According to an analysis performed by the Altus Group, there are 190,000 businesses in the UK that have received a summons to appear before magistrates over unpaid business rates. New rates came into effect on 1 April 2017 and businesses are still reeling from the changes. One group of businesses feeling particularly hard done by are high street retailers.
The new business rates were a significant change for many businesses and a once in a generation revaluation. Changes that should have happened in 2015, but were postponed to avoid a general election have led to some dramatic price changes. Although the rate change is staggered, price increases in certain parts of the country will be steep: hardest hit are parts of the South East and London. With the rateable value for property in some trendy London streets seeing over a 400% increase in value, the hike in business rate will be considerable. Many high streets in other areas of the country will see rates decrease – in some areas significantly.
With the high street facing dismal trading conditions due to online competition, those facing a big hike in rates are, not surprisingly, unhappy.
So 190,000 businesses are facing difficulty meeting rate payments, and some businesses in the South East are seeing crippling rate rises: how can this make sense?
The total cost to a rent a business premises = rent to landlord + business rates. The total cost needs to be at a level which incentivises businesses to sign a lease agreement so the landlord can afford to charge rent on the premises by calculating total cost – business rates = landlord rental price. Here is a short example:
The total cost of a high street shop which is affordable may be £2,000 per month. If the business rate is £500, then the landlord will set rent at £1,500; if business rates increase to £700, then the landlord will be forced to reduce the rent to £1,300.
So business rates are ultimately a tax on landlords who are forced to reduce rents to make their properties affordable. That seems a little fairer – landlords are often large groups and have some wealth so taxing them is better than getting tax from elsewhere (e.g. small businesses who traditionally struggle).
Retailers being unaffected by rate hikes makes a lot of sense in theory, but there are a few problems with this. Most importantly, it takes a little while for the prices to correct so while a rate increase is immediate (at least some of it) businesses are often stuck in rental contracts for a period and are likely to end up paying more. Also, it may take a while for landlords to work out how much they can charge and they may keep prices high to see if businesses can sustain them. It may take a business to fail before they reduce rents.
It was clumsy of the government to impose such a drastic change in one go, especially given what has happened to property prices in the past ten years, but the underlying economic principle of business rates does make sense. The £30bn it raises for HM Treasury each year is an important sum that would need to be replaced if lost.
There are ways to make business rates more palatable by introducing sensible reforms. Firstly, making business rates much higher than council tax incentivises landlords to build homes and this reduces the supply of business property further, so more parity could be considered here. Secondly, it makes sense to ask landlords to pay the tax rather than businesses – this will make property prices more transparent. Thirdly, the rate cost is based on the value of the property and not the land, effectively punishing businesses or landlords for making improvements, which feels punitive. Finally, reviews should happen more frequently so that price changes are less severe – the table below shows the changes in the last revaluation – a shocking short-term change for any business.
While the business rate hike in certain areas is certainly a shock, the high street is facing a more systemic crisis as shoppers move online to make purchases. With online retail becoming more trusted, slicker, and providing greater choice, trips to the high street don’t stack up so well for consumers. Retailers need to be looking at new and innovative tactics for drawing in shoppers. We sympathise wholeheartedly with retailers who have been hit by the clumsy recent rate hikes, but we point to innovation as the solution – this can be an opportunity for the very best retailers to rise to the top.
Whatever the macroeconomic theory says, rate hikes are real and the businesses facing financial trouble are real. At Red Flag Alert we have the perfect solution to ensure this doesn’t impact your business.
If you sell to businesses that have been hit with a business rate increase, it’s good practice to evaluate the health of those businesses, and you can do that directly with Red Flag Alert. We monitor every UK business in real-time, updating their financial health every day, so if your customers are experiencing financial distress, you will be informed immediately, giving you time to act and save possibly crippling future payment defaults.
If you’d like a free consultation to discuss how we can help you monitor your clients or suppliers effectively, then please get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699.