Everything directors need to know right now
There’s a lot but today we’ll concentrate on what recent developments there’ve been concerning commercial rents, business rates and VAT payments.
Business rates
The British Retail Consortium (BRC) is reporting that 83% of their members would have to close some stores if there isn’t immediate reform of the business rates system.
Their latest survey found that business rates have had a material impact on 67% of store closures in the past two years during the pandemic and subsequent lockdown.
When business rates were first introduced in the 1990s they were set at 34.8p in the pound and corporation tax was 34p. Today corporation tax is 19p and business rates have risen to 51.2p.
The retail sector has the most exposure to business rates paying a cumulative 25% of all collected which raises £8 billion.
The BRC claim that the business rates system has grown disproportionately compared to other taxes and levies and is especially unfair in punishing businesses that have a physical presence in a high street while online competitors have no liability.
During the pandemic business rates relief was granted although this expired in June 2021.
Another point of contention for the BRC is that business rates are still based on property values that were taken in April 2015 and do not reflect how property values had slumped during coronavirus lockdowns, nor do they reflect a business’s sales or overall profitability.
A government review into business rates is due to be published in the Autumn.
Helen Dickinson, chief executive of the BRC, said that their latest report “underscores the urgency of fixing the broken business rates system”.
She continued: “Given the retail industry contributes almost £100 billion to the economy and employs over three million people spread across the country, it has a vital role in the UK’s economic recovery.
“Our report underscores the urgency of fixing the broken business rates system, which currently holds back new jobs and investment. With one in seven shops currently shuttered, it is essential that action is taken, or else it will be our local communities and high streets which suffer the consequences.
“The Government needs to bring the burden down and take action to ensure that the system reflects the property market values more quickly.
“This should include a cut in the multiplier rate, returning it to its original rate of 35%. Furthermore, the government should introduce an improvement relief to prevent stores being immediately punished for investment into their property.
“At a time when the Green agenda is so important, it’s madness that business rates should rise for a firm that adds solar panels to their property.”
VAT
Businesses in the hospitality sector especially are bracing themselves for a rise in the VAT rate at the end of September.
The VAT rate was reduced to 5% in July 2020 and extended as the pandemic continued although this will rise to 12.5% for six months until March 31 2021 when it will expire and all goods and services will return to the 20% level.
UKHospitality (UKH), the trade body for the industry, would like to see the reduction made permanent.
UKH Chief Executive Katie Nicholls said: “The pandemic has had a devastating impact on our sector.
“The last 18 months have seen the hospitality industry lose over two thirds of its normal revenue, 10% of its businesses and seen headcount fall by almost 30%.
“The situation could have been so much worse had we not worked tirelessly to secure the support the sector needed from the government and while we know it has not been enough to offset the losses, it has undoubtedly saved jobs and livelihoods.
“Crucially, that support and engagement is continuing beyond reopening and into recovery as we have measures to rebuild resilience.
“We will aim to consolidate the profile the crisis has given the sector as a critical part of the UK economy and the perception of the role we can play in the UK’s recovery.”
Businesses that deferred VAT payments between March and June 2020 have to repay these fees and will incur a 5% penalty or interest if they did not make a payment arrangement by June this year.
Commercial rent
Business tenants have enjoyed a modicum of protection over the past 18 months as various steps and measures have been taken to offset a wave of evictions and business failures due to the pandemic.
Firstly commercial landlords were prevented from evicting tenants for failure to pay rent then restrictions were put in place to stop landlords recovering rental arrears through the seizure of tenants’ goods as they otherwise could through the Commercial Rent Arrears Recovery (CRAR) process.
The final protection was the temporary ban on the ability of landlords and any other creditor being able to serve statutory demands and winding up petitions – although this changes at the end of September and for the next six months they can be issued for amounts totalling £10,000 or over.
There was also a code of practice for commercial property relationships published in June 2020 that applied to all commercial leases held by businesses that had been negatively impacted by the pandemic.
The code is voluntary but is meant to facilitate fair and transparent discussion between landlords and tenants over rental payments and arrears.
It states that while tenants remain legally required to pay due rent under the condition of their leases, tenants who are unable to pay in full should enter discussions to find a way to pay what they can afford.
Since then the government has extended the moratorium on evictions and use of CRAR to March 25 2022 and announced that they would shortly introduce further legislation to:
- Ring-fence debts accrued during the pandemic by businesses affected by enforced closures
- Introduce binding arbitration for landlords and tenants as a last resort if they can’t come to a resolution on outstanding rent
The government has stressed that once legislation is passed the tenant protection measures will only apply to ring-fenced arrears.
This includes rent debt accrued from March 2020. So any debt incurred before this or after the end of restrictions for their sectors and those who haven’t been affected by any business closures can be pursued by landlords for payment.
A policy statement published earlier this year said: “The British Property Federation (BPF) estimates that by June 30 2021, £7.5 billion of commercial rent will be in arrears. Remit Consulting estimated that as of March 30, £5.3 billion of commercial rents arising since March 2020 were unpaid, of which half (£2.8 billion) was in the retail sector.”
Introducing a system of arbitration similar to countries like Australia and backed by the British Retail Consortium, UKHospitality and the BPF is an attempt to provide a long-term solution to the rent arrears problem and end any uncertainty.
You still have time to act to protect your business – so use it
While the end of September brings with it several changes and challenges – it also brings opportunities.
There is still time for a business to put a restructuring plan in place to deal with problem debt like bounce back loans, VAT arrears and other bills.
Alternatively, if the debt is insurmountable then it might still be possible for the company to close down and pay off a proportion of these liabilities to creditors but only after taking professional advice.
They might be surprised with the range of options available but only if these will only be available if they act quickly and then implement them.
The longer the delay the less choices they will ultimately have.