When the Palmers department store in Great Yarmouth closes at the end of next week it will be a sad end to the story of one of the country’s oldest retail businesses.
Part of the collapsed Beales chain, Palmers has been a familiar sight in the seaside resort since 1837 when Garwood Burton Palmer opened a drapery shop.
However, the 16 months since the government’s last budget have been brutal for the UK’s high streets, with an estimated 180,000 jobs disappearing amid record store closures and high levels of financial distress. Great Yarmouth lost its Debenhams in January, while M&S closed its town centre store five years ago.
The crisis has made the calls for the reform of business rates – which will raise more than £8bn from retailers in the coming year – even more urgent. The commercial equivalent of council tax has been blamed for making a bad situation worse, with the new chancellor, Rishi Sunak, expected to flesh out the Conservatives’ manifesto commitment to carry out a “fundamental review”.
Tony Brown, the former chief executive of Beales, says the group’s punitive annual £2.8m business rate burden scuppered attempts to rescue the 23-store chain, which is now being closed, leading to the loss of 1,000 jobs.
“Business rates are having a catastrophic effect on the high street,” said Brown, who explains that in some cases the rates bill for a Beales store was 10 times as much as the rent, with councils unwilling to grant any concession. “The system we have got at the moment is absolute lunacy.”
Retailers fear a review just kicks the can down the road when the industry is at a breaking point. The Ministry for Housing, Communities and Local Government looked at the issue in 2014 while the Treasury revisited it the following year. The government’s recent non-committal response to the Treasury select committee’s 2019 inquiry into the impact of business rates has also done little to inspire confidence.
Business rates are calculated by multiplying a property’s rental value by the multiplier (the number of pence-per-pound of rateable value you need to pay in tax). Bills have risen steeply in recent years partly because the 2015 revaluation of property values was delayed until 2017. The multiplier has also risen from 34.8p in the pound back in 1990 to 51.2p this year for stores paying more that £51,000 in rent.
Last month, more than 50 retail industry leaders, including the chief executives of M&S, Boots and Debenhams, wrote to then chancellor Sajid Javid calling for action on business rates. With the Tories’ “levelling up” of the UK economy the order of the day, the letter, coordinated by the British Retail Consortium (BRC), claimed the business rates regime had effectively forced retailers outside London to subsidise those within the capital by £596m over the last three years. It added that retail had subsidised other industries by a net £543m over the same period.
Retailers with premises facing sharp business rates rises after 2017’s revaluation, such as those based in London where rents have risen most sharply, could apply for upwards transitional relief, which caps big annual bill increases after a revaluation by slowing rates rises.
However, since the income generated by business rates will always add up to a fixed sum, set by the Treasury, upwards transitional relief is funded by downward phasing. This is the slowing of the speed at which retailers with premises revalued at a lower business rate have their bills reduced.
“The effect of this is to levy burdensome business rates on locations where demand is weak and rents are falling,” the letter said. These areas were often the most in need of levelling up with retailers in the north-west and Midlands effectively subsidising staggered bill increases in London, it said.
John Webber, head of business rates at advisory firm Colliers International, says a review won’t change much if the government insists on raising the same amount of cash from the same companies (business rates will raise about £26bn this year).
The 2017 revaluation hit big retailers particularly hard. They either experienced massive rates rises linked to historic high rents or, if their rates bills were due to fall, continued paying a higher rate because of the way downward phasing works. “This has kept rate bills in many poor parts of the country artificially high – something retailers can’t afford,” adds Webber.
Critics of business rates argue they favour online retailers, which operate from cheaper out-of-town warehouses. Amazon’s business rates bill was just £63.4m in 2018, almost £40m less than Next. This is despite Amazon reporting UK sales of nearly £8.8bn – more than double that of Next, which has about 500 stores.
The financial assistance schemes designed to smooth changes in bills meant struggling Beales essentially overpaid by £1.3m after the revaluation, which Brown said added to rising costs. “It’s not just business rates – although business rates was the key factor,” he says. “There’s the apprenticeship levy, pension contributions, minimum wage – all these things are making it impossible.”
Real estate adviser Altus Group says Beale’s flagship store in Bournemouth should have been a big winner under the revaluation after its rental value fell by a fifth. However, the limit on reductions due to downward phasing meant it was effectively denied a £230,000 tax cut.
Robert Hayton, its head of UK business rates, said abolishing these restrictions would put fairness back into the heart of the system. It was imperative, however, to continue to cap large increases as they acted “as an important shock absorber”, he added.
With another business rates review on the cards retailers will be dusting off their submissions while hoping for a different outcome this time round. “Essentially we will be going over old ground with the tough questions having already been asked,” Hayton concludes.