With the online sales tax consultation now closed, what can we expect, and will it happen any time soon?

Rishi Sunak was plauded by most for responding so quickly to support small businesses as Covid hit.

But what a shame the years of campaigning didn’t trigger a revolutionary business rates consultation before an unprecedented global pandemic hit an already underperforming high street retail and shopping centre sector. Moreover, we are now also contending with Brexit, the war in Ukraine, spiralling fuel prices and a cost-of-living crisis.

Any online sales tax (OST) is not supposed to be a revenue grabbing exercise. Furthermore, it has been mooted as a way to fund further retail business reliefs for physical stores that are not high value, thereby protecting Britain’s high streets and much beleaguered retail sector in a longer-term way than the emergency relief funds during Covid can allow.

The retail sector has undergone structural change with Covid a mere acceleration of the flight to online shopping. While, dependent on the location of course, physical independents and convenience stores have done reasonably well, the flight to online shopping has been well documented and the OST may even the playing field for some but the mere complexity of designing and implementing such a system will not be a simple task.

The consultation itself consisted of some 40 questions, of which many answers will not be simple. We expect that there will be a long period of review from now before any formal policy is proposed. After all, it is not straightforward to mediate what represents an online vs physical sales pipeline for multichannel retail and what goods will be defined as taxable under the scheme.

Much has been made about the charges for returns by online retailers, but what happens if you buy a product online and return it to the shop? It touches physical retail but the original transaction was made virtually.

Although it may seem positive that the Government is consulting on a possible online sales tax for retailers which, in turn, should allow further relief for Britain’s much beleaguered physical retail and high streets; is an online sales tax an appropriate “fix” to assist struggling retailers and their “unfair Burden of business rates”?

It’s important to look at how business rates are assessed in the first place.

The rateable value of a property should reflect the rental value on a year-to-year tenancy subject to certain statutory assumptions. Broadly, the tenant is responsible for rates, repairs and insurance – in essence standard lease terms.  Upon each revaluation cycle the valuation officer will undertake an exercise of collecting and analysing rental evidence from the market and revalue all commercial premises. 

Using the current rating list as an example, this came into force on 1 April 2017 with rateable values based upon rental levels as at 1 April 2015, hence two years earlier.  The two year “gap” between the valuation date and effective date of the rating list coming into force has been the norm since the first modern rating revalution in 1990.

Rating revaluations are designed to capture changing trends in the commercial property market and in essence, address increasing and decreasing rental levels in the property market. 

After many years of campaigning by the industry and ratepayers, it finally appears that more frequent revaluations are the new norm. This will ensure that the changing trends are more quickly translated to a revised rateable value, hence more reflective of what an occupier is paying in rent.  In my opinion, although this move is welcomed, government should have gone further and reduced the period between the valuation date and effective date to one year, so that rateable values are even more closely aligned with the market and reflective of actual rents being paid. Rateable values are set against rents being agreed and paid for by occupiers.

My belief is that the delay to implement more frequent revaluations has created the louder calls for additional reform to the business rates system.  The current revaluation was only intended to be four years in duration whereas it now stands at six years, leading to the even greater disparity between rental and rateable values with the backdrop of Covid and Brexit exacerbating the problem.

The business rates system has the fundamentals to be a fair tax, but an accelerated structural change should have been implemented to rebalance the burden and allow a ratepayer to understand why their rateable values are set at the level they are and that they are more closely aligned with the rent they are paying.  The lack of such changes and delays implementing change and extending the more recent periods of revaluations has created further unrest and calls for change.

Another area often overlooked which the government has also started consulting upon is transitional relief arrangements.  Transition is a mechanism that limits the increase or decrease in actual rate liabilities between rating lists, therefore even if a ratepayer sees a dramatic reduction in rateable value following a revaluation it will not always follow that their rate bills will fall by the same percentage or as much as expected. It will be interesting to see the outcome and the proposed arrangements, particularly in the retail sector. The message to ratepayers expecting a reduced rateable value from 1 April 2023 is act now, check and where necessary, challenge your current rateable value to ensure it is correct as it may have an impact upon your future liability, don’t wait for the new list to commence as the opportunity may be lost.

It is interesting to see the differing opinions of retailers over the OST discussion. Is there unfairness over online and physical sales and how rateable values are derived? To an extent I believe yes.  However, if the fundamentals of the rating system are addressed properly, and rateable values are more reflective to the property market, then we wouldn’t be in the position of reducing the rate burden by way of another relief.

In my opinion reform should go further and at a faster pace – reliefs are merely sticking plasters.

Perhaps in conjunction with greater and faster reform to the rating system, any OST should be used to assist small businesses and independent retailers further. Moreover, it should be used to fund the reinvigoration of town centres, creating safety and sustainability, and attracting the public back to the high street.  Online retail is here to stay but without investment in our towns and cities the decay continues, driving down rental values, increasing void levels and causing unrest and dismay in the retail world.

Like most we await the feedback on the consultation and admire the retail sector’s ongoing commitment to innovation and finding a way forward. I, alongside the industry’s many business rates experts remain poised to provide guidance and help mitigate against future rises, the end of reliefs, structural changes and global shocks.

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Ryan Jones

Partner, head of rating north

Manchester

T +44 (0) 161 521 5570

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