Tuesday 23 February 2021 6:00 am

Business rates from the 16th century are ruining the high-street and an online sales tax isn't enough

Director , Onward

The pandemic is in many ways not a break from the past but a rapid accelerator, and nowhere has the world sped up as much as in our shopping habits. 

In the last year, more retail sales shifted onto the internet than had done so in the previous decade. UK consumers spent £24 in every £25 offline as recently as 2008. We now spend £1 in every £3 over the internet. With high streets restricted for most of the last year, it is no exaggeration to say that online businesses have kept our families fed, our children entertained, and employees working.

But the growth of online, before and during the pandemic, also has a cost, and one that is visible every time you walk out of your front door. Britain’s high streets are in a state of disrepair. The vacancy rate is now 11.5%, up by half compared to twenty years ago. In some towns, like Burslem in Stoke-on-Trent, one in three shops stands empty. In the first half of last year, 171 shops closed every day in the UK but only 123 replaced them, double the rate of decline on the year before. And we are not done yet. The recent collapse of Debenhams and Arcadia will reportedly release 200 full-size football pitches of retail space onto the market.

The worst part? There is a good argument that the UK tax system is making this dynamic worse. Business rates date back to the Poor Laws of the 16th and 17th Century: they were not designed for a digital age. Because they fall on bricks and mortar, small high street retailers can pay ten times as much of their turnover on rates as major online firms do. The latter have other costs, such as delivery and logistics costs, and many businesses increasingly sell across different channels, but even so the retail playing field is far from level.

As a result, trades that are in direct competition with e-commerce, like hardware, bookshops, and clothes stores, have declined, while experiential retail – think nail studios, yoga studios and smoothie bars – have not. As the economics firm WPI Economics has shown, this problem is worst in Red Wall seats. In Bishop Auckland, Tesco spends eight times as much of its turnover towards business rates as it does in Surrey Heath. The system increasingly looks indefensible.

When the Chancellor decides later this year, one option on the table is a small levy on online sales. This would help to level the playing field, and would likely be popular with voters if the proceeds were ploughed back into the high street. But on its own, it would be unlikely to raise more than £2 billion a year, compared to £25 billion from business rates. It would also do nothing to solve the regional inequities of the system that hamper levelling up.

A better option would be to tax the property value rather than the rental value of commercial property, with no exemptions for vacant stock. At a stroke, this would make high streets in poorer places like Stoke-on-Trent more viable, because land values tend to be lower. If it was paid by the landlord, rather than the tenant, it would create a strong incentive to keep shops open or to sell up for other uses such as housing. And if councils were allowed to keep 100% of the revenue, it would give councils a way to share in the proceeds of growth through rising land prices.

Napoleon meant it as an insult when he declared England “a nation of shopkeepers”, but the vibrancy of Britain’s high streets has always been one of our greatest strengths. The Government has recognised that in the extraordinary support they have extended in grants, loans and business rates relief during the crisis. They should now act to put high streets on a firmer footing for the long term.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.