Retail

Business rates may have met their match in rise of CVA


Blink and you’ll miss it but some high-street companies are finding ways to reduce their business rate bills.

Last week two retailers proposed to ease their business rates burden using company voluntary arrangements, or CVAs, an early-stage insolvency mechanism where businesses seek better terms with creditors.

Debenhams, the department store chain, is looking for a 48-50 per cent cut in the business rates on 58 stores. Outdoor & Cycle Concepts — backed by PAI, the French private equity group, and owner of Runners Need, Snow + Rock and Cotswold Outdoor stores — is also asking creditors to ease up on rent and rates.

The trend comes amid a boom in company collapses. Corporate insolvencies in England and Wales rose 5 per cent in the first quarter from a year earlier, according to Insolvency Service figures released last week, and administrations increased to their highest levels in five years. The largest uptick was in the retail and wholesale trade.

CVAs are still comparatively few and far between, says R3, the insolvency practitioners’ trade body. However, it will come as no surprise to high-street watchers that they are on the up, too. More surprising is how few debtors have used the CVAs to cut business rate bills.

The first was last year when Homebase, the DIY chain, managed to trim rates on 70 of its stores by 25-90 per cent. There have been only a handful since, say insolvency experts. But many more are coming.

Business rates and rent are the heaviest costs for bricks-and-mortar retailers. Debenhams alone pays about £80m a year in rates. Negotiating the levy down would only last to the end of the tax year. But a few months’ reprieve is better than nothing.

Merchants have long complained that business rates are outmoded, clunky, inflexible and unsuited to the commercial reality of the high street. It is a land tax with roots going back to the Elizabethan poor laws. In its current form it is a charge on almost all commercial property — from kiosks to supermarket sheds — based on rental values and paid in advance over the tax year to the local authority. And every year it rises with inflation. Sainsbury’s business rate bill has doubled in a decade to more than £550m a year — twice its pre-tax profits in the year to March.

In theory, the levy should reflect economic shifts and movements in rents and commercial property values. However, the base rate is reset every five years or so by the government’s central valuation office, based on a formula linked to factors as varied as size of shop windows, condition and proximity to town centres. Even if a landlord agrees to lower rents, the group’s business rate is likely to be unaffected until the next reset. Some property pundits reckon retailers’ business rate bills will rise by £180m when the next reset comes into effect in a couple of years. 

Last year Charlie Mayfield, former chairman of John Lewis, pointed out that three-quarters of the taxes paid by retailers were in the form of business rates and national insurance. “Put simply, we have a taxation system that weighs heaviest on the businesses that employ lots of people and use lots of buildings,” he said. That was just about all right while shoppers trod the streets but less so in the age of Amazon.

However, the exchequer rakes in more than £30bn a year in business rates, making it one of the government’s biggest sources of income. It is easily collected, hard to avoid and relatively straightforward to calculate. Governments have tinkered with the rate at times, imposing temporary freezes, caps, rebates, and discounts for small enterprises, but up to now it has sidestepped calls for radical reform.

However, change may come through the side door as more companies push to lower business rates through CVAs. The property industry says the rise in CVAs used to lower rent and business rates should force the government to look harder at how CVAs work. And if they begin to eat into the government’s tax take, it could be driven to reassess how business rates work. It should, although it is a long shot. Still, even the cloud hanging over the high street may have a bit of a silvery lining.

kate.burgess@ft.com



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