High streets are bracing for a business rates hit the Government could have avoided

It even included a commitment to replace them in its general election manifesto.

At their heart, business rates are a blunt tax on property occupation. Local councils use a property’s rateable value - essentially its estimated open-market rental value - multiplied by a tax rate set by central government to calculate what a business owes.

Successive governments have promised and failed to reform the system to address a manifest unfairness: property-light online businesses pay far less, while traditional bricks-and-mortar businesses bear the brunt.

So there was widespread dismay among my members when, in last month's Budget, the Chancellor ducked the challenge. Instead of fundamental reform, we got more tinkering with the existing system.

From April next year, almost every commercial business in England and Wales will face a recalculation of its rateable value as part of the routine three-year revaluation cycle. The Government’s partial package - lowering retail, hospitality and leisure multipliers for properties valued at under £500,000, funded by a higher charge on big warehouses and distribution hubs - won't offset for most the brutal effect of a reset in rateable values, the phasing out of pandemic reliefs and inflation-driven increases that lock in higher liabilities.

Little or no thought seems to have been given to the winners and losers. Industry estimates suggest business rates will increase by 76 per cent for the average pub and 115 per cent for the average hotel over three years, compared to just 16 per cent for distribution warehouses, used by online giants, and 4 per cent for big supermarkets.

No surprise, then, that hundreds of local taverns have started barring Labour MPs, displaying the #taxedout slogan. But it's not just bars, pubs and hotels that are facing shock increases in their rates bills next April. Our theatres, galleries and visitor attractions, as well as offices and gyms, are all bracing themselves for bigger bills.

Businesses and high streets are reeling as the implications sink in. Things will only get worse over the next three years as rates keep rising. It's difficult to see how this can help our high streets, on top of all the other cost increases recently imposed on them, including higher National Insurance bills, energy costs and a higher minimum wage.

Some operators I know are reporting eye-watering figures - tens of thousands of pounds extra per year - in businesses that are already squeezed. There is no doubt some will go to the wall, and others will cut hiring and jobs. Businesses want to engage constructively with the Government on how we can avert this disaster and embark on fair, fundamental reform of our business rates system.

I start from two principles: that all businesses operating in the UK should pay their fair share towards funding local government services, and that any reform should evolve, not replace, the current system.

Business rates were introduced in 1990, before the digital economy even existed. Online transactions now account for over 20 per cent of the total UK economy, and this figure will only grow. This means that the business rate tax base is effectively shrinking, and an ever-decreasing proportion of businesses are having to pay for ever-increasing annual business rate totals.

Our solution is to evolve the business rate system by adding a digital element to the existing property element so that businesses in the digital sector can pay their fair share.

As well as levelling the playing field, the Hybrid Business Rate will widen the business rate tax base, making it sustainable for the future. All businesses selling goods and services online in the UK – not just online retailers - would pay a small digital levy, set at two per cent of sales in the UK, using the existing VAT system.

This would raise around £6bn a year, enabling the Government to reset the multiplier for traditional business rates to the level when they were introduced in 1990.

This would reduce business rates by 37 per cent for all businesses currently paying at the standard rate and by 31 per cent for businesses on the small businesses rate, excluding any reliefs.

Overall, the Hybrid Business Rate would bring in £29.6bn - £1.6bn more than the Government’s target for the next financial year.

So, it would be a win-win for high streets and the public finances. It would put the tax base on a sustainable footing as the economy moves online.

The storm of protest over what was announced in the Budget makes it clear the Government's existing plans can't proceed as planned. It's time to embrace real rates reform and implement a system fit for the 21st century.

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Ros Morgan is chief executive of Heart of London Business Alliance (HOLBA), which represents over 500 businesses.

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