Written evidence submitted by British Beer and Pub Association (IBR0028)

BBPA Submission to Treasury Committee’s Inquiry into the Impact of Business Rates on Business

The British Beer and Pub Association represents companies in the UK which among them own 20,000 pubs and brew over 90% of beer sold in the UK. Member companies have many different ownership structures, including UK PLCs, privately-owned companies, independent family-owned brewers and UK divisions of international brewers.  

Over 80% of Britain’s 48,000 pubs are run as individual SMEs and they are facing some major challenges. A disproportionate tax burden means that one in every three pounds spent in the pub goes to the taxman. This amounts to an average of £140,000 per pub each year. This is alongside sharply rising regulatory costs for labour-intensive businesses such as pubs (for example the National Living Wage, pension auto-enrolment and the apprenticeship levy), as well as increasing competition for the leisure pound and an aging population.

The BBPA therefore welcomes the Select Committee’s inquiry into Business Rates. As the country’s pubs struggle to keep their doors open and serve their communities, a change in Business Rates is needed now more than ever to ensure that tax is fit for purpose in Britain’s modern economy. Given that this is an issue which has an enormous impact on our sector, we would welcome the opportunity to give oral evidence to the Committee.

Executive Summary

The BBPA welcomes the Select Committee’s Inquiry into Business Rates. We have long maintained that our sector is disproportionately affected by a system that is no longer fit for purpose in Britain’s 21st century economy. Not only is our sector currently paying a crippling rate relative to other sectors that are taxed, but it is unfairly shouldering the responsibility of today’s modern economy due to large sections of untaxed or under-taxed sectors. Our submission seeks to address the wide terms of reference set out by the Committee, but as ever we stand ready to answer any further questions. It is our sincere hope that we can work with the Government to find a solution that delivers on growth and fairness, provides certainty, is coherent and, importantly, is fit for purpose for Britain’s modern economy.

Recommendations:

• We encourage Government to do more on rebalancing the fair share of tax from the Digital Economy.
• We support the report by the HCLG Select Committee Inquiry into High Streets and Town Centres which recommended that the Government introduce the ‘Growth Accelerator’, ideally for the longer of two years or until the following revaluation period.
• Government should provide certainty by extending length of relief until wider reform is enacted, especially for pubs recognising the important community services they provide and their current disproportionate share of the rates burden.
• Investment in valuation expertise and continued improvements to the pub valuation guide so that Fair Maintainable Trade is appropriately rated is also key.

The Business Rates Burden on Pubs

1. The business rates burden is crippling for many pubs. Pubs pay 2.8% of the total rates bill yet contribute only 0.5% of rate-paying businesses turnover; an overpayment relative to turnover of £500 million. Per pound of turnover, pubs pay more in rates than any other business sector as demonstrated by the graph below. A legacy of very different times, there can be no justification for such an inherent unfairness in light of today’s increasingly digital economy.

Table 1: Proportion of turnover accounted for by business rates

Source: Oxford Economics, 2015

2. In 2010, there were approximately 55,000 pubs across the country. By 2017, there were only 48,000. Like much of the hard-hit High Street, pubs continue to close their doors for good at the alarming rate of three per day. After the 2017 revaluation, the pubs sector faced a 15% increase on their Ratable Value, while the national average was only 9.1%. This translates to an estimated average increase in rates bills of over £120 million or £2,600 per pub[1] by 2022. London pubs will on average see a 34% increase in their business rates bills and in Scotland bills are set to rise by 31%.

Table 2: Change by region

Source: BBPA estimates

3. Important as it is to reform Business Rates in order to prevent tax base erosion and thus increasingly more taxes on fewer businesses, reform is critical to protect what the pub represents – the community. Pubs are where communities are strengthened and friends made. They act as social hubs for people from all walks of life with many pubs running public services, as well as putting on community events and cultural activities. There is a pub for every community. From urban gastropubs to rural country pubs, Britain has a hugely diverse pub offer. Indeed, 30 million people visit a pub at least monthly.

4. The loss of pubs also means job loss for the often-underrepresented workforce. Around 43 per cent of the beer and pub workforce is under 25, compared to 12 per cent in the overall economy as measured by the Labour Force Survey. 53 per cent employed are female. The jobs available in the sector also provide much-wanted flexibility, with 57 per cent of positions being part-time and many in rural areas, small towns and villages where other local jobs are scarce. Increasingly, employers within the sector are rolling out apprenticeships and providing greater career progression for all employees.

Table 3: Economic contribution of beer and pubs, by region

Source: Oxford Economics

Business Rates: Good Tax Policy?

5. Business Rates are unique in their ability to collect and therefore understandably attractive as one source among a set of business taxes. However, good tax policy, as stated in the pillars defined by the terms of reference to this inquiry, is meant to achieve the following: Fairness, Growth and Competition, Certainty, and Coherence. We have concerns that Business Rates do not meet these criteria.

6. Business Rates tax is the only form of tax reverse-engineered, whereby the total tax bill is determined before rates are applied. This creates a very real zero-sum game when the business tax base is shrinking or not fully represented. In addition, the headline rate, or Uniform Business Rate (UBR), has steadily increased adding yet more burden per business. When the UBR entered into force in 1990/91, it was at a rate of 34.8p. That meant that the tax burden represented roughly 1/3 of rental values of the property. In 2018/19 the Higher Multiplier was set at 49.3p (for Small Business, 48p), meaning the rates due on a pub represent about half of the annual rental value.

7. Importantly, Business Rates tax does not adequately tax an increasingly larger segment of the modern economy – the Digital Economy. Although these businesses may use fewer physical locations and be better at maximising space (especially vertically), they put the same strain on public goods, such as roads, and public services, such as police and need to pay their fair share. It is this same segment of the economy that continues to challenge the government’s ability to charge and collect a fair share of tax. By way of example, BBPA members pay, on average, one in three pounds of turnover to the taxman, of which 3.3% alone is spent on Business Rates. Yet, the international tech giant Facebook reportedly faced a total tax bill that represented 0.62% of their UK revenue. Facebook’s total tax liability, £7.4 million on £1.2 billion revenue, is roughly equivalent to just the beer duty bill of the well-known, mid-sized Yorkshire brewery, Black Sheep. Apple paid marginally more, handing £10 million to the taxman on £1.2 billion in turnover, a tax bill of 0.83%.[2] These rates are a far cry from fair, whether in the context of Business Rates alone or across the whole of tax burden.

8. We would like to see the Government commit to its manifesto promise of a wholesale review of business rates to address the rapidly evolving nature of business – and particularly the move to online goods and services reflecting the growth of on-line businesses and ensuring on-line businesses pay a fairer share of the business tax burden. The Digital Services Tax announced in the Budget was a positive step, but the additional projected revenue from this (around £400m by 2022-23) will not in itself be anywhere near enough to significantly reduce the £31bn business rates burden for property-based businesses, even if it was to be used towards this and there has been no commitment from Government that a digital tax will be used to reduce business rate bills.

9. The two-year business rates discount of a third of the total bill (for pubs and other retail businesses with a rateable value of less than £51,000) announced at the Autumn Budget was extremely welcome. This is worth up to £8,000 for qualifying pubs (and around £3,000 on average) and replaces the £1,000 pub-specific relief introduced in 2017/18. In both instances, the number of pubs that benefit is constrained by State Aid rules and larger pubs also continue to bear a disproportionate rates burden.

10. Rates discounts and reliefs, while welcomed and critical for many smaller pubs, indicate the level of burden and complexity the tax poses on our sector. In fact, a recent report by Europe Economics showed that 19% of pubs were at High or Very High risk (relief represented 5% or more of net income) with the removal of pub-specific relief. Those pubs hardest hit were small, community pubs and disproportionately those in the East and East Midlands regions. These temporary reliefs create uncertainty from year to year on what the total bill will be for the individual publican. In part, this is also due the revaluation cycles of the system. We welcomed the announcement of more frequent revaluations and would encourage Government to consider reducing even further. The more regular the revaluation, the less shock can occur in changing property rental values. Nevertheless, the nature of annual reliefs, sometimes extended, sometimes replaced, sometimes removed, creates an environment of uncertainty. This goes against another core pillar of good tax policy – Certainty.

11. Lastly, we have concerns that the current form of Business Rates does not satisfy the Growth and Competition pillar of good tax policy. Not only are pubs declining overall, but investment in the individual pub attracts a rates rise too quickly to realise the investment before facing the financial penalty. In fact, where investment includes alterations to a pub, the Valuation Office can backdate the uplift so that pubs are hit immediately, and indeed retroactively. Pubs compete with an ever-increasing offer for the leisure pound. As the competition increases, e.g. online food delivery and entertainment, the pub must reinvest to compete. The cycle for reinvesting has also accelerated in order to meet this demand, yet investments in pubs are punished by hikes in rates. This discourages investment at the individual pub level, but without investment in pubs they risk becoming less competitive in a vibrant marketplace for leisure spend. Europe Economics showed that a delay in rates rise is directly correlated to an increase in the Internal Rate of Return, making investment more attractive. By their calculations, a 2-year delay would increase IRR by 8.9% and a 3-year delay would further increase it to 9.5%, significantly greater than the 7.5% under an immediate rates rise. The greater the payback on investment, the more attractive investment becomes.

Immediate actions to support the nation’s pubs:

(i)                  Investment relief

12. Investment is the lifeblood of pubs which need to evolve to meet changing consumer demand. Up to £1.5 billion is invested in Britain’s pubs each year. Pubs are almost uniquely valued on the basis of turnover and this can be a significant disincentive to investment.  Investment in pubs almost certainly leads to an immediate revaluation based on a presumption of increased turnover. However, any increased profitability and return on investment will inevitably be realised over a longer period.  This was recognised in the recent Barclay Review in Scotland and the recommendation, accepted by the Scottish Government, of at least a 12-month period before any increase in business rates following an investment.  The recent report by the HCLG Select Committee Inquiry into High Streets and Town Centres has already recommended that the Government introduce the ‘Growth Accelerator’ proposed in Scotland for one year. 

13. We would like to see this applied to pubs throughout the UK and extended so there is no revaluation of a pub premises on the back of investment for the longer of two years or until the following revaluation period. This would complement the additional business investment incentives announced in the Autumn Budget.

(ii)                Community Services Relief/Adjustment

14. Pubs are the original social network and, by their nature, inefficient users of space. They provide a comfortable and welcoming environment and often provide free use of this space for local clubs to meet, run sports teams and charitable events at their own expense and act as tourism information points.

15. Through Pub is the Hub and other schemes this may be taken to the next level in terms of providing post-office services, a library, parcel collection, tourist information among others.  Indeed, many pubs are listed as Assets of Community Value.

16. We believe there should be a relief or an adjustment to a pub’s rateable value that can demonstrate it provides additional community services beyond running the business. The criteria would be agreed with Government along with the level of relief/adjustment to reflect the level of community service provided.

(iii)             Overtrading

17. The turnover on which pubs are rated is based on an assessment of fair maintainable trade (FMT) that is deemed achieved by a reasonably efficient operator. 

18. The 2017 valuation guidance includes a section on how to deal with this but, in reality, the default position continues to be based on the latest annual accounts of actual turnover. Therefore, when a high-achieving operator takes an average pub and transforms this they are often heavily, and unfairly, penalised in terms of a large increase in business rates.

19. The determination is by its nature a subjective one and one that requires expertise in valuing pubs specifically. However, the declining number of Valuation Officers with pub expertise means this subjective term is more likely to be misused or misunderstood leading to less robust valuation and a greater number of appeals. We would urge greater investment and training in pub-specific valuation officers – a Google search cannot replace the local knowledge and sector-specific understanding of a well-trained officer. Furthermore, we welcome collaboration with the Valuation Office Agency and hope to see further enhancements to the VOA’s 2021 Valuation of Public Houses guide which reflect our concerns. Getting this guidance right is critical for pubs and there are key aspects of the guide that can be improved.

Summary

20. The Great British pub is a valuable institution that is being placed in grave danger due to overly burdensome tax pressures. This is on top of a beer duty regime which taxes the pub’s most popular product higher than almost any other nation in Europe, despite welcome recent freezes.

21. It is important that the Government continues to recognise the unique place the pub occupies in British society by creating an environment in which they can thrive.

22. We encourage Government to do more on rebalancing the fair share of tax from the Digital Economy, to provide longer terms of relief until wider reform is enacted, especially for pubs recognising the important community services they provide and their current disproportionate share of the rates burden. Investment in valuation expertise and continued improvements to the pub valuation guide so that Fair Maintainable Trade is appropriately rated is also key.

23. The move to more frequent revaluations and poundage multiplier using CPI rather than RPI is also welcome. We would encourage even more frequent revaluations in order to minimise distortions from one year to the next.

24. In the longer term, there have been a range of alternative options proposed to replace business rates, from a sales tax to a land value tax. Whilst, as the CBI notes, research indicates that well designed taxes on immovable property are less distortive than other taxes, other options should now be fully evaluated to reflect the economy of today. Whilst a complete reform of total business taxation seems unlikely in the current political climate, a way must be found to capture on-line sales more fairly and ultimately, the business rates burden for property-based businesses be reduced significantly.

Appendix One

Submitted March 2019