Why Traditional Retailers Might Actually Have It Worse in the UK

Higher business rates, on top of heated online competition, have made things tough for brick and mortar.

If surging online competition wasn’t enough for traditional brick-and-mortar retailers, things might be harder in the United Kingdom. That country’s retailers—especially those located on high streets that make up the hearts of many communities—are simultaneously being hit with higher business rates.

The story surrounding those rates, which are effectively local taxes, is multilayered and has roots in the Great Recession and connections to the nation’s ongoing political turmoil. To find some clarity, we spoke with Ian Mackie, who leads BRG’s Real Estate & Fixed Asset Valuation practice in the Europe–Middle East–Africa region.

Business rates historically have been a somewhat sleepy issue. Why all the fervor about them now?

Rates are based upon the rental value of a property; however, valuations are done infrequently, and the last valuations were based on higher rents from a few years ago. That led to higher rates for (among others) retailers, many of whom are struggling against online competition. Retail organizations and some lobbyists are saying that the combination will be the death of the high street as we know it.

That might be overstating things, but we do have a problem. The Treasury Select Committee in Parliament is investigating the impact of business rates on the high street, and a lot of people recognize that the current business rate system is outdated.

What are the possible alternatives?

There are four. The first would be to make minor tweaks to the existing business rate system, certainly by having more regular revaluations—maybe every three years instead of five. There’s also a proposed change to the rates to use different inflation measures, and these could be further refined.

But I favor the other three more substantial options. One would be keeping business rates but making major changes, including evaluating what is considered exempt. Small businesses currently are, and there are some quirky parts of the existing system, including the valuation of plant and machinery that could be overhauled. Another option echoes recent actions in France (i.e., evening the playing field by introducing more taxes on internet-based retailers). There’s currently a proposal in the UK for a digital services tax.

Finally, the Labour Party wants to abolish business rates and replace them with a land-value tax that would charge landlords and not the occupiers. There’s economic theory that supports that approach, but the Labour Party proposal is short on detail. It’s unclear what will happen—much might depend on whether we have a general election anytime soon and who wins—but we need change given where we are in the economic cycle and the maturity of internet businesses.

If I’m not a retailer, why should I care about this?

Business rates apply to all large businesses, so any unfairness or inadequacies in the system are widely felt. The current focus on the high street is largely because brick-and-mortar retailers are major employers, so a lot of jobs are at stake. There’s also the issue of the makeup of the high street in some towns. For instance, as retailers close or move, charities—which are exempt from these taxes—are moving in. That might be a problem if you figure that some people still want the retail experience in their towns.

And beyond potential lost jobs, there are large economic issues, as pension funds and other institutional investors own many of the city centers and malls. Difficulties for retail tenants to pay existing rents will ultimately have an adverse impact upon the valuations of these properties for the landlords and will affect fund performance.

Given everything going on in the UK these days, is there enough bandwidth to even address business rates?

It’s a big issue, and it has been for the last couple of years—but it’s more now prominent in the press, culminating in government action. That said, it’s being overshadowed, like many things in the UK, given our government’s focus on Brexit. There’s a good argument to be made that this isn’t getting the attention it deserves, considering the stakes.

Is this another situation where the world should be closely watching what’s happening in the UK?

That’s right—because the brick-and-mortar problem for retail is, of course, not limited to the UK. Beyond that, if the UK follows France’s lead, it could prompt other countries to go that way.

What might be most interesting about this whole situation is that business rates historically weren’t even seen as a tax. They were looked at as operational costs. But austerity measures in the wake of the global financial crisis from the central government hit local municipalities hard, and those municipalities turned to business rates to bring in revenue. This was one of few mechanisms where local governments could raise money, so the relative cost to occupy for retailers and others went up.

That’s why this isn’t just an issue of online retailers increasing pressure on storefront merchants. Maybe it’s a cliché, but what’s happening to UK retailers is sort of a perfect storm. And it’s unclear what’s going to happen next, but in the last few months we have seen a significant number of high-profile business failures in the UK retail sector, and the concern is that, without change, these may continue.