Business Rates: Small Retail Businesses

Jim Shannon Excerpts

Tuesday 9th October 2018 Commons Chamber

[Rachael Maskell (York Central) (Lab/Co-op)]

Will the hon. Gentleman give way?

[Jim Shannon (Strangford) (DUP)]

Will the hon. Gentleman give way?

[Sir Geoffrey Clifton-Brown]

My golly! I will give way to both hon. Members, but I will give way to the hon. Lady first.

--- Later in debate ---

[Sir Geoffrey Clifton-Brown]

Yes. The whole thrust of my speech is that we shall ultimately need to reform the rates system, but it will take time. The Government have to be very careful to guard the huge amount of revenue that they gain from the rates in any change that they make. I am sure that my right hon. Friend the Financial Secretary will have something to say about my proposals in that respect.

I have a problem in the Cotswolds. The rents are very high, which influences the rateable value. It takes time to deal with that when there are a number of empty units, such as the ones in York that the hon. Lady mentioned. When the rents are lowered the rateable values follow, but the district valuers are, of course, reluctant to lower the rateable values, because they do not want to lose revenue. That problem is increasing, as I shall explain shortly. Offline businesses, IT businesses and so on, do not need premises as large as those required by some of the businesses in the hon. Lady’s constituency. For example, furniture shops, bed shops and cycle shops need large premises, which inevitably means large rateable values, but they do not necessarily have the turnover to match those rateable values. The ability to pay is not necessarily reflected in the rates that must be paid. However, I sympathise with the hon. Lady.

[Jim Shannon]

I thank the hon. Gentleman for raising this issue, which is a problem in my constituency as well as others. He referred to a national decline, and the evidence of that is very clear: planning portals in local areas show a downturn in the number of businesses applying for extensions and renovations. Does he agree that that is because businesses cannot expand because of costs, and does he agree that a review of business rates might just allow some companies to take the plunge, upgrade their businesses, sow into them and, hopefully, reap the benefits, rather than continually treading water—as they often do—just to keep afloat?

[Sir Geoffrey Clifton-Brown]

I entirely agree, and I will shortly demonstrate the way in which the current rates system is a disincentive for small businesses to expand. Surely what we should be doing, in the entire economy, is encouraging small businesses that will one day become medium-sized businesses, and will hopefully one day become large businesses, employing more people, selling more goods, and exporting more goods around the world. That is exactly what we want to see in a dynamic UK economy, particularly in the post-Brexit era. We need to look very carefully at the rates system, which is why I initiated this debate.

The hon. Member for York Central (Rachael Maskell) Lady was talking about the relationship between the ability to pay and the rates payable. I do not want to knock the banks as I have great regard for them, but I was shocked to hear that HSBC has six banks in London alone that qualify for small business rate relief. I am sure that HSBC would not have those banks open unless they were making a good profit. That is an excellent demonstration of how the rates payable are not related to the profits a business makes.

I am not for one second questioning the importance of competition in the marketplace, but to reverse the decline of our high streets we must ensure that competition is fair in every respect, and if the rates system is making it unfair, we should look at reforming it. There is a stark example in my constituency in the beautiful town of Stow-on-the-Wold. The large edge-of-town Tesco store is excellent; I go there myself to shop. It is only a five-minute walk from the town centre and pays business rates of £220 per square metre. However, a small independent delicatessen, with much higher costs because it occupies a listed building and which, no doubt, as the hon. Member for York Central says, will have to pay considerably more rent per square metre than the Tesco store would pay if it were not the owner of the store, has to pay £500 per square metre as opposed to £220 for the out-of-town supermarket. I cannot believe that that system is fair, and that, of course, is what is leading to a decline of some shops in our high street. It is therefore imperative that we support our small businesses through these measures.

However, sadly, the Federation of Small Businesses small business index for quarter 3 of 2018 showed that small business confidence has fallen into the negative for only the third time since 2013. Small retailers continue to report the lowest confidence level of any sector. That has to be a worrying trend for all of us.

Another concerning consequence of the current business rates system is the penalties that businesses face when expanding under current rules, which is the point made by the hon. Member for Strangford (Jim Shannon) made. The majority of small businesses growing from one premises to a second will lose the existing small business rate relief, which has a negative effect on business growth. This quirk in the rules means that a business can receive full relief if it has a single property with a rateable value of £12,000 or less, but a business with two properties each with a value of £3,000 would not receive any relief. That is clearly unfair and discourages businesses from expanding to more than one site.

I have another constituency example. The beautiful village of Guiting Power contains two pubs: The Hollow Bottom and The Farmers Arms. You might like to come and sample them, Madam Deputy Speaker, to see whether what I am saying is true. The Farmers Arms recently invested a significant amount of capital into the business and is now a very nice gastropub. However, The Hollow Bottom remained a traditional Cotswolds pub, much loved by many of my constituents. Unfortunately, even though The Farmers Arms and The Hollow Bottom started as the same size and as roughly similar businesses, because they are both in the same village only The Hollow Bottom now receives business rates relief because it is not possible for two pubs in the same village to receive the relief whatever the circumstances, and The Hollow Bottom is regarded as the smaller of the two pubs and is therefore the pub designated for relief. It would be helpful to understand why this inequality exists and how business rates could be reformed to promote, rather than penalise, investment.

It is troubling that the current rates system in certain respects discourages, and even stifles, investment by penalising ratepayers who invest in their business, as I have just demonstrated with The Hollow Bottom pub. For example, if a business owner were to add an air conditioning unit or CCTV cameras to their business, their rates bill would increase. To tackle this, time-limited exemptions for new store developments should be provided. I am keen to understand from the Minister what steps the Government are taking in linking business rates more closely to a company’s turnover, not just its physical size. As I indicated to the hon. Member for York Central, I find the example of a large IT firm pertinent. Such a business requires, by turnover, much less space compared with a cycle shop, a furniture shop or a bed shop, which would inevitably have a lower turnover but require more space.

In the last revaluation announced by my right hon. Friend the Chancellor, the Government did offer some help to smaller businesses by doubling the threshold from £6,000 to £12,000, and I want to make it absolutely clear to my right hon. Friend the Minister that I am not carping about the reliefs that are currently available. Many of the small businesses in my constituency, and in those of other hon. Members, benefit from small business rate relief. However, this does not help the majority of my retailers, who are above that level. The average rateable value in this country is £34,000.

To provide further detail, the new allowance proposals that I support—as opposed to the relief that businesses have to claim—would be based on the same principles as the personal allowance currently applied to income tax. This is a pragmatic, pro-business solution that would simplify the tax system and significantly cut the burdensome tax levels that small retailers are facing. A simple allowance, ahead of a full review of the system, would see a reduction in rates for the majority of those small businesses that qualify for the relief and that are struggling with their tax. All those below this allowance—for example, £12,000—would be out of the system entirely, because they would not have to claim the allowance. This would cut down on the resources required to process these claims. Perhaps my right hon. Friend the Minister has a figure in mind for the Government’s current compliance cost for processing small business rate relief claims. That compliance cost affects not only the Government; in percentage terms, it is even more burdensome for the small businesses that have to claim the relief, because they often need to employ specialist professional practitioners to enable them to claim the tax satisfactorily and not have their claim disallowed.

An additional benefit of introducing such an allowance, as opposed to a threshold, would be the simplification of the relief system. In other words, there would no longer be any need for small business rates relief as there would be a standard application for all small qualifying businesses across the country. Furthermore, the small business relief system currently costs the Government £2.6 billion. Introducing such an allowance and erasing the £2.6 billion in rates relief—even though we would be redeploying it as an allowance—would result in businesses reducing their compliance costs. Perhaps the Minister can tell me what the compliance cost is for the Government. If not, perhaps he could ask his officials to look it up. We could then redeploy the money involved in that compliance cost—and in the bureaucracy involved in administering the system—and perhaps consider raising the £12,000 threshold and introducing the allowance that I would prefer, so that even more small businesses could benefit.

I, and I am sure all hon. Members, want to see this country’s small businesses thriving in post-Brexit Britain, and we should be encouraging small enterprises, not penalising them for wanting to expand and grow further. We should cherish the fact that 500,000 new businesses have been created under this Conservative Government in the past five years and under their predecessor coalition Government. That shows the strength of the British economy. That is why we have such full employment rates, and we need to keep it that way. We need to keep employing as many of our constituents as possible, particularly the youngsters, and to encourage them to consider forming their own businesses. As I have said, from small businesses come medium-sized and large businesses. This country has always been full of entrepreneurs. I have great optimism for the future, post-Brexit, but we need my right hon. Friend the Minister and his team in the Treasury to consider the fairness of the current rating system. I am grateful to you, Madam Deputy Speaker, for allowing me to say these few words tonight.