‘We’ve been lied to’: Hospitality in uproar over business rates overhaul
A 5p reduction in business rates for hospitality and retail was held up by the Chancellor as a sign the government was listening to their concerns. But – writes Ali Lyon – as business owners calculated what it meant for their bottom line, they discovered that the devil was in the detail.
It was supposed to be one of the few scraps of good news in a Budget otherwise short of festive cheer.
Having announced a deeply unpopular cap on salary sacrifice, alongside a 2p hike to dividend tax and a continuation of the freeze on income tax thresholds, the Chancellor, nearing the end of her speech, turned to the good news.
The long suffering hospitality industry would, along with retailers, be granted a 5p cut to their business rates bill. A decision, Rachel Reeves said, that would take the overall rate for the main commercial property tax to its lowest “since 1991”.
For Sacha Lord, chair of the Night Time Industries Association and creator of Manchester’s Warehouse Project, the immediate response was one of relief: “When she announced it yesterday, she did it in such a positive manner. I sat back and thought, ‘This is great. She’s kept her word.'”
But as landlords, hotel owners and restaurateurs across the country punched the numbers into the government’s ‘widget’ – a tool developed to help business owners estimate their tax bill – any feelings of good will evaporated. Far from a cut of 5p, most businesses, it transpired, would face a higher overall business rates bill when the changes come into force next April.
In many cases the amount they now owed to HMRC was not just more – but more by an order of magnitude.
‘One of the biggest stealth taxes for years’
“Hospitality has been lied to,” says Leon Burton, the managing director at the Pub Grill Co, a chain of six pubs across the North West and Midlands. “And the public has been gaslit on the support that the government claims it is giving hospitality.”
“It’s one of the biggest stealth taxes that hospitality has had for many, many years,” adds Lord, who was at one point both a Labour donor and Andy Burnham’s night time economy adviser.
What are business rates?
The business rates system has been a sore blighting the bricks-and-mortar economy for years. Levied on all businesses with a physical presence, it is the commercial equivalent to council tax but half of the proceeds it generates are funnelled to Whitehall. It also one of the only remaining major revenue drivers the government can raise, after it boxed itself into a myopic manifesto promise not to pull any of the main tax generating levers.
The jargon pertaining to the levy is complicated, but the concept is simple: a business has a ‘rateable value’, which is an estimate by a central government agency for how much it costs to rent their property – or properties – for a year. And then firms are told the percentage of that – known as the ‘multiplier’ – that they have to pay in rates.
In crude terms, therefore, the more expensive and commercially appealing your property, the more you can expect to pay in business rates. It is this, over and above any other factor, that, according to UK Hospitality chief executive Allen Simpson, means high street shops and restaurants have suffered such a conspicuous years-long decline.
A business that wants to be close and convenient to customers and patrons – and thus in more central, coveted real estate – will invariably have a considerably higher ‘rateable value’. And so despite also paying more rent their business rates bill is larger.
“If you run a restaurant on a high street, which we all think is a good thing, you are taxed more than if you just run a dark kitchen on an industrial estate,” Simpson summarises, referring to the catering businesses that fuel many of the delivery platforms.
In its pre-election manifesto, the Labour party vowed to rectify this, promising to “replace the business rates system” with one that did not place “an undue burden on our high streets”. But as the harsh realities of government set in – and the deadline on a business rates discount introduced during the pandemic loomed – ministers ducked the radical overhaul they promised.
Instead, what was offered was a zero sum game: the government would try and offset of the inevitable pain-points at low margin, already-struggling industries, by going after larger commercial sites harder.
It is those changes that Rachel Reeves announced, with pride, at Wednesday’s Budget. As many as 750,000 retail and hospitality properties would enjoy decades-low rates, she confirmed, which would be paid by large hikes to the rate on properties worth £500,000 or more “like the warehouses used by online giants”.
Business rates overhaul ‘a sin tax on community business’
Such rhetoric should have been music to the ears of Leon Burton, the publican running the aforementioned Pub Grill Co chain. Like many hospitality bosses, he was watching the Chancellor’s speech in real time, simultaneously apprehensive and optimistic about what it might entail. But as he then worked out what the business rate shake-up meant for his bottom line in reality, he realised the promise that larger online businesses would pay more to subsidise the high street “simply did not happen”.
Across Burton’s six venues, his average rateable value rise is 40 per cent. One of them has seen it rocket 224 per cent – from £22,500 to £73,000. This means that even though the ‘multiplier’ – the percentage rate at which his business rates bill is levied – was given a 5p cut, the value the government now says his properties are worth is 40 per cent more. Ultimately, Pub Grill Co is worse off to the tune of £85,000 every year.
“This is not the overhaul of the relief we were promised,” he tells CityAM. “Far from the lowest rates since 1991, pubs and hospitality are being hit the hardest. This is money that will be taken straight out of hiring, out of our teams, out of investment and growth.”
A Treasury spokesman said: “We’re protecting pubs, restaurants and cafés with the Budget’s £4.3 billion support package – capping bill rises so a typical independent pub will pay around £4,800 less next year than they otherwise would have. This comes on top of cutting licensing costs to help more venues offer pavement drinks and al fresco dining, maintaining our cut to alcohol duty on draught pints, and capping corporation tax.”
After digesting the Chancellor’s vast tax-raising Budget and realising the sector he represents would not benefit as expected, UK Hospitality’s Simpson set to work on his own fact-finding mission. If hospitality and high street firms largely faced a bigger bill, would the warehouses and out of town centres the overhaul was meant to target – at least – face a steeper rise too?
He picked three businesses at random and put them into the government tool. A hotel outside London that is one of his members, he found, faced a 41 per cent rise. A pub in Northamptonshire – much like Burton’s – was looking down the barrel of an eye-watering 291 per cent hike. An Amazon warehouse Simpson knew about? Just 6.4 per cent.
“It’s a sin tax on community business,” he says. “And it’s going to unravel.”
The ‘family farm tax for hospitality’
The reason Simpson is so certain of the move’s unsustainability has much to do with the brutal year that many in his sector had hoped was moving into the rear-view window. Hospitality – an industry which relies on a lot of young, part time staff – was especially badly affected by the fateful NICs rise and seven per cent minimum wage hike in last year’s Budget.
Those measures, according to Lord, left morale in the industry the lowest it has been in 30 years. But the ramifications were also more tangible. According to official statistics half the 200,000 job losses that have occurred in the UK since last October were made in hospitality, the UK’s fifth biggest industry and third largest employer. In Pub Grill Co’s case, Burton needed to find £200,000 just to stand still.
‘To use a technical term, it’s shit’
“It was a disaster, absolute disaster,” says Simpson. “We spent last year being told, ‘We get it. We understand.’ But actually this Budget was as bad.”
“It claimed to – as its centrepiece for business tax – be a rebalancing of, as they say, ‘clicks to bricks’, is actually seeing taxes go up more on those high street businesses than it is on the warehouses that they said they were going to deferentially tax. It is – to use a technical economic term – shit.”
Left unchanged, and the economic and social consequences be the more of the same. Burton will have to review his team numbers, dial down recruitment, explore reducing opening hours and run on a skeleton staff. But there will also be another consequence, which the Chancellor appeared almost to revolve the make-up of her entire Budget trying to avoid: inflation.
There is “no doubt” Pub Grill Co will have to raise its prices, he says, a prognosis with which Simpson agrees: “If you’re a pub and your rateable value has gone through the roof, you just have to put that onto the price of a pint.”
Of some consolation to landlords and other hospitality business owners will be the fact they are entering their most lucrative month of the year. Many will make a third of their entire annual turnover between the start of December and the new year. What lies beyond that, Lord predicts, will be “incredibly difficult”, with closures and job losses happening at a faster rate “than ever before”.
“Or it could be the family farm tax for hospitality,” he adds.
For Burton, though, there’s another, more emphatic solution. “She needs to resign. We were promised a pro-growth, pro-business, pro-high street, pro-small business and hospitality Chancellor and government. But they have done more damage in two budgets than I’ve seen in 12 years of running our company.”