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Large Stores Vulnerable to Declining Markets

Easter Sunday marks the anniversary of the first revaluation in 7 years, which adjusted the rateable value of business properties, used to calculate business rates bills, to reflect changes in the property market. During that first year, the design of the system has had an acute impact on large shops in areas with declining markets.

This revaluation should have been good news for ratepayers in economically disadvantaged areas, particularly in the North of England. For towns like Stockport in the North West, which had historically suffered from high vacancy rates for empty shops driving down shop rents, last April’s revaluation offered hope and optimism.

However, a year on, Marks & Spencer has announced the closure of Stockport’s  7,735 square metre store as part of Steve Rowe’s five year turnaround plan, whilst the town’s New Look store last month fell victim to the company’s voluntary arrangement.

According to real estate advisor, Altus Group, Stockport’s businesses should have been among the biggest “winners” in the revaluation, with rateable values for the town’s 2,389 shops falling 22% from £41.3 million to £32.2 million. Larger shops faired even better seeing their rateable values fall, on average, by 35%.

The reality is that large business premises, in towns like Stockport, will never receive the full benefit of the decline in their property values, making them vulnerable as retailers review their store portfolios amid challenging trading conditions.

Transitional relief is a method of limiting or “capping” significant variations in business rates bills with both large increases and decreases under a revaluation gradually being phased in.Transitional relief is self-financing for the public purse, with increases in some areas subsidised by reduced savings in others, and lasts until the change has been smoothed out, year by year. Due to the deferral of revaluation from 2015 to 2017 and the substantial change in rentals since the previous valuation in 2010, the effects of transitional relief have been pronounced especially in towns like Stockport with tax bills for shops falling overall by just 6.2% for 2017/18.

The M&S store, earmarked for closure, was one of the five biggest retail winners in the North of England under the revaluation, with its rateable value falling from £935,000 in 2010 to £500,000 in 2017.

Yet, despite the massive fall, according to calculations by Altus Group, the rates bill fell only marginally from £464,695 before the revaluation to £449,166 for 2017/18 as reductions were limited to just 4.1% before the effects of inflation. Without the “capping”, the bill would have fallen to £239,500.

It is a similar position for the town’s New Look store, closing under the retailer’s CVA despite its rateable value having halved from £267,500 to £124,000. Given the effects of “capping”, Altus Group says the actual bill only fell from £132,947 to £128,257 in 2017/18. Without such limits, the bill would have been £59,396.

According to Alex Probyn, president of UK business rates at Altus Group, large shops that have seen their local markets and values plummet will only see real term falls in tax bills allowing for inflation of 11% in the final year of the new four-year cycle adding:
“Maybe, just maybe, had M&S and New Look not been denied tax reductions of £732,969 and £246,825 respectively over the full four years, the fate of these stores could have been different.”

“Transitional relief needs a redesign. Phasing should apply only to those bills which increase between one revaluation period and the next.  Where local economies are struggling and values fall, ratepayers need to benefit from the full reduction immediately.  The cost of upwards transition could be paid for by a small supplement. It would be like an insurance premium against a steep increase in liability.”

“Without this reform, places where respite is so badly needed won’t get the fair deal they need to respond to changing markets.”

Large shops in towns like Stockport, with rateable values over £100,000, will see further reductions of just 4.6% for 2018/19 before the effects of 3% inflation.

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