The number of empty and boarded up shops and office premises in town centres has skyrocketed over the last 10-15 years. One of the worst example of this is Lowestoft in Suffolk, which has been described as a zombie town.
Key drivers behind all this include the switch to online shopping and the increase in working from home. However, undoubtedly one of the main contributory factors has been business rates, which has made high street retail uncompetitive compared with online rivals.
Business Rates
There have been growing calls for business rates to be abolished altogether to make high street retail more competitive, and to revive town centres. It is an issue that has been looked at many times previously.
Kevin Hollinrake MP argues that the most straightforward way to replace business rates would be to replace them with an increase in VAT. That would create a level playing field, as it would apply to both high street retail and online.
Furthermore, should the Labour Party win the General Election, then they have undertaken to replace business rates. The shadow chancellor, Rachel Reeves, states that Labour "want[s] to reform the business rate system in a way that reduces the costs for small businesses and high streets, ensuring that some of the big multinationals and tech companies pay their fair share."
So what are the key benefits of abolishing business rates and consigning them to the dustbin of history?
Key Benefits Of Scrapping Business Rates
The main benefits of scrapping business rates and replacing them, include the following:-
- A Boost To Small Businesses: Abolishing business rates would alleviate financial pressure on small businesses, allowing them to reinvest the savings into growth, hiring more staff, and improving services. This could lead to increased innovation and competition in the marketplace, ultimately benefiting consumers.
- Stimulate Economic Growth: Removing business rates can encourage new startups and expansions by reducing overhead costs. This can drive economic growth, as businesses will have more capital to invest in new projects, technology, and infrastructure.
- Increases Employment Opportunities: With lower operating costs, businesses are more likely to expand and hire additional employees. This can help reduce unemployment rates and create a more dynamic job market with diverse opportunities for workers.
- Enhance Urban Renewal: High business rates often discourage companies from setting up in underdeveloped or struggling areas. Abolishing these rates could incentivize businesses to invest in such regions, leading to urban renewal and balanced regional development.
- Improve Retail Sector Health: The retail sector, particularly physical stores, have been hit hard by online competition and high business rates. Eliminating these rates would help bricks-and-mortar stores remain viable, preserving local shopping districts and maintaining consumer choice.
- A Fairer Tax System: Business rates are often criticized for being outdated and unfair, disproportionately affecting certain sectors like retail and hospitality. Abolishing them in favor of a more modern, equitable tax system would ensure that taxation better reflects businesses' ability to pay, leading to a fairer distribution of tax liabilities.
- Enhanced Economic Resilience: By eliminating business rates, companies would have more financial flexibility to weather economic downturns. Reduced fixed costs can enhance their resilience against economic shocks, enabling quicker recoveries and sustained operations during challenging times. This stability helps safeguard employment and maintain service continuity.
Are There Any Downsides To Abolition?
The only argument against the abolition of business rates is what would you replace them with?
The following alternatives have been put forward:-
- An Increase In VAT: Raising VAT can generate significant revenue without directly impacting business property costs. It spreads the tax burden across all consumers, potentially reducing the financial stress on businesses. However, higher VAT can lead to increased prices for consumers, which might reduce overall demand and slow economic growth. It can also disproportionately affect lower-income households, exacerbating inequality.
- A Land Value Tax: A land value tax is based on the value of land itself rather than the buildings on it. This encourages efficient land use and development while providing a stable revenue stream for local governments. However, accurately assessing land values can be challenging and contentious. Property owners might pass on the costs to tenants, leading to higher rents and potential displacement issues.
- An Online Sales Tax: An online sales tax targets e-commerce transactions, ensuring that online retailers contribute fairly to public finances. This can level the playing field between bricks-and-mortar businesses and online competitors. However, implementing an online sales tax can be complex due to varying international regulations and tax jurisdictions. It may also discourage small online businesses and startups from entering the market due to increased operational costs.
- A Profits Tax: A profits tax ensures that businesses are taxed based on their profitability rather than their physical presence or property value. This can help support struggling businesses while taxing more successful companies proportionately. However, profits taxes can be volatile, fluctuating with economic cycles. High rates may deter investment and expansion within the UK, as companies might seek more favorable tax environments elsewhere.
- A Single Consolidated Tax: A single consolidated tax simplifies the tax system by merging multiple taxes into one, reducing administrative burdens for both businesses and the government. It promotes transparency and ease of compliance. However, determining a fair rate for a single consolidated tax would be challenging, potentially leading to either over-taxation or under-taxation of certain sectors. Transitioning to this system would also require significant restructuring and adjustment periods.
- A Hybrid Tax: A hybrid tax system combines elements of different taxes, such as property and income taxes, providing a balanced approach that spreads the tax burden across various bases. It offers flexibility in adjusting rates for specific economic goals. However, the complexity of a hybrid tax system can lead to higher administrative costs and potential confusion among taxpayers. Ensuring fairness and avoiding double taxation requires careful design and implementation.
Conclusion
Amongst the alternatives to business rates, a profits tax (which includes online business) stands out as the most equitable solution for replacing business rates. It ensures that taxation is directly linked to a company's financial performance, promoting fairness across different business sizes and sectors. By taxing profits rather than property value or sales volume, it encourages efficient business operations without disproportionally burdening low-margin enterprises or stifling consumer spending. This approach can also help to mitigate tax avoidance through proper enforcement mechanisms, making it a robust improvement over the current business rates system.
