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Why a rise in business rates could hurt small businesses

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 4 minutes

Business rates are set to rise in April this year and it has caused panic and uproar from some businesses who worry their payments could rise by up to 400%. These business rate rises have been delayed for two years which has made it a more difficult pill to swallow for some who feel the rates could push their finances into a place where they can no longer manage month to month.

The way business rates are calculated is the rental value of the business premises times the business rate multiplier which is set by the government. For many businesses, their rates will drop, for most they will stay the same but for a small minority, mainly those located in London and the South East, they will rise.

As property prices in London and the South East are starting to stagnate and fall, businesses in these areas do not feel their new, mostly higher, rates will be representative of the current economy they find themselves in.

This is a particular worry for small businesses in areas where property prices have risen sharply since 2010 because alongside high rents, their business rates bill will also be rising significantly. The main issue is not just the timing of these rises, in post-Brexit Britain with a weaker pound and higher inflation, but because they are based on the rental value of the business premises in 2015.

Senior ministers in these areas have written to Conservative MP’s to try to stave off a rebellion over the revaluation of business rates. Senior Conservative MP, Mark Field, said that most businesses who are facing the rises would prefer a ‘smoother transition period’ to give them time to ‘adapt or plan in full’.

Findings released in October show that there were 15 shop closures a day across the UK in the first half of 2016, the majority of these shops were independent retailers.

These closures are as a result of a difficult time for bricks and mortar shops as people turn towards the internet to do their shopping. As high streets lose shops and are lacking in investment, the footfall in town and city centres is dropping making it more difficult for these independent retailers to attract customers.

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There are ways they can deal with this, such as putting up prices and cutting staff number but this only goes so far to getting finances back on track. The worry from many economists, ministers and businesses is that a sharp rise in business rates could push some businesses as far as insolvency as they struggle with rising bills and lower profit margins.

These rate changes will affect everyone from supermarkets, restaurants, pubs and cafes from local independents to chain stores. Pubs and restaurants have called on the chancellor to help by lessening the impact of the changes by providing more transitional relief for businesses in this sector.

It’s not just local businesses which are worried about the rate rises in April as Sainsbury’s CEO, Mike Coupe, spoke out about this earlier this month. He has called for fundamental reforms to business rates as the current system is archaic and ignores out-of-town warehouses which are the bases for online retailers.

He feels that without change these rates rises could spark High Street closures; “As it stands, we could see High Streets face serious challenges and ultimately more closures… It could impact investment in places that most need it, in areas of the country where there is already a marginal call on investment.”

Mr Coupe also feels that “there’s a strong case for a level playing field in business rates and taxation more generally” as many big name internet retailers will be seeing their business rates slashed considerably come April.

Analysis from CVS, the UK’s business rate and rent reduction specialist, suggests the nine Amazon distribution centres in England and Wales will see around £148,000 taken off their property tax liabilities in 2017 while Boohoo, the online fashion retailer, will have a cut of around 13% on their property tax bills including business rates.

These findings have sparked the Institute of Directors’ (IoD) comments which urge the chancellor Philip Hammond to tackle these irregularities in the tax system where vast warehouses used by online retailers are taxed less than small High Street stores. They suggest the government put together a new tax system which take into account internet shopping and the increased use of warehouse space.

Whether the concerns, recommendations and gripes of the business community, especially the independent business community, are taken into account before the budget and the rises take place remains to be seen. All businesses seem to be able to do at the moment is prepare and make their views known to try to change the system for the modern age.

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