1st November 2018

A fiscal friend for the high street?

While changes in consumer habits linked to the growth of online retail has been squeezing the high street for some years, the steeper decline witnessed in recent months has been largely pinned on the 2017 hikes to high street business rates. Of course, the freedom of online retailers to trade from cheaper out-of-town distribution centres with vast economies of scale and lower employment and logistics costs continues to put pressure on shops.

While changes in consumer habits linked to the growth of online retail has been squeezing the high street for some years, the steeper decline witnessed in recent months has been largely pinned on the 2017 hikes to high street business rates. Of course, the freedom of online retailers to trade from cheaper out-of-town distribution centres with vast economies of scale and lower employment and logistics costs continues to put pressure on shops.

Mr Hammond has sought to meet these challenges by:

  • Recalibrating business rates liability from 2021 in an effort to aid those struggling smaller high street retailers with rateable valuations of  £51,000 per annum or less; and
  • Providing £675m worth of co-funding to create a Future High Streets Fund, supporting local authorities to transform their High Streets. The idea is to “facilitate re-development of under-used retail and commercial areas into residential thereby helping with the housing challenge and delivering much needed footfall for High Street businesses”.

This reflects the sector-led thinking at major UK retail conference Revo earlier this autumn. The mood at the annual show encapsulated determined pragmatism from retailers wanting to work in partnership with local authorities towards a reanimation and rejuvenation of the high street. Both parties spoke out for a review of business rates. The  desired direction was clear: mixed use residential and commercial development to provide 24-hour footfall; use of local authority compulsory purchase order (CPO) powers to facilitate the necessary changes and; a review of ‘use classes’ as well as the development process (also through permitted development rights) to streamline and accelerate change.

It’s reported that public authorities have spent more than £4bn on commercial real estate since 2013. Although unclear how much of this went to the high street, the new trajectory is decidedly towards revitalised commercial streets and districts. By accelerating footfall through these shopping areas, local employment levels expect to be raised and new dynamic growth synergies developed across a number of sectors - be they services, retail, residential or  office use.  The newly announced Future High Streets Fund should act as a turbo-boost for this vision and reflects a political will to see it realised.  We might also see the mooted Centres for Excellence for the negotiation of public sector contracts, also proposed by the Chancellor, help move these developments along.

But the Chancellor’s proposals to help the high street didn’t end there. Mr Hammond noted the imbalance between bricks and mortar retailers and digital providers and presented a Digital Services Tax by way of a solution, set to take effect by April 2020.  The 2% tax is designed to target established and profitable tech giants, specifically those generating upwards of £500m in global revenues and will apply to profits rather than operating at the point of purchase. It’s not clear how this will be implemented or enforced in practice and some international co-operation may be necessary.

On the basis that the recalibration of the business rates will: (a) not take effect until 2021; (b) not help larger anchor type retailers like John Lewis (more on that below) and; (c) not clarify the actual mechanism for the implementation of the Digital Services Tax – their scope to target and alleviate the pain of many UK retailers currently fighting to escape the eye of the e-storm is questionable. It could be argued that the measures could actually benefit some e-retailers enjoying lower business rates as a result of their out-of-town distribution centres.

It’s wholly unlikely that the relaxation of business rates liability can help those larger-scale retailers, many of whom have already fallen victim to the challenges of the sector. Realistically, the competitive panacea for them would be a targeted Digital Services Tax – beyond what is proposed in this Budget. The mooted rate of 2% on profits generated from UK e-shoppers bears no meaningful comparison to a corporation tax rate of 19% on profits generated by bricks-based retailers in a highly-leveraged UK market.

The Digital Services Tax will be subject to ongoing review due to the global nature and structure of digital service providers. Of course, such providers have the economic resources at their disposal to both counter and restructure their offerings to offset or reduce the impact of such proposals (which will in any case not take effect until 2020) whilst retaining their competitive advantage. It’s therefore unlikely that the tax will restore balance as far as the Amazons of the world are concerned.

It would be unfair not to recognise, however, that these online retailers have evolved to become a valuable part of the economy and provide a service that is required (and enjoyed) by consumers. The genie is certainly out of the bottle.  Arguably, it could be equally relevant for policy makers to focus on those retail areas which cannot be impacted by digitisation. I’m talking about things like experience-driven retail: hairdressing, beauty, health, fitness and wellbeing, entertainment, food and drink retail, medical provision, cinema - all encouraged to flourish around exceptional and attractive community spaces.

Notably, no reference was made to the environmental impact of digital sellers - but it’s a matter that we expect to become more relevant bearing in mind intentions to address air quality in the forthcoming Environmental Bill. A spokesman for the Department for Environment, Food and Rural Affairs has acknowledged that air pollution is “the top environmental risk to human health in the UK” at the moment.

The revitalisation of the high street could be achieved through sustainable and local footfall – in contrast to the click, wheel-churn and emissions footprint of the e-model. If clean air environmental legislation is introduced, future Budgets are likely to address this in greater detail through policy and taxing mechanisms.

So, can we call the tools announced by the Chancellor fit for purpose in a retail sector facing unprecedented structural change and cost challenges, not to mention the impact that Brexit may have on the high street’s bottom line? That remains to be seen. It may be that further calibration or a “fiscal event” will sharpen the toolkit to adequately respond to this revolutionised sector.

For more information or to discuss your retail-related matters, please contact Fionnuala Nolan or another member of Thrings’ Retail team.


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