11 February 2021

The Chancellor should axe the High Street Tax

By James Daunt

Physical retail, the largest private sector employer in the UK, was under huge pressure before the pandemic, with many prominent business failures. The enforced closure of specialist retailers for months on end has exacerbated the crisis greatly, with tens of thousands of retail jobs lost – including an estimated 16,000 in January alone.

Meanwhile online retailers, including the online operations of the largest retailers, have been among the big winners of the last 12 months. That should not surprise anyone: online shopping had been growing before the pandemic and this shift in consumer behaviour has greatly accelerated at a time when many shops are closed, and people are cautious about visiting those that are allowed to open. The online operations of Waterstones have been amongst those to have benefited and we believe the shift to be a permanent one. Even when shops reopen, the share of sales taken by our online side will remain higher than before Covid-19.

This said, high street retail will remain the preferred place to shop for the majority of people. This will be for many reasons, not least the sense of community and recreation offered by shops, cafés and restaurants. Those who are tied to the home – for the most part by reason of age, the old and the young as well as those who care for them – are especially reliant on the high street. In short, shops are social spaces in addition to commercial ones.

The jobs offered by shops are also essential to many communities. They are local and flexible, open to the young and the old who otherwise could not find employment, and with a unique mix of part-time and full-time staff. A Saturday job working in a shop is the first job for many teenagers, and shops equally provide jobs to many in the twilight of their working years. Shops are run by a core of permanent professionals with good quality, well-paid jobs. Especially in the more economically challenged parts of the UK, these are jobs that will not be replaced easily.

We should all, therefore, want high streets to survive and flourish, supporting the vibrancy of their communities by providing jobs and social hubs. The present experience of mass closures of shops should be deeply concerning.

This is the context for examining the disproportionate burden that business rates impose on shops, and questioning the contribution of this tax to the destruction of tens of thousands of livelihoods and the attendant degradation of communities. Business rates in the UK are the highest in Europe and as a proportion of economic contribution, retailers pay more in business rates than any comparable sector.

Even as the high street has lost ground to online, the tax has been increasing, with the slow ratcheting of the multiplier from 35% in 1990 to over 50% today. Beyond this, the manner in which the tax is levied is perverse. Infrequent revaluations have severed the relationship to current rental levels, a fact exacerbated by limiting the decline in rates payable for valuations over £100,000 to between 4% and 5% per annum. When a tax has become so incoherent, it is perhaps no surprise that the corresponding rate of increase is set to between 40% and 50% per annum.

The Government has provided extraordinary support to businesses impacted by the pandemic, including the business rates holiday for the retail, hospitality and leisure sectors. This has not been sufficient to save all, but it has undoubtedly saved a great many retailers. Those companies, however, now contemplate the double whammy of a return to business rates and the substantial shift in consumer behaviour to online retail.

High street shops will have lower sales as a result when they reopen, and they will have fewer neighbours. The forthcoming closure of all 124 Debenhams stores and hundreds of shops in the Arcadia Group have made the headlines, but many others will not reopen. There is the real risk of a vicious cycle developing, with the closures of shops hurting footfall already under pressure, prompting more closures which in turn undermines the viability of further shops. The more vulnerable the community, the more likely this is to happen.

One means to avert this acceleration of shop closures is to rebalance the tax burden, recognising that the retail landscape has changed fundamentally. Physical retailers should no longer shoulder such a disproportionate amount of the overall tax paid by the sector. Rather, the tax should be balanced, with a reduction – or better still, the elimination – of business rates on retail premises, compensated by a new tax on online sales, something the Government consulted on as part of the Business Rates Review last year. A sensible threshold, as exists with VAT, should exclude small retailers and entrepreneurs in online retail, and thereby also ensure the fast and easily executed adoption of an online tax.

For a large retailer such as Waterstones, with both a substantial number of physical shops and an increasingly successful online operation, the overall burden of taxation would probably not change significantly. What would change is the present incentive to close physical shops, especially in more deprived locations in favour of a further concentration on online growth. The taxation system would align itself to support the most socially advantageous business strategy, rather than the perverse current situation where it does the opposite.

This would also recognise that dedicated online retailers will pay more tax and small retailers, especially independent shops, will pay less. The advantages to the high streets of smaller towns and the more disadvantaged retail locations will be substantial. Jobs in these communities, and the social fabric supported by shops, will be protected. It will also result in a small increase in prices for online shoppers, and a corresponding decline in physical shops. Again, the most disadvantaged in society will be the beneficiaries. Ofcom’s annual report on adults’ media use and attitudes notes that 13% of adults do not use the internet, with those aged over 55 or in the DE socio-economic group least likely to go online.

It is for these urgent reasons that I added my name to an open letter to Chancellor Rishi Sunak, signed by 18 major businesses and organisations in the retail sector representing large and small retailers, landlords and staff, calling for a cut in business rates and a levelling of the playing field between bricks-and-mortar and online retail businesses. Such a shift could be revenue-neutral, and it would recognise how retail has changed. By making this change in his forthcoming Budget, the Chancellor could transform the prospects of high streets, helping to level-up communities across the country.

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James Daunt is CEO of Waterstones.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.