Business rates … a tax on the sustainability of towns and cities?

The purpose of a tax is first and foremost to raise revenue.  A second purpose can be to influence behaviour by taxing goods or services that society wants people to use less.  A third purpose is where the tax is used to pay for the costs the consumption of the goods or services impose on society.  An example is the tax levied on alcohol, where there is both a health impact and costs imposed on society through increased road deaths, violence, family break-up, and costs on the National Health Service.  Business rates are, however, an exception.  They disadvantage a social good – local shops, in favour of a form of retail with significant environmental impact and negligible social benefit – internet retail.

Local shops bring many benefits, not just in supplying a range of goods, but by providing the basis of a local community around which other activities and friendships can form. Local shops also provide the destinations that encouraging walking and cycling.  Internet retail on the other hand brings substantial environmental and social costs. Operating from out of town distribution centres, it is totally dependent on vehicle use, and supports very little by way of community.   The business rates regime charges out of town warehouses at a fraction of town centre or neighbourhood shops, enabling internet retailers to undercut traditional place-based shops and drive them out of business.  The British Retail Consortium has warned that business rates could lead to closure of 80,000 shops by 2017 .  It would be a devastating blow to our towns and cities.

Some of the large internet retailers have been able to avoid paying corporation tax.  Amazon for example paid just £4.2 million in 2013 against UK sales of £4.3 billion. 

The situation is made worse by the fact that road transport costs do not reflect the full social and environmental costs imposed on society.   

There is a strong case for reforming the Business Rates system to stop the environmental, economic and social damage to towns and villages.

There is even a case for questioning whether it would simply be better to scrap the tax altogether and raise the funds through a cost and price neutral increase in VAT.  Business rates bring in just over £20 billion to the UK Treasury each year, compared with over £100 billion raised through VAT.   Dispensing with business rates would also save money in the bureaucracy and costs involved in operating the system.   

The Business rate system has not kept pace with the changes in technology and trading patterns.  It has failed to reflect the growing understanding of environmental, social and health impact from the decline of traditional town and neighbourhood centres.

As it stands the Business Rate system is a tax on the sustainability of local communities.  It is in urgent need of reform.  

First published in Urban Update 19th June 2015