The speech made by Kevin Hollinrake, the Conservative MP for Thirsk and Malton, in the House of Commons on 12 January 2021.
I beg to move,
That leave be given to bring in a Bill to abolish business rates; and for connected purposes.
At one of my first hustings as a prospective parliamentary candidate back in 2015, a question came from the audience about a local electrical retailer that had just closed down. The question, which came to loud applause from the audience, was, “What are the Government going to do about it?” The irony, of course, was that the business had closed not due to the actions or inactions of the Government, but because the people in that very audience had stopped shopping on high streets and started shopping online, which is creating the change we are seeing on our high streets this very day.
Having said that, there is no doubt that rent and rates are having a disproportionately large effect on high street businesses compared with online businesses. In time, of course, that differential will naturally diminish, as rents—and therefore rates—reduce. The problem is that by that time, hundreds of thousands of businesses and millions of jobs will have been lost forever. Last year alone, 180,000 jobs were lost in retail in the UK. We need immediate change.
My Bill delivers immediate change. It abolishes business rates completely and replaces the revenue with a small increase in VAT, thereby fundamentally levelling the playing field between online and our precious local high street businesses. I have taken into account the Government’s manifesto commitment not to increase VAT in this Parliament, but the scale and pace of change to the business landscape necessitates a new approach today.
Business rates as they are were designed for a bygone era a long time ago, when business went hand in hand with high street premises. Covid has quickly made that time seem even more distant, as the trends already in train have been accelerated due to our forced house arrest. Online sales now account for 33% of all retail sales, up from 20% only a year ago.
The inevitability of this transition and transformation, and the urgent need for reform, is widely recognised across the House. I have sat on two Select Committee inquiries on the matter, one by the Housing, Communities and Local Government Committee and one a joint endeavour between the HCLG Committee and the Treasury Committee. The Treasury itself, of course, is fully aware of the need for reform, and our Ministers have gone further than any of their predecessors.
In July last year, the Treasury undertook a review and a call for evidence, which set out some potential options for reform. The main suggestions were an online sales tax, or increased rates of VAT or corporation tax. It seems that the Treasury is most keen on an online sales tax, as the document asked for opinions on that solution rather than the other two, and stated that the Treasury expects
“that any such tax would exist alongside business rates.”
That has to be seen as a further complication of the tax system.
I very much welcome the call for evidence, and my Bill and this speech are little more than a contribution to this debate, but I would like to offer one key reflection that is not addressed by the review. It is not only the retail playing field that needs to be levelled. Retail is perhaps the most obvious sector where consumer behaviour is changing, but there are similar trends in other fields. New competition to high street pubs and restaurants is emerging from the dark kitchens of business parks, facilitated by Deliveroo, Just Eat and Uber. Sales and lettings agents—I draw the House’s attention to my entry in the Register of Members’ Financial Interests—are being challenged by the likes of Purplebricks, Strike and Yopa, and travel agents and insurance brokers are also witnessing similar competitive trends.
An online sales tax for retail would therefore only partially level the business playing field. It would also be a very blunt instrument, as different retail sectors have different profit margins, so it would hit some sectors harder than others. Many high street retailers also offer online and click and collect sales, leading to the potentially fiendishly complex prospect of a retailer having to decide how a product was sold and quantifying the tax on it accordingly, while still having to pay business rates, albeit at a reduced level.
In my view, it would be better to completely scrap business rates and apply a small increase to the sales tax that we already have—VAT. That would immediately level the playing field and would not create any additional bureaucracy or burden on business. We would completely dispense with the convoluted business rate system, including revaluations, check, challenge, appeal, annual bills and debt collection. It would liberate thousands of talented, intelligent, hard-working people in the Valuation Office Agency and survey practices across the country to find new career opportunities that would help drive the UK economy forward.
No longer would we need the myriad reliefs—small business, charitable, empty property, retail and rural—as, due to its input and output elements, VAT would continue to automatically adjust, depending on the business type and turnover. A further and perhaps more controversial levelling would be delivered through a reduction of the VAT threshold, currently £85,000, to the German level of £20,000. The current level creates winners and losers either side of the cliff edge. It disincentivises growth and incentivises tax evasion.
There are no easy solutions. As Ronald Reagan once said:
“There are no easy answers, but there are simple answers.”
An increase in VAT from 20p to 23p would fill the £30 billion per annum gap created by the abolition of business rates. Some might say, “Won’t businesses simply pass on the increase to consumers?” Yes, of course. In a competitive free market, all taxes are paid by consumers, as profit margins are inexorably driven down towards the cost of capital. Exactly the same thing happens with corporation tax, business rates and, indeed, online sales tax.
Others might raise concerns about how it might affect recent moves to allocate business rates receipts to fund local authorities, but the HCLG Committee heard compelling evidence that there was very little correlation between business rates and local service need, so it makes no sense to fund councils by means of a system that needs to be adjusted through convoluted top-ups and tariffs. We should look again at the future funding of our councils alongside this proposal.
Governments of all shades have a chequered history when it comes to simplification of the tax system, picking winners, targeting incentives and allocating reliefs. We should avoid doing that wherever possible. Instead, we should focus on a levelling of the business playing field. The move from business rates to VAT does exactly that. I commend the Bill to the House.