Business Rates for Online Businesses

By Neil Harrison LL.B. (Hons)

The big business rate debate

Recently a massive upsurge in discontent has been voiced by shopkeepers over the business rates they have to pay if they want to trade from a physical premise.

The shopping landscape has changed considerably over recent years with the increasing amount of online consumerism, making owners of actual shops feeling penalised by the amount of business rates they have to pay, when the perception is that online businesses pay little or nothing. But what is the reality?

Business rates tax

What the high street is facing

Apart from having to employ shopfitters to set up the layout of the shop, there is the issue of stock, equipment and anything else that the business requires to operate. Depending on the type of business, you may require refrigeration units, ovens and of course cash registers and card payment facilities, the list is almost endless. Then came the pandemic with its stop-start measures and collapse in revenues.

But it is only now, with the vaccine roll-out in full swing, and the promise of reopening on the horizon, that many shopkeepers are considering throwing in the towel.

Many are wondering at what point does it become just too much and not worth the effort to keep going. A big part of the problem is business rates according to many shopkeepers.

Crippling business rates is nothing new

The issue of business rates is certainly not a new issue that high street business owners have to face. I recall back in the middle of the eighties, a friend who owned a fishing tackle shop was looking into relocating his business from a back street in a little frequented part of the town, to the newer, more popular part of town, as this would increase the footfall considerably.

Unfortunately, the cost of just the business rates in the new location was far more than his entire annual takings and it was simply too much of a gamble to assume that the potential for the extra business would make up for the increase in rates.

The end result was that he stayed put, continued to trade and pay his already costly business rates and eventually closed the doors when the outgoing expenditure overtook the income the shop could generate.

Business rates today

Many shopkeepers today have not had to pay business rates since the start of the pandemic. This payment holiday, along with furlough for workers, help with VAT, and government backed loans and grants, have saved many business owners from closing down.

But much of this support, including the business rates holiday, is set to end in April unless the chancellor has a change of heart before the Budget in March.

The chancellor may decide to extend the help, which would be a lifeline for shop owners, but better still, many believe the treasury should look at the way rates are calculated altogether.

Before the pandemic more than half of a lot of business profits went to pay the business rates, now that is a fair chunk of cash. Clearly once any break from paying the rates ends, shop owners would have to start paying it again, even though few expect their customers to be back to their previous spending habits for many months. After all, many consumers may have been on reduced income, or may have even lost their income during the pandemic, thus not keen or able to spend money on the high street as they would have before.

The way business rates are calculated

Business rates are calculated based on the value of the high street shop front, not on the revenues coming in or the resulting profits.

And when shopkeepers spot customers browsing their shelves and checking prices on their phones, they automatically assume that they are comparing the prices with online outlets such as Amazon.

This creates a lot of bad feeling as the high street shopkeeper must wonder why retailers like them are expected to shoulder so much more of the tax burden than their online rivals, just because internet sellers operate out of cheaper premises like out of town warehouses.

Although they expect to pay business rates, they simply feel the way they are calculated is unfair and puts their online rivals at an advantage.

High Street retailers around the country are saying that it is time for online operators, who are taking up more and more of the retailing carried out, should take on board more of the tax burden. And that if they don’t the high street shops that we all take for granted, will simply go out of business.

The British Independent Retailers Association argues that the current business rates method is an unfair tax system and they claim that it is widely recognised as no longer fit for purpose.

Although an alternative is apparently being developed, the chancellor must accept that he needs to suspend the current system to support the high street shops, enabling them to play an integral and effective part of the economic recovery that is so desperately needed.

A change in the system could leave a large hole to fill

Many shopkeepers argue that the government needs to provide at least another six months of business rates relief to help shop owners survive through the recovery period when Covid restrictions have been relaxed or lifted.

Shopkeepers recognise that they cannot compete with internet rivals, unless something is done about business the rates.

The situation is plain to see too, as when you consider that a shopkeeper on the high street may pay the same rates for their store as Amazon pays for a massive warehouse because it sits on an industrial estate away from the the main shopping centre. Also when you consider that that warehouse may attract fifty times the revenue, it becomes easy to understand their frustration.

Shopkeepers do recognise that simply abolishing business rates would leave the government with a £30bn black hole that needs to be filled somehow. So to address this, some have argued for an online sales tax, while others have called for lower business rates on the high street, with higher rates for the huge warehouses and fulfilment centres.

The online business rates situation

Online business such as Amazon have been critisised for having to be literally forced to reveal for the first time the amount of business rates they pay. Amazon stated that in the United Kingdom and Ireland, they paid £63m in rates.

This may surprise many that thought online businesses escaped business rates altogether, but clearly they don’t. However, is this amount proportionate when you consider that Amazon makes £8billion worth of sales?

The fact is that rates are based on the land values and have absolutely nothing to do with turnover, sales or profits.In essence, even the bigger high street stores who have have out of town warehouse distribution centres with relatively low business rates, which is no different to Amazon. The difference is that the high street retailers also have their shops on high streets, which attract very high business rates indeed.

Business rates have always been a certain form of income for any government as they are based on the land the premises occupy. Unlike business profits and losses, land doesn’t disappear, it is a constant and so the only question is how are business rates spread across built up and rural areas equally?

When high street shops have called for Amazon to pay higher business rates, they may not have considered that this would impact the larger high street chains who also operate warehouses. This may be seen as unfair, but it has always been the case that turnover is irrelevant for taxation and where Amazon could be paying taxes is through Corporation Tax based on their profits. It is easy to agree with the argument that Amazon should pay more tax, but just not through business rates.

A possible solution

Many believe that the business rates system is an outdated taxation that is not fit for purpose in todays society.

Many also believe that the solution is simple, there should be a simple base tax per cubic meter of space that is the same for all commercial premises. The value of the building or the rent is not considered at all. The business is then taxed through the corporation tax system. It is argued that this will also close the loopholes that allow multi national business to move their profits offshore.

Whatever happens, it is clear that the convenience of shopping from the comfort of your armchair and having the goods delivered straight to your door, often within a few hours, is very attractive.

This is particularly true in the current climate where many will not be able to visit the shops as they are simply shut due to Covid restriction and may not want to brave the high street when restrictions are lifted.

Online shopping can often be cheaper, quicker, more convenient and you don’t have to follow a one way system or wear a mask to do it.

The business rates issue will rage on for the foreseeable future, but the online market appears to continue to go from strength to strength, while the high street appears to be in an increasingly perilous position.

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