Retail collapse means business rates rethink is urgent - Murdo Fraser

Even before Covid-19 came on the scene, traditional high street retail across the country was in serious trouble.

A solitary shopper on Edinburgh's Princes Street during last year's lockdown

Household names were disappearing almost on a weekly basis as shoppers increasingly turned to buying goods online. One-time giants of shopping centres, like House of Fraser and Debenhams, suddenly found themselves in serious trouble.

Since the introduction of lockdown restrictions last Spring, the situation has become much worse. A walk down the main shopping thoroughfare in any Scottish town or city tells its own story, with empty properties and a proliferation of “To Let” signs. Forced of necessity to turn to online shopping and home deliveries, people have become more and more used to the experience.

Even the ending of the current retail restrictions, when they come, will not see a return to shopping patterns as they once were. And, at the same time as retail chains are losing money whist closed, online retailers like Amazon are seeing profits boom. Its sales in the UK are up 51 per cent against the previous year. Yet the company still only pays a tiny sum in UK Corporation Tax, just £14.5 million in 2019.

Asking online behemoths to pay a fairer contribution towards public services seems only reasonable, when traditional shops are burdened with expensive business rates. Even with the temporary relief currently in place, they have far higher fixed costs than those selling just online.

Against this backdrop, it is encouraging to hear that the UK Treasury are currently looking at plans to introduce an online sales tax, to help raise more funds to fill the black hole in Britain’s finances. I have argued for some time that this is a measure that could not only produce much-needed revenue, but could also help level the playing field between those selling online, and traditional high street retailers.

An online sales tax would be an important component in rebalancing business taxation, currently weighted heavily on those who operate from expensive properties through the system of non-domestic rates. One recent poll found that 56 per cent of the public want online retailers to pay more tax, and only 6 per cent wanted them to pay less. It is clear that the public are onside for a reform which would have major social and economic benefits.

But a digital sales tax would be only part of a wider solution. The whole system of business rates needs comprehensive reform; if not replacement altogether. Devised on the basis that businesses in the most expensive premises pay the most in tax, the current system directly operates as a disincentive for traders to extend or improve their premises, for they are penalised the moment that they do so.

Moreover, a whole range of anomalies have opened up with the non-domestic rates regime. We have recently seen massive hikes in the rates bills for small scale renewable energy projects such as hydro schemes or solar panels, at the very time when public policy should be encouraging their development, not disincentivising them. It seems ridiculous that when so much in the way of public funds is being invested in trying to meet our climate change targets, the system of non-domestic rates is actually making it less likely that such developments will now proceed.

There is a looming problem, too, in relation to the taxation of empty properties. The current SNP Government removed, or radically reduced, the rates exemptions for properties left vacant, in the hope that this would incentivise landlords to reduce rents and encourage tenants to come in. Whilst this approach may have had some logic in a booming retail market, at a time of widespread business closures it simply leaves landlords with huge tax bills to pay for shops that are unlike to see new tenants at any price in the foreseeable future, if at all. If the current regime remains in place unreformed, then it will simply drive property owners to demolish properties or try and find new uses for them.

That the current system of non-domestic rates is creaking at the seams has been recognised by the UK Government, which is embarking on a fundamental review of the whole system. We may hear much more about this from the Chancellor when he presents his Budget at the beginning of next month.

In the meantime, there is no reason why the Scottish Government could not start their own work on what is a wholly devolved tax.

Already the Finance Secretary, Kate Forbes, has announced that the existing 100 per cent rates relief for retail, hospitality and leisure premises will be extended for the whole of 2021-22.

Whilst welcome, it is a short-term sticking plaster on what is a much more serious problem.

We have a system of non-domestic rates which is no longer fit for purpose; based on antiquated assumptions about how the economy works; and where the need for reform or replacement is becoming ever more pressing.

The introduction of a digital sales tax could be the trigger for a whole new approach in the way in which we tax businesses.

One thing that is clear is that we cannot carry on as we are. If we really want to ‘build back better’ post this pandemic, business taxation is one element that needs to change.