Skip to main content

Business Rates: Small Retail Businesses

Volume 647: debated on Tuesday 9 October 2018

Motion made, and Question proposed, That this House do now adjourn.—(Jo Churchill.)

I am privileged to follow the emotional and sensitive debate secured by my hon. Friend the Member for Eddisbury (Antoinette Sandbach). I sometimes wish the public could see more of such debates, where sensitive subjects are discussed so constructively on a completely apolitical, non-partisan basis. I congratulate my hon. Friend.

Madam Deputy Speaker, I am grateful to you and Mr Speaker for scheduling this important Adjournment debate on reforming the business rates system for small retail businesses. I am particularly grateful to the Paymaster General and Financial Secretary to the Treasury, my right hon. Friend the Member for Central Devon (Mel Stride) for being here to answer this debate at such a late hour, when I am sure he would much rather be at home with his family.

I am quite sure that right hon. and hon. Members from both sides of the House will agree with me when I say that protecting our country’s small businesses is of paramount importance. There are more than 5.7 million small and medium-sized enterprises in the UK, and we must recognise their importance to the local economies of all our constituencies in providing much-needed jobs for our constituents.

I have been working closely with the British Independent Retailers Association and with many businesses in my constituency to promote their business rates reform proposals. It is an eminently sensible idea for the so-called small business rate relief, which has a £12,000 threshold and has to be claimed, to be replaced by an allowance which would be automatic. That would benefit the huge majority of the small businesses that currently qualify for the small business rate relief. Retailers pay nearly a quarter of the collective rates bill, amounting to a staggering £7 billion a year. They pay far more than those in any other industry. The present system does not value business rates on the basis of business profitability. That unfortunately results in a system that fails to place the burden of taxation on the businesses that are most able to pay.

The national decline of the British high street is a worrying trend. More than 8,000 shops have closed over the last 18 months, and one in eight high-street shop units in England and Wales now stands empty. Large shopping centres away from town centres qualify for much lower rates than smaller retailers on our high streets, owing to their peripheral locations. That, of course, does not take into account the significantly higher turnover of retailers such as the “big four” supermarkets.

I am grateful to the hon. Gentleman, who is making an excellent speech. In York, there are 47 empty units in the centre of our city, partly because of high valuation rates. Offshore landlords are more concerned with their investments than the revenue from the rentals, so they keep pushing up the rents. Does the hon. Gentleman agree that the whole system needs to change if order is to be restored?

Yes. The whole thrust of my speech is that we shall ultimately need to reform the rates system, but it will take time. The Government have to be very careful to guard the huge amount of revenue that they gain from the rates in any change that they make. I am sure that my right hon. Friend the Financial Secretary will have something to say about my proposals in that respect.

I have a problem in the Cotswolds. The rents are very high, which influences the rateable value. It takes time to deal with that when there are a number of empty units, such as the ones in York that the hon. Lady mentioned. When the rents are lowered the rateable values follow, but the district valuers are, of course, reluctant to lower the rateable values, because they do not want to lose revenue. That problem is increasing, as I shall explain shortly. Offline businesses, IT businesses and so on, do not need premises as large as those required by some of the businesses in the hon. Lady’s constituency. For example, furniture shops, bed shops and cycle shops need large premises, which inevitably means large rateable values, but they do not necessarily have the turnover to match those rateable values. The ability to pay is not necessarily reflected in the rates that must be paid. However, I sympathise with the hon. Lady.

I thank the hon. Gentleman for raising this issue, which is a problem in my constituency as well as others. He referred to a national decline, and the evidence of that is very clear: planning portals in local areas show a downturn in the number of businesses applying for extensions and renovations. Does he agree that that is because businesses cannot expand because of costs, and does he agree that a review of business rates might just allow some companies to take the plunge, upgrade their businesses, sow into them and, hopefully, reap the benefits, rather than continually treading water—as they often do—just to keep afloat?

I entirely agree, and I will shortly demonstrate the way in which the current rates system is a disincentive for small businesses to expand. Surely what we should be doing, in the entire economy, is encouraging small businesses that will one day become medium-sized businesses, and will hopefully one day become large businesses, employing more people, selling more goods, and exporting more goods around the world. That is exactly what we want to see in a dynamic UK economy, particularly in the post-Brexit era. We need to look very carefully at the rates system, which is why I initiated this debate.

The hon. Member for York Central (Rachael Maskell) Lady was talking about the relationship between the ability to pay and the rates payable. I do not want to knock the banks as I have great regard for them, but I was shocked to hear that HSBC has six banks in London alone that qualify for small business rate relief. I am sure that HSBC would not have those banks open unless they were making a good profit. That is an excellent demonstration of how the rates payable are not related to the profits a business makes.

I am not for one second questioning the importance of competition in the marketplace, but to reverse the decline of our high streets we must ensure that competition is fair in every respect, and if the rates system is making it unfair, we should look at reforming it. There is a stark example in my constituency in the beautiful town of Stow-on-the-Wold. The large edge-of-town Tesco store is excellent; I go there myself to shop. It is only a five-minute walk from the town centre and pays business rates of £220 per square metre. However, a small independent delicatessen, with much higher costs because it occupies a listed building and which, no doubt, as the hon. Member for York Central says, will have to pay considerably more rent per square metre than the Tesco store would pay if it were not the owner of the store, has to pay £500 per square metre as opposed to £220 for the out-of-town supermarket. I cannot believe that that system is fair, and that, of course, is what is leading to a decline of some shops in our high street. It is therefore imperative that we support our small businesses through these measures.

However, sadly, the Federation of Small Businesses small business index for quarter 3 of 2018 showed that small business confidence has fallen into the negative for only the third time since 2013. Small retailers continue to report the lowest confidence level of any sector. That has to be a worrying trend for all of us.

Another concerning consequence of the current business rates system is the penalties that businesses face when expanding under current rules, which is the point made by the hon. Member for Strangford (Jim Shannon) made. The majority of small businesses growing from one premises to a second will lose the existing small business rate relief, which has a negative effect on business growth. This quirk in the rules means that a business can receive full relief if it has a single property with a rateable value of £12,000 or less, but a business with two properties each with a value of £3,000 would not receive any relief. That is clearly unfair and discourages businesses from expanding to more than one site.

I have another constituency example. The beautiful village of Guiting Power contains two pubs: The Hollow Bottom and The Farmers Arms. You might like to come and sample them, Madam Deputy Speaker, to see whether what I am saying is true. The Farmers Arms recently invested a significant amount of capital into the business and is now a very nice gastropub. However, The Hollow Bottom remained a traditional Cotswolds pub, much loved by many of my constituents. Unfortunately, even though The Farmers Arms and The Hollow Bottom started as the same size and as roughly similar businesses, because they are both in the same village only The Hollow Bottom now receives business rates relief because it is not possible for two pubs in the same village to receive the relief whatever the circumstances, and The Hollow Bottom is regarded as the smaller of the two pubs and is therefore the pub designated for relief. It would be helpful to understand why this inequality exists and how business rates could be reformed to promote, rather than penalise, investment.

It is troubling that the current rates system in certain respects discourages, and even stifles, investment by penalising ratepayers who invest in their business, as I have just demonstrated with The Hollow Bottom pub. For example, if a business owner were to add an air conditioning unit or CCTV cameras to their business, their rates bill would increase. To tackle this, time-limited exemptions for new store developments should be provided. I am keen to understand from the Minister what steps the Government are taking in linking business rates more closely to a company’s turnover, not just its physical size. As I indicated to the hon. Member for York Central, I find the example of a large IT firm pertinent. Such a business requires, by turnover, much less space compared with a cycle shop, a furniture shop or a bed shop, which would inevitably have a lower turnover but require more space.

In the last revaluation announced by my right hon. Friend the Chancellor, the Government did offer some help to smaller businesses by doubling the threshold from £6,000 to £12,000, and I want to make it absolutely clear to my right hon. Friend the Minister that I am not carping about the reliefs that are currently available. Many of the small businesses in my constituency, and in those of other hon. Members, benefit from small business rate relief. However, this does not help the majority of my retailers, who are above that level. The average rateable value in this country is £34,000.

To provide further detail, the new allowance proposals that I support—as opposed to the relief that businesses have to claim—would be based on the same principles as the personal allowance currently applied to income tax. This is a pragmatic, pro-business solution that would simplify the tax system and significantly cut the burdensome tax levels that small retailers are facing. A simple allowance, ahead of a full review of the system, would see a reduction in rates for the majority of those small businesses that qualify for the relief and that are struggling with their tax. All those below this allowance—for example, £12,000—would be out of the system entirely, because they would not have to claim the allowance. This would cut down on the resources required to process these claims. Perhaps my right hon. Friend the Minister has a figure in mind for the Government’s current compliance cost for processing small business rate relief claims. That compliance cost affects not only the Government; in percentage terms, it is even more burdensome for the small businesses that have to claim the relief, because they often need to employ specialist professional practitioners to enable them to claim the tax satisfactorily and not have their claim disallowed.

An additional benefit of introducing such an allowance, as opposed to a threshold, would be the simplification of the relief system. In other words, there would no longer be any need for small business rates relief as there would be a standard application for all small qualifying businesses across the country. Furthermore, the small business relief system currently costs the Government £2.6 billion. Introducing such an allowance and erasing the £2.6 billion in rates relief—even though we would be redeploying it as an allowance—would result in businesses reducing their compliance costs. Perhaps the Minister can tell me what the compliance cost is for the Government. If not, perhaps he could ask his officials to look it up. We could then redeploy the money involved in that compliance cost—and in the bureaucracy involved in administering the system—and perhaps consider raising the £12,000 threshold and introducing the allowance that I would prefer, so that even more small businesses could benefit.

I, and I am sure all hon. Members, want to see this country’s small businesses thriving in post-Brexit Britain, and we should be encouraging small enterprises, not penalising them for wanting to expand and grow further. We should cherish the fact that 500,000 new businesses have been created under this Conservative Government in the past five years and under their predecessor coalition Government. That shows the strength of the British economy. That is why we have such full employment rates, and we need to keep it that way. We need to keep employing as many of our constituents as possible, particularly the youngsters, and to encourage them to consider forming their own businesses. As I have said, from small businesses come medium-sized and large businesses. This country has always been full of entrepreneurs. I have great optimism for the future, post-Brexit, but we need my right hon. Friend the Minister and his team in the Treasury to consider the fairness of the current rating system. I am grateful to you, Madam Deputy Speaker, for allowing me to say these few words tonight.

Madam Deputy Speaker, may I say what a pleasure it is to see you in the Chair after the recess? It is also a pleasure to realise that I have an hour and 16 minutes in which to address my response to my hon. Friend the Member for The Cotswolds (Sir Geoffrey Clifton-Brown), but I may cut it down just a little bit to please the House.

I thank my hon. Friend for bringing this important debate to the House tonight. It is entirely characteristic of him that such a debate is in his name, because throughout his parliamentary career he has been a strong advocate of business both across the country and, importantly, in his constituency. He was right to highlight in his opening remarks the sheer size and importance of our small business community—there are 5.7 million small businesses, a figure that he cited—and the recent growth that we have had under the coalition Government and this Government. He has worked closely with the British Independent Retailers Association on various thoughts and proposals, some of which he put forward this evening and to which I shall respond in a moment.

My hon. Friend is right that business rates are an important tax. When we consulted on business rates back in 2015 and considered the various alternatives, several different suggestions were made, such as turnover taxes, taxes on gross value added and so on. Inevitably, with every kind of measure or metric that one focused on, they had their own particular drawbacks and complexities and so on. The conclusion that was reached at the time was that business rates were a stable tax that is difficult to avoid because property is static by definition. Of course, as my hon. Friend also rightly pointed out, business rates raise around £25 billion a year, which is a significant contribution to our public services and funds, in turn, our doctors, nurses, policemen and policewomen and so on.

The Government recognise that business rates represent a high pressure on small businesses, particularly for high street retailers. Rates are a fixed cost that cannot be avoided, irrespective of whether a business is profitable or otherwise, which is why we have undertaken a series of important measures. In the 2016 Budget, we made 100% small business rate relief permanent, at that time increasing the threshold for the relief and taking 655,000 of the smallest businesses out of business rates altogether. We also increased the threshold for the standard multiplier, taking 250,000 properties, including most high street shops, out of the higher rate of business rates.

However, that is not all. Following the most recent property revaluation in 2017, we introduced a £3.6 billion transitional relief scheme to cap and phase in bill increases. Additionally, at spring Budget 2017, we announced an extra £435 million to support those businesses facing the steepest increases in bills, including £110 million to support 16,000 small businesses losing small business rate relief or rural rate relief to limit increases in their bills to the greater of £600 a year or the real-terms transitional relief cap for small businesses in each year. We also provided local authorities with £300 million of funding for discretionary relief to support individual cases in their local area.

In parallel to all that, we have taken significant steps to ensure the fairness of the business rates system as a whole. That is why, at spring Budget 2017, the Chancellor announced that we would reform the revaluation process to make it fairer. I am pleased to say that we have delivered on that by increasing the frequency of business rates revaluations from every five years to every three years, following the next revaluation. That is an important point in the context of what my hon. Friend said about the difference in the rates being paid by the out-of-town store and by retailers on the high street. If we can have more frequent revaluations, as rateable values on the high street perhaps fall, we can more quickly pass on the benefit of that within the system.

Does the Minister recognise that inequality exists between property size and turnover and that online businesses do not have the same huge valuations as retailers on the high street? Therefore, there is a complete dissociation between the success of a business and its ability to pay under a rateable system, whether that system is based on turnover or profitability, as opposed to a system that is dependent on an external landlord and the rents that they are charging for their property.

The hon. Lady will probably be aware of the Chancellor’s speech at our recent party conference, in which he spoke quite strongly about the importance of a level playing field for online businesses that derive value in the United Kingdom and end up paying very little tax and about the international tax approach that we may look at taking unilaterally as a consequence. The most important thing overall is that the Government recognise that when it comes to high streets and the smaller retailers to which the hon. Lady refers, we should take measures to reduce the burden of rates, particularly among smaller businesses, in the way that I have described this evening. That makes bills fairer for everyone, as they more closely reflect the current rental values and relative changes in rents. To ensure that ratepayers benefit from this change at the earliest point, the spring statement 2018 included an announcement that the next revaluation would be brought forward by one year to 2021.

Before I address some of the specific points raised by my hon. Friend, it is worth highlighting that, at autumn budget 2017, we brought forward the planned switch in the indexation of business rates from RPI to CPI by two years. This switch is worth £2.3 billion over five years, and the move to CPI is worth £4.1 billion in total by 2023. So once more, the Government are making a significant investment to recognise the pressures that rates introduce.

My hon. Friend raised the specific issue—

Before my right hon. Friend goes on to the specific BIRA proposals, may I put to him something about the out-of-town retailers, particularly supermarkets? As I explained to the House, the rateable system is based on rents payable, which one would assume in a market would sort itself out. The problem with out-of-town supermarkets is that they have a monopoly on these sites and they manage artificially to keep the rents low, so their rates are unfair compared with the in-town shops, as I have already demonstrated with my Stow-on-the-Wold example. Something needs to be looked at. I do not know whether the issue could be looked at in a revaluation system or whether legislation is needed, but it is an issue particularly when the out-of-town supermarkets are competing with the small in-town businesses. For example, the owner of a card shop recently told me that the out-of-town supermarket started selling cards and immediately put him out of business.

I thank my hon. Friend for his intervention. I know that the Valuation Office Agency is thorough in the way in which it conducts revaluations. It is an independent agency. However, I note the point that he has made, and if he would like to write to me or meet me to discuss it in the context of potential undervaluations, I am open to doing so.

The points that my hon. Friend made included the idea of an allowance instead of the threshold. I assume that he wanted to apply that allowance to all retail businesses, and of course that would come with some cost. It would mean providing further additional relief to some companies or businesses that do not currently receive it.

I hope that I chose my wording very carefully. I said that the allowance would be applied only to businesses that qualified for small business relief. It would be nonsense automatically to give the big businesses an allowance. That would cost the Treasury, and I want to make it clear that my proposals are revenue neutral.

I thank my hon. Friend for clarifying that point, and I am sorry that I misunderstood. He asked what the costs of compliance were under the current system and suggested that, if we changed it, we might be able to absolve ourselves from those costs and pass the benefits on to these businesses. That is certainly something that I am happy to look at and discuss with him. The overarching point is that we had a fundamental review of business rates in 2015, and many of the issues that my hon. Friend has raised were carefully looked at.

My hon. Friend said that he recognised that change would take some time, and we are likely to be considering these matters over some reasonable period. He raised the issue of the confidence of small business retailers at the moment, and this is where I would broaden the debate’s scope a little by saying that it is not just bearing down on business rates that is the mission of this Government. We also provide the employment allowance and we are bringing down small business tax rates, with corporation tax having fallen from 28% in 2010 to 19% now and set to reduce further to 17% in time. A lot of small businesses, including retailers, will be benefiting from other measures such as fuel duty freezes. We have just announced that fuel duty will be frozen for yet another year—the ninth year in succession.

In conclusion, let me again thank my hon. Friend for this very important debate. He is focusing on one of the great challenges of our time for our high streets, which lie at the heart of our local communities. It behoves us all to do all we can to make sure they are live, whole and thriving.

I want to impress on the Minister that this problem is not going to go away. The decline of our high streets is getting worse. It is accelerating, so the Government cannot just sit back. With great respect, just providing allowances in the rating system to try to make this work means that the tax base is being eroded, because the allowances have to be provided. The Government need to look at this seriously to see how they can make the system work a little better, particularly in favour of small businesses.

My hon. Friend is absolutely right; high streets face a variety of challenges, of which business rates is but one. One of the greatest challenges they face is the change in how we are now shopping, with just over 18% of all retail now going online; that presents a huge challenge and that number is likely to increase in time. That tells us that high streets will need to transition, reinvent themselves, change and come up with new ways to serve their local communities and drive traffic into our high streets. We recognise the importance of making sure that all those things are looked at through the planning system and the reviews we are carrying out at the moment and through the important work we have been carrying out to date. I see this debate as being very important in that regard. We will continue to keep this under review in terms of making sure we keep those cost pressures through the business rates system as low as they can be for our important high street retailers.

Question put and agreed to.

House adjourned.