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UK retail can withstand business rate reform

There's been a lot of debate around impending business rate rises, but they might not be the threat that some perceive
UK retail can withstand business rate reform

The prospect of higher business rates for the UK's shopkeepers has long been a threat on the horizon. But as the April deadline approaches, debate over whether this is a fair move is intensifying. Earlier this month chancellor Philip Hammond told Conservative MPs he was listening to their concerns about an imminent re-evaluation of business rates. Ministers have received a number of complaints from their constituents over the changes, with many fearing an extortionate rise in bills payable. How the new rates are calculated has also been called into question, particularly as the amendments relate to property size and location rather than the financial performance of the business on site.

Rates are being updated for the first time in seven years, to bring them into line with current property values. They effectively act as a tax on non-residential property, including pubs, restaurants, shops and offices, and are based on how much annual rent could be charged on these premises. This is otherwise known as the 'rateable value'. However, the final bill is only determined by multiplying this amount by a figure chosen by the government each year, known as the 'multiplier'.

This sounds like a terrible threat to British retailers, particularly as foreign exchange rates (specifically the devaluation of sterling against the US dollar) have already led to higher input costs for many. But the government has argued that the revaluation of property should actually result in rates falling or staying flat for around three-quarters of businesses affected. The government has also changed the measure of inflation that it uses to increase rates every year, from the retail prices index (RPI) to the consumer prices index (CPI). It says this should mean smaller increases for businesses, given that the forecast yields run higher for RPI than the latter.

But what area you're analysing makes a big difference here. Given the state of the London property market, businesses based in the capital are likely to see the sharpest rate rises, and this will be a hard pill to swallow for small- and medium-sized businesses. In fact, many independent retailers are claiming they will be forced to shut up shop as a result.

The upshot of the debate seems to be that city-based, independent retailers will struggle to absorb higher costs. To what extent this will affect the likes of Marks and Spencer (MKS) or Debenhams (DEB) is more debatable. We're sure management could do without the added headache of rising costs - they're already grappling with a higher minimum wage don't forget - but they're more likely to be able to take it on the chin. Besides, the former has already announced plans to close 30 stores as part of a wider overhaul of the business.

What the public seems to fear most is the closure of more independent stores and the desolation of the UK high street. Their concerns have been fuelled by recent data from the Office for National Statistics (ONS), which showed retail sales slowing again during January as consumers tightened their belts into the new year. Richard Lim, chief executive of research consultancy Retail Economics, said the figures were "significantly worse than expected", highlighting that retail sales volumes were at their weakest since November 2013.

The BDO High Street Sales Tracker (HSST) earlier published its worst January sales figures in four years, marking the first negative growth in the crucial January promotional period since 2013. This has left retailers feeling nervous, according to BDO, as UK shoppers retreat in the face of inflation, price increases and political uncertainty in 2017.