Levelling the retail playing field by replacing Business Rates with additional standard rate VAT

There has been an increasing relation during the pandemic of the value of local bricks and mortar businesses, with research from Deloitte Digital showing that 59% of consumers in Britain have used more local stores and services to help support them during lockdown, and 46% of consumers say they are more likely to spend money at a shop that supports local charities, such as food banks, once the lockdown has lifted. However, these are the same businesses that have borne the brunt of restrictions, including none-essential retails, and hospitality/cultural venues. One way to support these businesses by lowering their fixed costs would be to replace business rates (and equivalent property taxes) with an increase in the standard rate of VAT to 25%.

One of the actions taken by the government to support businesses during the pandemic has been providing business rates relief/holidays to help businesses forced to close for extended periods. This support provides the opportunity to review and reform the business rates and wider business tax regime to help those businesses which bore the brunt of the impact of COVID-19 restrictions: “bricks and mortar” retailers and other businesses with high fixed costs due to large property portfolios. The current business rates system has proven to be problematic in an increasingly digital world. This problem was apparent before the pandemic, as highlighted by the House of Commons Treasury Committee Impact of business rates on business report published on 22 October 2019. This report outlined possible alternatives including an online sales tax, a new sales tax, or additional tax on profits. However, an increase in the standard VAT rate provides benefits not realised by those options. There are benefits for both businesses and individuals, with those hit hardest by the pandemic in both groups being among those who benefit the most.

The measure could be roughly cost neutral, in 2019 business rates (and equivalent business property taxes) raised £31 billion of UK government income, whilst VAT raised £130 billion. With the current standard rate of VAT set at 20%, a 5% VAT rise would be roughly equivalent to the income raised by business rates. This does not consider the contribution of lower rated VAT goods such as domestic energy, but the breakdown of figures for this are not as easily available, therefore my arguments are caveated with this impact uncalculated.

The benefits for businesses are:

1. Lower fixed costs, which makes businesses more resilient to economic downturns.

2. Fairer taxes between digital and physical retailers, with reduced tax burden on businesses with large/high value property enabling them to cut prices to compete with digital competitors.

3. No increase in tax on essential items such as food, sanitary products, or energy which are 0 or 5% rated for VAT.

4. As well as helping physical retailers, it will also help cultural venues, as extension of government plans to reduce business rates for some cultural venues. Some cultural venues would also benefit from their admission charges being VAT exempt.

5. Simplification of business tax regime by completely removing business property taxes, and replacing with a system already used by the majority of retailers

6. A proportionally lower impact on alcohol prices due to duty making up more of the cost of alcohol, therefore reducing the impact on hospitality venues.

The benefits for individuals are:

1. Lower prices for essential items sold by physical retailers due to no VAT increase and lower business tax burden. Businesses in the highly competitive markets for food, health/sanitary products, and books, are likely to pass on savings due to competitive pressure.

2. More competitive pricing for individuals who are unable to shop online due to either lack of digital skills or access.

Benefits for government are:

1. Reduced cost of tax administration due to removal of business rates valuation and collection

2. Boost local retailers which benefit local economies more than online sales which are disproportionately skewed to multinational or drop shipping companies with no local or national economic benefit.

The benefits above are more substantial than those generated by an online sales levy. This is because an online sales levy applied on all online sales would discourages physical businesses from offering digital sales in addition to physical sales due to increased tax and administrative burden. VAT is often characterised as a regressive tax because low-income households spend a greater proportion of their income than high-income households.

However, this change would not increase the regressive tax burden because it only applies to standard rated items which make up a lower proportion of the spending by lower income households. One potential problem of this change would be the need to split VAT income between local and national government. However, this could be done either based on VAT income being split by the location of the sale (for physical sales) or another formula being created entirely. Given that business rates income is currently split between local and national government, according to a formula, it is not beyond the ability of government to create a suitable formula for VAT income.

Another problem is government income would suffer during economic downturns due to reduced public and business spending generating lower VAT receipts. However, this could be negated by more businesses surviving these downturns due to lower fixed costs, and the change also enables governments to take greater advantage of growth in spending during better times. Prior to the pandemic VAT income had grown for a decade and once more “normal” times resume, the higher VAT income generated by the increased VAT rate could provide a boost to public finances to help pay down the massive debts incurred during the pandemic.

This change would create a fairer market between physical and online retailers, without discouraging digital innovation, whilst benefitting lower income families, and encouraging local spending with the increased economic benefits that it brings. This will help Britain recover from the impacts of the pandemic and aid the country’s development in an increasingly digital world, whilst ensuring government income is not significantly affected.

 

 

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