One of the anticipated budget announcements on March 3 is the extension of the business rates holiday. In the UK, businesses like high street retailers pay business rates tax on the assessed rental value of their commercial property. At the beginning of the first lockdown, the government introduced a business rates holiday for businesses in the retail, hospitality, and leisure sector – arguably those businesses that are, and have been, most affected by the Covid-19 restrictions. Given the current state of the economy these businesses are unsurprisingly hoping for an extension of the holiday.
The extension of the business rates holiday would support a speedier economic recovery. Without the holiday, it is likely that some businesses with low income and profit may face real financial difficulties in affording the tax and may consequently be forced out of business. In principle, a less profitable business might move to a less expensive property to reduce both rents and tax bills. But that may not be possible for retailers, and in the uncertain times of the pandemic and Brexit, some businesses may simply find it necessary to close down completely instead.
In our recent research, we analyze how a business rates holiday could provide a material cash flow benefit to firms. In the recovery period, the level of business rates may well play a strong role in determining whether businesses find it sustainable to continue operating. An extension of the business rates holiday would help to keep businesses alive and active, allowing them to contribute to the process of economic recovery.
Of course, there will be revenue consequences of extending the holiday – it is costing the government £11 billion of tax revenue in 2020-2021, when the normal revenue from business rates would be about £26 billion. Given the pressing need for tax revenues, an important question is whether an extension of the holiday might forego too much tax revenue? But the holiday would not only prevent some businesses from shutting down, it would also generate other much-needed taxes such as VAT, corporate income tax, as well as income tax paid by their employees. So an extension of the business rates holiday is less costly than it may seem.
In the longer term, there is an ongoing discussion on the future of business rates – and even whether they should continue at all. It is possible that there may be significant reform following the current consultation, due to report this autumn.
The tax is sometimes referred to as a tax on the “brick-and-mortar” sector of business, and it is often argued that it has become archaic and wholly unsuitable for the digitized economy. That perspective is rather over-simplified because the existing system already has various types of relief. For example, the small business rate relief gives partial to full tax exemption to small business (those that use only one property). Retail relief was introduced in 2019 and gives a one-third reduction to help the retail sectors in the light of a fall in footfall in the high street. These examples demonstrate that appropriate reliefs can help balance the tax burden on different sectors of the economy. But a potential drawback from this approach is that the necessary adjustments would – at least in principle - need to be constantly calibrated in the light of new economic circumstances.
A related issue is whether an online sales tax should be levied on retailers with a heavy online presence. It could be argued that this would “level the playing field” between physical and online retailers. In principle, it could be introduced either as an additional charge, thereby helping the government to balance its books, or as a revenue neutral switch away from business rates.
However, the distinction between physical and online retailers is not as clear as it may seem. Many retailers already have both physical shops and online sales, and their emphasis on one or other of these channels will be affected by economic incentives. A high online sales tax may reduce their incentives to invest and expand their capacity for online sales. It is also not clear if a sales tax is the best option. For example, an alternative option for more revenue is simply an increase in the VAT rate – which would have an advantage in not “cascading” the tax along the supply chain.
More generally, introducing a new tax (or tax measure) to correct the problems of an existing tax is – unfortunately – a classic approach to tax reform. Creating any new tax will add complexity, and it would be far better to address the existing problems directly.
In the longer run we need a tax on business that is both equitable and that does not distort competition. But in the short run, we need to keep businesses afloat with an extension of the holiday.
Relevant CBT research
Discretionary fiscal responses to the COVID-19 pandemic, Michael P. Devereux, Irem Güçeri, Martin Simmler and Eddy Tam (2020). Oxford Review of Economic Policy, 36(Supplement_1), S225-S241, 2020.