BRC: Transitional Relief could cost retailers over £1bn

• Transitional Relief could cost retailers over £1bn from 2023-26
• This increases the current burden of costs on retailers and adds to pressure on prices
• Government consultation on reforming the scheme ends on Friday
• Industry calls for scrapping of ‘downwards phasing’ part of Transitional Relief

Retailers have warned that the failure to fix the flawed Transitional Relief system, could cost the industry over £1bn between 2023-261. The Transitional Relief system sees retail subsidising other sectors, including over £550m between 2017-20 for government-owned infrastructure. It also forces businesses in poorer parts of the country, where rents are dropping, to subsidise those in richer areas, where rents are rising.

Today marks the final day of the Government consultation on the design of the Transitional Relief scheme for the 2023 Business Rates revaluation. The British Retail Consortium is calling for an end to the ‘downwards phasing’ part of Transitional Relief. It will be up to the next Prime Minister and Chancellor to decide how to move forward with any reforms.

Transitional Relief is a scheme which limits how much a firm’s business rates can change in a year. It forces those who are being overcharged on their business rates (as their rateable value falls) to subsidise those who are underpaying (as their rateable value rises). It means businesses are gradually moved to the “correct” rate over a period of years. This contrasts with other business and personal taxes, where those who are overpaying are immediately moved down to the “correct”, lower level of tax.

While there are countless examples of retailers losing out to Transitional Relief, here are two from a retailer:

• A store in Chorley, Lancashire saw a 45% fall in the rateable value from 2010 to 2017, reflecting lower rents. Their business rates bill remained over 50% higher than it should have been in 2017, forcing them to pay £4,300 rather the ‘correct bill’ of £2,800.
• A large store in central Blackpool saw a 36% fall in the rateable value from 2010 to 2017, reflecting lower rents. Their business rates bill remained 44% higher than it should have been in 2017, forcing them to pay £26,000 rather the ‘correct bill’ of £18,000.

While the multiplier, which is applied to the rateable value of a property to calculate a firms business rates liability, is set at 51.2p in the pound, Transitional Relief is effectively forcing some firms to pay much higher rates. Another retailer found that one large store in Gloucestershire was paying an effective tax rate of 66% of the rateable value due to Transitional Relief, while two more stores in Greater Manchester were paying effective rates of 61% and 64%. The same retailer noted that over the course of the 2017 revaluation cycle, downwards phasing of Transitional Relief added £60m to their business rates bill.

Retailers are struggling with rising costs throughout their operations and supply chains. While businesses are trying to limit how much of these costs are passed to consumers, there is little margin left. The money lost to Transitional Relief in 2023-26 is yet another burden that must be accounted for, particularly for retailers outside of London, who are worst affected by the scheme.

Tom Ironside, Director of Business & Regulation at the British Retail Consortium, said:

“The business rates system is damaging our high streets and town centres by directly undermining store viability. The retail industry accounts for 5% of the economy yet is saddled with 25% of the total business rates bill. This is directly contributing to the loss of shops and jobs, particularly in many of the parts in the UK in need of ‘levelling up’ and putting additional pressure on prices.

“Transitional Relief is a flawed system that could cost retailers over £1bn during the next three years, leaving them with no choice but to close those shops which are most impacted by artificially inflated rates bills. This is money which would be used to help address the cost of living, or support the vitality of towns and cities around the UK. In the short run, the most impactful change that any new Prime Minister could make to reform business rates, would be to scrap the ‘downwards phasing’ part of Transitional Relief.”

Jerry Schurder, Business Rates Policy Lead at Gerald Eve, who undertook the research for the BRC added:

“It would be manifestly absurd for the Government to impose a £1bn plus business rates surcharge on retailers desperately in need of the benefits that the 2023 revaluation would otherwise bring. This would have a devastating effect on the affordability of retail premises and damage hopes of a recovery in the high street. Critically it would also be diametrically opposed to the Government’s levelling-up agenda as some of the largest Rateable Value falls are expected to be seen in the most deprived areas of the country.”

-ENDS-

¹ The £1bn cost is based on the following calculation:

In the first 3 years of the 2017 revaluation Transitional Relief of £577mn was given to English retailers facing increases in business rates. But that was more than cancelled out by the £1.12bn withheld from those whose liabilities fell. Jerry Schurder at property consultancy Gerald Eve estimates that if the 2017 relief regime is retained in 2023, retailers could lose out on £1bn over the three-year period until the next revaluation because few retailers, if any, can expect to see their bills increase at the 2023 revaluation but the downwards phasing of the Transitional Relief (a cost to businesses) would be substantial.

Transitional Relief Background:

Transitional Relief limits the speed at which a firm’s business rates’ liability changes, meaning that businesses are gradually moved to the ‘correct’ rates over a number of years. Those who must pay more (upwards revaluation), benefit from ‘upwards Transitional Relief’, which subsidises this process, meaning the firm’s rates will rise slowly over several years. Those whose rates bill should fall, following revaluation, suffer from ‘downwards phasing’, which prevents them moving straight to their lower rate, instead slowly adjusting their rates bill over several years – forcing the firm to ‘overpay’ compared to their ‘correct’ valuation.

Figures produced by Government ahead of the 2017 business rates revaluation. See Annex A.

Over the first three-years of Transitional Relief, retail paid £1,120m (the ‘yield)’ in gross terms, and £543m in net terms (the yield minus the cost), to the Treasury than it otherwise would. This is roughly one third of the cost of Transitional Relief – a significant burden on one sector of the economy. 

At a regional level, the effect of Transitional Relief is to reduce the speed at which the rates bill rises in London by concurrently staggering the speed by which rates bills fall in other regions. This means the Transitional Relief system is effectively forcing businesses across most parts of the UK to subsidise businesses in London. Furthermore, Transitional Relief also forces businesses to effectively subsidise the business rates of national infrastructure (“Central” category).