True Views: reviving the High Street – is it really that taxing?

The customer behaves in a multi-channel way; the retailers provide multi-channel experiences to its customers – it is our belief the tax system should similarly reflect a channel agnostic structure.

Business rates have become a “cause celebre” in the retail sector. It is the subject of much complaint, but few meaningful and relevant solutions have been put forward.

What is clear to us here at True is that attempting to solve the problem in isolation – with proposals of an “online only” tax – risks harming the high street rather than revitalising it. This is particularly important given the increasing multi-channel nature of most successful retailers, their lack of visibility on e-commerce channel profitability, despite any further levy, and the difficulties in attributing the consumer journey.

Writing as one of the largest UK investors in fit-for-the-future retail and consumer brands, we have the benefit of seeing the changing nature of the sector throughout the whole investment vertical: we receive over 2,000 innovative business plans from 38 countries each year, and partner with 11 of the largest global retail corporates.

In our view, a simple solution for business rates is often prevented due to the following factors:

  • Altering the business rates structure will not secure the future of businesses that don’t offer a unique customer proposition, delivered by a superior business model. Innovation and change has been – and will continue to be – a constant theme in retail. As an industry we must recognise that consumer preferences are in a constant state of flux and those businesses slow to recognise the changes will inevitably become redundant. If that decline is compounded by a business model that is weaker than peers’, then failure is highly likely
  • Legislation needs to reflect the natural ebbs and flows of market dynamics. Due to consumer behavioural shift and the opportunistic taxation arbitrage that prioritises company spend in some channels, new channels to interact with customers have emerged. This is a toxic cocktail for a traditional retailer without material exposure to the channel shift, nor over-exposure in channels which have cost and tax structures limiting profitability, investment and growth. However, over time this arbitrage will reverse (or at least find equilibrium): indeed, we would argue that this process is already underway and if the current rampant rates of inflation in digital marketing continue, it will inevitably make real estate an attractive channel once more. In our experience, we would say that this tipping point is close
  • A solution to the absence of an ‘online levy’ must be found. Despite a significant structural advantage for online-only operators for the past 10-15 years, rates in general are a significant problem for retailers: somewhat startlingly, 50% of the tax relating to rates paid by the top 100 companies was by retailers, and 40% of all taxes paid by the retail industry are via business rates, nearly double that of corporation tax. Business rates have increased by 91% since 2005, according to PwC – a very significant headwind for growth
  • The UK economy has a challenge to create, sustain and retain global champions. This is particularly prudent for businesses of scale, whose contributions to society can lead to beneficial re-investment via jobs and tax contribution. PwC’s annual report into tax contribution shows that the top 100 companies paid £82bn in taxes, representing 13% of all government receipts, despite only accounting for 6.5% of the UK’s workforce. We should be both inexhaustible and proud in our efforts to create world leaders in this country, such is the positive impact to society
  • A solution with community at its heart will have a profound impact for local infrastructure, investment and ultimately societal wellbeing. By 2020, all local councils are expected to receive 100% of all business rates in their geographic catchment, a significant hike from today’s 50%. Any solution must ensure the benefit flows back to local customer catchment areas or, in this case, council boundaries. A challenge for these councils is that catchments with the lowest wealth and productivity per capita naturally suffer more: fewer successful retailers choose to locate there, widening the perceived advantage of the online channel. However, new catchment areas don’t need to be created: the country is already carved up into councils and the Government is giving them more power to decide on the future
  • Reforming rates is a sensitive subject: as it’s not just confined to retail and leisure companies. In headline terms, it generates around £30bn for the Treasury but specifically for the local councils it represents a significant portion of their catchment income: removing it risks further cuts to other areas of spend such as healthcare and care for the elderly

 

So what is the solution? Taxing a “transaction” not a “channel” regardless of which channel the customer began or ended their journey. With customers behaving in a multi-channel way, and retailers providing multi-channel experiences to its customers, it is our belief the tax system should reflect a channel agnostic structure.

How to achieve this: scrap business rates for retail and, indeed, leisure businesses (given the increasing digital revenue streams in their business models). Replace this with a “transaction” tax that is the same across all channels of customer interaction. This will level the playing field, deliver incremental new revenue for councils from online retailers, and reduce the requirement of retailers to prove channel attribution. Given it will be based on customer location, it will largely deliver an incremental benefit for local councils that will be compounded by an increasing revenue share from central Government coffers, allowing councils to re-invest into their local areas.

In simple terms, tax would be due and collected in the area where the product / service is delivered to the customer. If the transaction is real estate-based (i.e. in a shop), tax would be paid to the council who governs that particular property. If it’s an online transaction and delivered to the customer’s home, the levy would be payable to the council where that consumer lives.

This is phase one of our thinking and we are here, willing to contribute further to this critical debate.

If you’d like more information on this article in particular or in general how we can support your retail business, email us at: enquiries@true.global

Posted by:
True CEO and CO-Founder, Matt Truman.

06 August 2018