Taxes on Small Businesses

Debate between Derek Thomas and Nadine Dorries

Wednesday 18th October 2017 Westminster Hall

[Derek Thomas]

If the hon. Gentleman is happy to wait, I will be pleased to address that issue later.

I will move on to business rates, which have been quite a contentious and well-documented issue in recent months. There is no doubt in my mind that if the Treasury were inventing a taxation system from scratch today, the current business rate system would not feature in its proposals. The Government should scrap the current system of business rates and develop a fresh solution, injecting fairness into the tax system for small businesses and taking into account the growth of online shopping and supermarket home delivery services.

Structurally, there are many things wrong with business rates. The tax bears little or no relation to the success or activity of a business. The method used to calculate it is arbitrary. Colleagues will be aware that rates are calculated by multiplying the rateable value, based on the assumed rental value of the property, by a multiplier set by Government. Almost in recognition of that, and in an attempt to spare small businesses the business rate burden, the 2010 Conservative-led coalition and the two successive Conservative Governments have sought to address the problems associated with business rates. As a result, some businesses are eligible for rate relief, with many paying no rates at all. Others, for reasons that are beyond the understanding of most lay people, find they are charged 100% business rates, with many in my constituency experiencing considerable increases following the revaluations earlier this year.

The owner of a small independent delicatessen in Helston, where rents are relatively lower, approached me for help in March. Her current rateable value stands at an extortionate £17,750 per year. To rub salt into the wound, her rates are calculated as £149 per square metre, which is the second highest on the street. A chain bakery operating next door pays just £101 per square metre—32% less—and a national clothing chain on the other side of the street pays just £66 per square metre, which is over 56% less. If she enjoyed the same rate per square metre, she would be liable for no rates whatsoever. Because of her business rate charge, she is not sure that she can afford to stay in business.

The current business rate calculations unfairly discriminate even between businesses in the same part of the high street and do not enable businesses to operate on a level playing field. The great tragedy is that that example is not unique. There are similar cases of an independent photography shop in Penzance and a car paint-spraying business that is run by two youngsters who find that their business rate charge bears no comparison to similar units on the same industrial estate. In both instances, there is little hope for the businesses unless the Government act quickly.

Furthermore, in this age of online shopping and supermarket home delivery services, there are businesses essential to the health of the high street that find competing in today’s world nigh on impossible, despite their so-called privileged position on the high street. Historically, a place on the high street gave an advantage to the shop owner, and consequently the business rate levy reflected that. The ability of supermarkets to provide a delivery service direct to the door has undermined that advantage, and in many cases, despite the modern reach of supermarkets as a result of home delivery services, the supermarket pays relatively less in business rates than the high street shopkeeper. In fact, in St Ives, business rates for some supermarkets reduced this April.

To add insult to injury, rents in St Ives town are being pushed up by the perceived popularity of this iconic place. This year, because rate charges relate to rental values, independent business owners have seen their business rate charge rocket. Traditional retailers, such as bakers, butchers and grocers, face the risk of closing after decades of trading. High street chains move in, and ironically the very thing that drives visitors to St Ives is being lost, partly because of what I believe is a flawed business rate system.

Could it be that the cost of running a high street business, including a business rate charge, means that a greengrocer can no longer compete with a supermarket 20 miles away, now that it can deliver groceries to the family living in the flat above? Surely a modern-day business tax should recognise such changes in consumer behaviour. Furthermore, business rate charges take no account of external factors such as high parking charges, poor upkeep of the local area, closure of local public toilets, or a downturn in the economy, most of which have been experienced in Cornwall in recent years.

I have worked hard with a number of business owners who have found the business rate system profoundly challenging. That group includes a local pub owner, who came to the trade recently, full of enthusiasm. The pub employs 14 locals and is a focal point for the community. A rate review means that the pub now faces a 280% increase in business rates, which equates to an extra £13,000 a year. I recognise that the Government have done some work, and Cornwall Council is also doing some work, to help with that, but the fact remains that that rural pub owner’s rates have increased by 280%. As rural pubs close around us and communities are losing their rural services, issues such as this are hardly encouraging to new entrants.

Another major drawback is that business rates hinder aspiration. Should a small business benefiting from full rate relief wish to take on a second property, expanding both the business and the workforce, it will lose its rate relief and pay rates on both the new and the existing outlet. That step change discourages growth and innovation, and stifles all the benefits that growth brings, including job opportunities, staff training and career progression. That is hardly the intention of what I believe is a small business-friendly Conservative Government.

Before moving on, I want to stress the potentially unique role that traditional independent retailers such as bakers, butchers and grocers have in looking out for vulnerable people in the community—for example, the elderly. That is reason indeed to consider the potentially devastating impact of an outdated business rate system.

Finally, I would like to address the Government’s Making Tax Digital plan. I am in favour of moving across to digital tax reporting and I recognise the Government’s ambition to move to a fully digital tax system during the next few years. Will the Minister ensure that SMEs, including sole traders, have easy access to reliable software and training? Have the Government considered that for some businesses, a transition to digital-only tax will present a further serious administrative and financial burden? Strange as it may seem, there are still significant numbers of traders who are not naturally acquainted with online activity. I am reluctant to single out individuals, but I have met a number of sole traders who are not tech savvy, and the idea of making tax digital fills them with dread.

At present, I can see that there may be a benefit to Her Majesty’s Revenue and Customs in making tax digital, and I know that the Government are making allowances for areas of poor digital connectivity and plan to exempt some on very low self-employed incomes. Can the Minister please ensure that those exceptions are properly supported by accurate data, so that those who are not yet in a position to take part in the brave new world of digital tax reporting will not be unfairly penalised or discriminated against?

In conclusion, I believe that the Government could send a clear message that Brexit does not mean that important domestic priorities are being left on the back burner. The Government can do that by ensuring that small business growth is not stifled by out-of-date and grossly unfair tax systems. Taxation must promote growth so that, as a nation and within our communities, we can maximise all the benefits that a vibrant economy brings. As changes in consumer behaviour and better digital services lead consumers to gravitate towards online shopping and supermarket home delivery, we must ensure that the Government have a fair system of taxation and make changes to unlock the potential of our country’s entrepreneurial small businesses.

The Government must recognise that the negative impact of business rates and the profit hit from VAT registration often go hand in hand. Both taxes kick in at the crucial point when an enterprise is on the cusp of growing to a size at which it can be of useful benefit to the local economy and community. Will the Government please consider scrapping business rates once and for all, in favour of a tax that reflects the economic activity of all businesses concerned? Will the Government explore opportunities to raise the VAT threshold in coastal and rural tourist areas, and will the Government continue to listen carefully to those who recognise the move towards digital tax reporting but ask that we approach it with caution and understanding?

[Ms Nadine Dorries (in the Chair)]

I call Jim Shannon.