High street blues: is a corporation tax hike the answer?
4 March 2020: a government-commissioned report is set to recommend an increase in corporation tax of 2% to finance business rate cuts for struggling high street retailers. But should UK plc shoulder a greater tax burden to support one part of the economy? Beth McLoughlin investigates.
A sub-committee of the Retail Sector Council – established by former Prime Minister Theresa May’s government in 2018 – is set to recommend funding business rate cuts with a 2% increase in corporation tax. This along with other suggested measures will be circulated in the form of a report throughout Whitehall in the coming weeks.
The proposals are designed to help struggling retailers as they battle a combination of rising costs and changing consumer habits.
The report follows recent closures of big-name stores such as Mothercare and Beale’s, and a fall in retail sales in December – for the fifth consecutive month – according to the Office of National Statistics.
Paul Newman, Partner and Co-head of RSM’s consumer markets group, said high street operators have been hit by cost increases beyond their control such as the national minimum wage, apprenticeship levy and pension contributions in the past few years.
“For many it has been almost impossible to pass these on to price-conscious consumers who are able to trawl the web to find the best deals,” he said. But he did not think a corporation tax hike was the answer.
“It would seem a little unfair for UK plc as a whole to shoulder a greater tax burden to support one - albeit important - part of the economy,” Newman said. “Rebalancing the tax burden between offline and online operators would likely be a better solution. The planned introduction of the digital services tax in April 2020 which will target large online marketplaces will be a first step in this process, but ultimately the government may wish to consider introducing an additional levy for all online sales.”
Business rates have often been cited as a problem for retailers, and it is widely expected that the UK government will announce a wide-range review of the levy. ICAEW provided evidence to the Treasury select committee’s business rates inquiry last year, in which it called the current system complicated and unfair.
However, according to David Williams, who is Legal Director of BDB Pitmans and specialises in insolvency and property, finding a solution for the problem will not be as simple as raising one tax rate to pay for another.
“It is a good thing these discussions are going on, but not enough has been done,” he said.
Williams said raising corporation tax to finance business rates cuts could have negative knock-on effects, including angering those who resent paying more tax to fund retailers.
“Any measures should look at what the underlying problems are,” he said. “Rates are one of many things that need to be taken into consideration. If you are paying enormous rent and rates, it is hard to compete with an online retailer who only has to rent a warehouse out of town.”
Williams said that those retailers who are doing better tend to use their high street store as a shop window, and maintain a strong online presence, selling products across multiple channels. Some such as Primark lure shoppers to their stores by selling goods which are not available online.
“Anecdotally, there is a rise in independent shops on the high street,” he said. “If you make shopping centres a destination, with attractions such as cinemas or mini-golf, it will help footfall.”
If the proposed rise in corporation tax goes ahead, it could raise up to £6bn annually by 2022/23. This would be reportedly equal to about 20% of total business rates income.
Prime Minister Boris Johnson gave an indication he would scrap corporation tax cuts last year, but this month’s Budget is likely to reveal more about the government’s approach to a thorny question.