ICAEW.com works better with JavaScript enabled.

Are small retailers drowning in business rates?

Author: ICAEW Insights

Published: 10 Jul 2023

Retail was one of the industries hit hardest in recent years due to myriad changes, and they’re still struggling. Is regulation holding them back?

As an expert in retail and a partner at RSM UK, Jacqui Baker understands the advantages and weaknesses in business regulation for retailers. And, as a bricks-and-mortar retailer herself – together with her business partner, Baker owns and runs a women’s fashion boutique in Cheshire – she is also uniquely positioned to understand the reality and impact of those regulations on businesses’ day-to-day operations.

She manages the financial side of the business including the buying, forecasting and budgeting, and enjoys being on the shopfloor with customers at the weekend: “It gives me a good opportunity to gain an insight into our consumers’ priorities and spending habits,” says Baker, who also chairs ICAEW’s retail group.

Like most small businesses, during the pandemic Baker’s boutique also had to learn to quickly pivot to social media. This was successfully achieved and now social media is an integral part of the business’s interaction with its audience.

This first-hand experience, together with her years of professional knowledge, arms Baker with a two-pronged view of business operations. Above all else, she says, it is business rates that negatively affect the ability of some smaller businesses with physical stores to grow and prosper. “For most retailers, particularly small ones, it’s business rates that have a big impact,” she says.

The Valuation Office Agency (VOA) has undertaken a huge exercise to revalue all properties over the last 12 months – an initiative it has been talking about for years. At revaluation, the VOA updates the rateable value of business premises to reflect changes in the property market. This has resulted in the revaluation of properties for taxable purposes. 

Some business owners have found the exercise beneficial if it means their rateable values have fallen. However, some rateable values have gone up, as is the case with Baker’s store. “Following the review, my rateable value is more than twice what I pay in rent. It’s crippling because it’s a big cost. But the problem is that the government makes quite a lot of revenue from business rates, so to be able to replace or change that will be a big ask.”

The elusive online sales tax (OST), intended to remove the disparity in the tax burden between physical stores and online-only stores, has stalled. HM Treasury launched a consultation last February exploring the arguments for and against the introduction of an OST. The consultation has now closed and at the Autumn Statement 2022 the government said it would not proceed with the tax due to its complexity and impact on consumers and businesses.

Baker says: “Since COVID in particular, there has been a big drive back to bricks and mortar. Especially with the cost-of-living crisis, people are wanting to go physically in store more now [because they can check quality and it’s easier to return items]. Booming local high streets are an important part of local economies and benefit the overall retail industry. So it’s essential the government considers business rates before they become more of an issue.”

Audit thresholds

To qualify for audit exemption a company must qualify as small during that financial year, meeting any two of the following requirements: annual turnover must be not more than £10.2m; the balance sheet total must be not more than £5.1m and/or the average number of employees must be not more than 50.

“Audit thresholds are particularly low and haven’t changed since 2016. If you think about the prices of goods back in 2016 compared to the price now, and the fact that those thresholds haven’t moved, businesses will be falling into the audit bracket without actually growing their business significantly. They haven’t kept up with the challenges and pressures that we’re all facing at the moment with inflation,” Baker says.

Another potential challenge for small businesses could be the government’s plans to remove the option for them to submit abridged or filleted accounts. The government has issued a White Paper on this topic.

The change will result in small businesses having to file both a profit and loss account and a director’s report, adding to the admin and cost burden. But more worryingly, Baker says, is that if this information is publicly available it could put pressure on their margins: “This level of transparency is disproportionate for a small business. Suppliers, customers and competitors will have access to more detailed accounts, which could be used to squeeze business owners on price.” 

“Our country is built on the growth of small businesses, but we keep putting more and more regulatory burden on them which is stifling that growth. Regulation is well intended but it’s clear that bigger businesses have the resources to better cope with the burden. It’s too onerous for small businesses,” Baker argues.

She also points to the plastic packaging tax, which came into force on 1 April 2022, and which companies need to register for if they have manufactured or imported 10 or more tonnes of plastic packaging in the past 12 months. Again, Baker says the tax is there for a good reason, but for a lot of small businesses the complexity and cost of implementing it often outweighs the tax payable.

It’s clear that regulation is essential to ensure consumers are protected and businesses remain ethical, but at a time of entrenched weak productivity and some of the lowest economic growth among the G7 countries, maybe it’s time for the government to review thresholds for regulatory implementation for smaller businesses – that are always held up as the engine of British growth. 

Jacqui Baker, Partner at RSM UK, Head of Retail and North West Head of Consumer Markets

Discover more from ICAEW Insights

Insights showcases news, opinion, analysis, interviews and features on the profession with a focus on the key issues affecting accountancy and the world of business.

Podcast icon
Insights Podcast

Hear a panel of guests dissect the latest headlines and provide expert analysis on the top stories from across the world of business, finance and accountancy.

Find out more
Daily summaries
Three yellow pins planted into a surface in a row
News in brief

Read ICAEW's daily summary of accountancy news from across the mainstream media and broader financing sector.

See more
A megaphone
Stay up to date

You can receive email update from ICAEW insights either daily, weekly or monthly, subscribe to whichever works for you.

Sign up