time, introduced a scheme to help out. The Retail, Hospitality and Leisure Relief Scheme, affectionately known as RHLR, allowed a 75 percent discount on rates for a limited period only, to help those businesses to mitigate the impact of the pandemic. But this temporary scheme was generally targeting the smaller business. Retailers come in all shapes and sizes, but the scheme had a cap, a maximum allowance, Of 110, 000 per business. That's per business, not per outlet. So some retailers, and some independents with fewer but larger premises, hit that cap pretty quickly and couldn't achieve the maximum 75 percent benefit that smaller retailers enjoyed. RHLR was initially offered in 2022, with an expectation that this relief would expire in March 2025, as the country in general, and the retail, hospitality, and leisure sectors in particular, got back on their collective feet. So we all knew it was a short term fix, although I guess many businesses in those sectors have kind of got used to it. There's been a lot of press coverage of the impact of losing the relief, like this is some kind of negative, although in reality it is just rebooting the previous normal. But then in October 2024, so a few months before the intended expiry of RHLR, the national elections saw the Labour government return to power after a long absence. And one of the proposals in their budget was to extend that expiry to 2026, but giving with one hand and taking with the other, it was extended at only half the rate down from 75% to just 40%. And I say, just let's not look a gift horse in the mouth. 40% off is better than N, but still good for smaller and medium sized businesses and less good, but still helpful to the larger business. The labor budget also proposed a second example. of juggling the eventual bills on an unequal basis. Aside from the extended but halved RHLR scheme, the new Labour government also proposed changes in how a rates bill would be calculated in the first place for certain business categories that include retail. And again, the impact could be more beneficial for the smaller or independent operator, and less so, or perhaps even harmful, to the bigger business. A rates bill is made up of two, perhaps three components. The first is the rateable value, and this is a notional value supposedly based on rental values on specific dates. These values are supposed to be revised every few years, and they can be appealed. If an occupier has evidence that the value is incorrect, more on this later. The second is the multiplier. Now this is a pence in the pound rate. In simple terms, these are not genuine figures. If a rate bill shows a rating value of a hundred thousand pounds and a multiplier of 40 pence in the pound, then the rate payer would pay 40,000 pounds. Simple enough, there is a possible third element, which is an arrangement for transitional relief. which is a buffer against large increases from one rating list to the next. Not all occupiers have the benefit of a transitional arrangement, also known as phasing. For most occupiers, the bill is just rateable value times multiplier. And changing the multiplier, the rate in the pound, gives a rates bill a different total amount payable. It could also impact some occupiers with transitional relief arrangements. And in simple terms, playing with the multipliers is like playing with the income tax rates. If they increase the rate in the pound, they can gather more tax pounds. And here's where the inequality of the Labour government's proposal comes in. For years, there have been two classes of multipliers. Supposing that some rateable values are deemed small, And anything else is not small. Small rateable values used a lower multiplier. For example, back in 2017, the multiplier for small rateable values was 46. 6 pence in the pound, while everything else used 47. 9 pence in the pound. And small was defined as anything with a rateable value below 18, 000 pounds, or 25, 500 pounds in Greater London. So a check of the arithmetic at that time, a small hereditament, With a rateable value of 10, 000, would basically pay 4, 660, the new Labour government proposed to review the multipliers for the sector which includes retail, hospitality and leisure. The Chancellor announced that from April 2026, properties in this sector would be taxed at a lower multiplier compared to other uses. But before you hurrah and cheer, consider that this sound bite isn't the full picture. In order for this change to be fiscally neutral, the lower rate for some properties would be funded by a higher rate applied to other properties. The government proposes the lower rates for any rateable value in this sector below 500, 000. But a higher rate would be applied to rateable values at 500, 000 or above. And this higher value can still include retail property, maybe for larger stores, and particularly in the South East and in affluent areas nationwide. So a retail store with a rateable value of half a million pounds would pay substantially more in business rates than its neighbor with a rateable value perhaps just one pound less because one would use the higher multiplier and the other would use the lower one. Now imagine, if you will, the scramble of occupiers who will try to appeal their rateable values by even just one pound to squeeze below the threshold. This highlights the inequities, the difficulties in administration, the consequences. Could a drastic change, a different process, actually save millions of taxpayer pounds, which fund the hamster wheel of valuation offices and rating tribunals? It could be fiscally neutral to the state, and possibly save the high street, which at the end of the day is the heart of our community. In my opinion, the rating process as it stands is fundamentally flawed, not fit for purpose, archaic, expensive to run, and impossible to control. Let's consider the journey that has led us to here. The foundation of our current system was legislated a century ago, in the 1925 Rating and Valuation Act. But according to the National Archives, the first rate system was set up as long ago as 1601, as a form of local taxation to fund essential municipal services to help the poor. The basic tenets were simple, that an occupier would pay a tax based on the assumed rental value of their premises, whether that building was in fact held freehold, not leased, or was leased on a rent bore no resemblance to the assumed value. The assumed value was just a means to levy the tax. Like other daft schemes, such as the window tax, paying tax based on how many windows your property had. Or the brick tax, paying tax on how many bricks you needed to build your property. Those other daft taxes were soon repealed, but somehow the 1601 Act rolled on. With a few facelifts for over 300 years. And then a century ago came the 1925 act the 1925 act proposed fresh nationwide revaluations of the rental value of commercial and residential properties. The residential side eventually morphed into the council tax bans that we now recognize, but which are, of course, still based on an assumed value of a property, which has no relation to the funds that the local authority requires to perform its basic services. But the commercial side remains pretty much untouched, still locked in an antiquated system. The idea of the 1925 Act was that lists of rating values would be created and then reviewed every five years. So five years on would have been 1930, but somehow that deadline got missed. And the next list didn't come out till 1934. And then the second world war got in the way. So the 1934 list just rolled on until 1956. So one review between 1925 and 1956, you can see that the prompt and seamless delivery of the bureaucracy of business rating didn't get off to a good start. And that kind of set a trend. These new valuation lists were created by valuers working for the Inland Revenue, and they were basically expected to value everything, everywhere, all at once, at the same moment. That's a real workload challenge, maybe in second place only behind Father Christmas. The rating legislation gave new meaning to an old word, hereditament. The original meaning, in common law, is any kind of property that can be inherited. But in rating parlance, it's any property that can be valued for rates. A rating hereditament isn't necessarily an exact match or clone of the legal interest in the property being assessed. It can be part of a building, if an occupier effectively splits a genuine building into separate parts or uses. So a three story structure with a retail shop on the ground floor and perhaps office space on the upper floors could be arbitrarily split into two hereditaments for rating purposes, even if it's held on a single lease. Or a single hereditament could be formed by arbitrarily combining multiple areas held on different leases, if the valuation officer simply deemed it to be one homogenous operation. In many ways the original hereditaments, and remember these are the basis for the rating assessments. depend heavily on whatever the valuation officer encountered when they first set foot in the place maybe decades ago. In theory, the assumed values of each hereditament were based on recognized valuation practices. The valuation officers tried to gather comparable information for similar buildings and locations. But through the years, So much of this has now become a desktop exercise. The sheer overwhelming volume of values and analysis and older unchecked data, like the physical footprints of buildings, means that some, dare I say many, rating valuations just don't reflect the actual building that a retailer occupies. Some buildings will be over assessed and others will be under assessed. But that simply highlights the futility of trying to impose this basis of taxation. Surely there must be easier ways. But back to our history lesson. A new list came out in 1963, and that was the year the Beatles released Twist and Shout and A Cup of Tea Cost Sixpence. But the plan for the five year revaluations fell by the wayside. The 1963 list stayed with us until 1973, which was slightly longer than the Beatles. The values in those lists became fixed in the public psyche, almost set in stone. A consequence of this was that over a period of years, and with a fair degree of inflation, the assumed rateable values dropped way behind actual rental values. So the actual rate payment, which is the sum you pay, a liability based on the rateable value, lost significance. It wasn't a massive cost burden. It didn't really factor into business decisions, not like now. The sheer volume of activity thwarted the process. Not just the requirement to do the five yearly nationwide revaluations in the same moment, but to deal with all the appeals. Because, any bureaucratic process needs a right to appeal. If an occupier felt that they were being unfairly or unreasonably taxed based on an incorrect valuation, they could submit an appeal and wait for their day in court. Or tribunal, to be rating relevant. So the lists rolled by and the appeals backed up. There was a reboot of the system in the 1980s and then lists followed in the nineties, the noughties, 2010, 2017. The most recent values are based on rateable values assessed in 2021 and became effective from 2023. Each list carried its own backlog of valuations and appeals. It was possible to have a linked series of appeals sitting in consecutive lists, where the outcome of the earliest appeal, whether up or down, impacted the next. If you had an appeal in the 2010 list that hadn't been resolved when you submitted an appeal for the subsequent 2017 list, you'd still have to wait for the 2010 list. 10 appeal to be resolved before the tribunal would even look at your 2017 appeal. Even if both appeals were based on the same very objective argument like they valued the wrong building. One consequence of waiting on these consecutive appeals was the impact on something called transitional relief or phasing. This has changed a bit over the years but was basically introduced as a buffer. against sudden and great changes. If the rates bill, that's the actual amount you paid, went up or down drastically when a new list came out, the transitional relief limited the impact. It created a series of steps or maximum changes per year to soften the blow, to phase it in over time. This sounds helpful, but it could work both ways. Phasing in the impact of a large increase for an occupier, but also phasing in the benefit of a large decrease. Thankfully, phasing on decreases ended in 2022, so occupiers now get the full immediate benefit. So an appeal from an earlier list could have an impact on the size of the increase in the next list, which could impact on whether the occupier got transitional relief, or not, or how much. And of course, at the point of receiving the outcome of the appeal, the occupier is always looking back in time. Years have passed, during which time they've been obliged to keep making payments based on the pre appeal situation. Which could all then get reversed by the impact of the results on any phasing. It's absurd. All of this Kafkaesque bureaucracy is dependent on a small army of valuation officers and some tribunals. Insufficient, in my opinion, to be effective. Just dragging the system down. They simply can't process appeals fast enough. In the hundred years since the first modern act of parliament about business rates, It has never worked, but still they proceed, still they push ahead, at huge cost to the taxpayer, not the ratepayer, because everyone pays for the government to run this valuation system. And there are even more layers to this frankly bonkers arrangement, on top of the obvious appeals for the main valuation on each list. There can be other reasons to appeal. Maybe for a change in value due to a substantial material change in circumstance. Like the opening of a new destination shopping centre a few miles away, which sucks the life out of an established town centre, and so, in theory, Reduces its assumed rental values or a temporary impact, like a long running road improvement scheme or the pedestrianization of a town center with all the associated chaos and traffic issues that effectively drive away all the shoppers for months on end. These appeals layer up on top of each other, and so the backlogs grew. And an occupier could wait a long time for the results of an appeal, any appeal. And don't forget, while the appeal is pending, the occupier is obliged to keep paying the disputed tax. The burden of this liability could contribute to the downfall of a small business. The refund, when it finally comes through, might be substantial, but that's of no benefit to a retail occupier who's just gone into administration a few months before. There must come an opportunity to consider and discuss whether the rating system is in fact relevant or appropriate at all. Is a taxation system, which is based on assumed values of assumed hereditaments, which may not align, with the actual subject of a tenant's lease. Fair or fit for purpose? Should this tax be transitioned into something based on the business we do, not the building we do it from? Could the abandonment of this archaic process help to level the playing field for bricks and mortar business against online retailers? Whether these are Super large or bedroom based crafters. Could a fare assistant be fiscally neutral for the government, while reducing the costs of being a physical retailer in any location? Which in turn could breathe new life into town centres and other retail locations, and make us all feel better about where we live and shop. This brief guide through the complexities of business rating is far from intended as a complete guide. It's perhaps a bluffer's guide. An elementary background. And of course, a little knowledge is a dangerous thing. This is a complex area. So if you have questions or need help, please seek it from an experienced property professional with the right specialist knowledge. Arm yourselves with the facts, get the right support, be proactive and save unnecessary losses. Thank you for listening to That Retail Property Guy. Don't forget to explore more episodes, and if you have ideas for future topics, feel free to share them below. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit thatretailpropertyguy. com. Thanks again for tuning in.