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Without Business Tax Reform, ‘Four in Five’ British Retailers Could Close

More than “four in five” U.K. retailers could be forced to shut stores if the government fails to reduce painfully high business taxes, a new British Retail Consortium report warns.

Knight Frank said the business rates in the U.K. amount to “a tax on the right to occupy commercial property and typically equate to approximately 50 percent of annual rent.” These taxes “represent one of the largest overheads for businesses and substantially impact on profitability,” the real estate firm added. Any business that occupies a building, or even part of one, for commercial purposes is required to pay taxes for filling the space.

The BRC survey shows that property costs for rates and rents form the “single biggest factor in deciding whether to close a store,” with London stores set to be hit hardest.

Companies have pushed for a review because they say the U.K. legacy business rates system no longer reflects the reality of digital retail. Some retail executives, including outgoing Frasers Group CEO Mike Ashley, have been vocal about the need for change. Frasers Group chairman David Daly in August called the rates “excessive” and said the government’s lack of action on this front could jeopardize some House of Fraser locations.

Although rates should be around half of the rent, the BRC report found that on average the rates are higher than the rent in 25 percent of the stores among the surveyed businesses. “The majority of these stores are in the North West, North East and West Midlands,” BRC said. And in its survey of retail owners, almost six out of 10, or 59 percent, said they experienced an increase in rates liability in the five years to March 2020. Nearly 44 percent said they saw a 25 percent increase, while almost 13 percent said they’ve been hit with a 50 percent increase. And just as important, roughly two-thirds, or 65 percent, of retailers said they are paying more in rates than rent at some of their properties. That translates to one out of four stores, or nearly 25 percent, that are paying more in rates that rents, the BRC said.

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The current system cost retailers more than 500 million pounds ($683.7 million) between 2017 and 2020, BRC said.

The BRC recommends that the multiplier used for calculating rates be cut to 35 pence ($0.48) from the current average of 50 pence ($0.68), without automatic annual increases. It also said revaluations should be done every three years to make sure valuations are more closely linked to actual market values.

A report on the future of business rates was due in the spring, per a “fundamental review” of the existing structure disclosed by Rishi Sunak, Chancellor of the Exchequer, in last year’s governmental budget. Following a delay, the final report is now expected this fall.

One of BRC’s concerns is that retail, representing 5 percent of the U.K.’s economy, is the country’s largest private-sector employer with more than 3 million jobs. Without business rate reform, jobs will be lost to the detriment of both social mobility and local employment, the council added. In contrast, “reform to cut the burden will unlock the industry’s potential to support the economic recovery from the pandemic, ensuring that retail remains a provider of quality jobs and important contributor to tax revenues for years to come,” it said.

High streets have been particularly hard hit during pandemic remote-work culture that ultimately accelerated e-commerce’s ascent. Retailers such as Marks & Spencer and John Lewis have been working on initiatives to close the online-offline gap.

Footfall in the U.K. remains stagnant overall, new data shows. A weekly footfall benchmark from British data firm Springboard showed that foot traffic in U.K. retail destinations last week remained level from the week before, although on a year-over-year basis traffic rose 14.9 percent. High streets suffered early in the week due to rain, but bounced back from Wednesday onward. Foot traffic in Central London and in regional cities outside of the capital rose last week, alongside drops in Outer London and market towns. With many working from home last year during the pandemic where foot traffic in Outer London and market towns were more resilient, the latest data suggests that a shift in consumer behavior could be underway as more office-based workers return to their workplaces.

Retailers seem to need all the help they can get. Retail sales volume in August fell by 0. percent, on top of a 2.8 percent decline in July, but were 4.6 percent higher than February 2020 before the pandemic began in the country. Non-food stores reported a fall of 1.0 percent in sales volumes in August, driven by declines in the department store sector by 3.7 percent. In contrast, retail sales from the online channel rose 27.7 percent for the month, up from 27.1 percent in July. The August figure is substantially higher than the 19.7 percent in February 2020, U.K.’s Office for National Statistics said Monday.

As retailers in the U.K. await the final report, retail trade groups across the pond are also busy taking aim at a draft tax plan that would roll back some tax-law provisions greenlit under former President Donald Trump. Both the National Retail Federation and the Retail Industry Leaders Association have voiced objections to the draft tax plan.

The plan aims to raise $2.9 trillion in new taxes and revenues to help pay for an infrastructure bill and other social spending initiatives, though many object to raising the corporate tax rate to 26.5 percent from its current 21 percent for companies earning north of $5 million.