If retail is to survive, the UK’s archaic business rates must change

The writer is chief executive of Marks & Spencer

Britain’s reputation as a nation of shopkeepers is fitting in many ways. Retail is the beating heart of the economy and our communities. It’s the UK’s largest private sector employer: Marks & Spencer alone has over 70,000 colleagues and operates more than 1,000 stores across the country.

Even before Covid-19, though, the sector was suffering. Empty retail space was on the rise, footfall in decline and the sector was grappling with a seismic shift in customer behaviour. The crisis has only accelerated these trends. Thousands of shops are now shuttered and high streets are deserted. The pandemic has seen many loved brands disappear. It has also laid bare the urgent need to create a fairer and more sustainable tax system that relies less on property and doesn’t only go one way — up.

Business rates is a system rooted in property taxes of the 1600s, and have provided a source of Treasury income for hundreds of years. They are charged on non-domestic property and based on its “rateable value”, which then faces an automatic “multiplier” set by central government.

No one believes this system is acceptable. Just as we now no longer rely on horse and carriage to get around, property is no longer a proxy for profitability. Policymakers also need to catch up with the digitalised, global economy. Our sector faces the fight of its life, and the government needs to act on its forthcoming review of business rates.

Put simply, rates have become too heavy a burden on the sector. In the past decade, business rates collected by government have risen by 30 per cent and a quarter of this £30bn annual tax take comes from retailers. Alongside National Insurance contributions, we believe this means that our tax burden is higher than other for other sectors. It is also utterly at odds with retail’s current state: more than 13 per cent of store space stands empty. Our Covent Garden store faced a 30 per cent rate rise worth almost half a million pounds the year before it closed in 2018, a position we found untenable.

During the pandemic, government support has made a real difference to all retailers. It’s vital that this substantial effort is not wasted. Even as the UK economy reopens, there will still be a long road ahead. So Chancellor Rishi Sunak’s reassurance that current support will not face a cliff edge is to be applauded.

However, without action on rates reform, the viability of much of the retail sector — and the substantial taxes it generates — will hang in the balance. Rates play an important role in supporting public finances. But the system also simply cannot continue as is. Three changes need to be made.

First, the standard multiplier applied to properties’ rateable value should be cut from the current level of 50p on the pound and taken back to the 1990 level of 35p. This would rebase rates to a sustainable level and alleviate the burden on all property-based sectors, including hospitality. Second, there needs to be more frequent revaluation of properties’ rateable values so that they better reflect market conditions. Third, rate payers whose properties drop in value should not have to wait to see their rates bill fall, as currently.

Clearly, these changes would leave a hole in the UK’s public finances, just when they need to be rebuilt. So the challenge is how to make them fairly, and in a way that supports economic growth and investment. Some property-intensive retailers argue that an online sales tax would level the playing field with pure online retailers who don’t pay rates on a store estate.

But, setting aside the complexities of how this tax would be collected, I believe that an online sales tax has too narrow a focus and would once again leave retail overburdened. We must not stifle the innovation that the sector’s future depends on, nor constrain bricks-and-mortar retailers from embracing digital and competing with ecommerce.

Put simply, omnichannel retailers should not lose any benefit of rate reduction due to an online tax. 

The fairest and most sustainable way for taxes to be levied is to base them on profits and ensure they do not penalise a specific sector or operating model.

UK corporation tax is at a historically low 19 per cent. So a case can be made for a modest increase to offset a cut in the rates multiplier. This would create a more equitable tax rate across sectors.

A final issue is treatment of multinational businesses, which all governments struggle to regulate and tax. The UK should redouble efforts to find an international solution whereby profits are recognised and taxed in the jurisdictions where revenues are earned. The UK presidency of the G7 this year is a perfect time to do this.

Such an approach would support UK public finances, help businesses, and tax them in a way that fosters the growth and jobs we all need.