Northern Ireland’s retail sector is in crisis. Insolvencies are hitting both small independent retailers and well known high street brands. Even when some companies such as HMV have emerged from administration, there has been a substantial reduction in their retail presence in Northern Ireland.
The latest figures from the Northern Ireland Retail Consortium (NIRC) provide evidence of the scale of the crisis. We continue to have the highest percentage of vacant shops in the UK and some indicators of retail health are getting worse. In March, footfall fell by 5.2% against last year – and it was 7.0% down in the high street, with shoppers clearly deterred by the bad weather. In the weekend before Easter, retail footfall here was down on 2012 by a shocking 48%.
Various initiatives have been proposed to overcome underlying problems, but none offers a definite solution. Retail guru Mary Portas has advised the UK Government on how to support the high street, concentrating on improving the retail environment. As yet, though, there is little sign that this is having much positive impact.
Many retailers focus instead on the strain of paying business rates. The Federation of Small Businesses complains that business rates in the UK are much higher than comparable taxes in other countries – and are three times higher than elsewhere in Europe. The FSB claims that business rates are the third highest expense for small firms, after wages and rent. NIRC calculates that across the UK, retailers pay 28% of total commercial rates collected, yet contribute only 5% of GDP.
A specific complaint is that ‘bricks and mortars’ retailers face competition from online traders based in cheap warehouses, sometimes offshore, and so pay little if any business rates. And independent high street retailers complain that they pay more per square feet than do out-of-town multiples.
“There should be equalisation between what you pay out-of-town and what is paid in town,” says Glyn Roberts, chief executive of the Northern Ireland Independent Retailers Association (NIIRTA). He believes that large chains located out-of-town should pay “considerably more” than they do at present. This is despite the temporary introduction of the Large Retailer Levy, which NIIRTA says has played an important role in protecting small traders and which it wants continued beyond its planned expiry date of 2015.
By contrast, NIRC is very unhappy with the levy and looks forward to its end. NIRC director Aodhán Connolly says: “The Large Retailer Levy was a huge extra burden on retailers and we did not want to see it introduced…. What we are asking for is that the rates system is fair and equitable for all sectors and does not become another burden on retailers in Northern Ireland.”
He adds: “To impose any added burdens on retailers would be counter productive and result in fewer jobs and less growth. This will have implications not only for prices to local consumers and hard pressed household budgets, but also on the attractiveness of Northern Ireland as a potential investment location for internationally based retailers.”
One option sometimes floated is to replace business rates with a local sales tax, additional to VAT, that applies at the same rate online as within shops. This mirrors a debate in the United States where at present only the very largest online retailers are subject to sales taxes. Congress is considering a proposal to allow online sales taxes to be levied on smaller online retailers. So could a sales tax be implemented here create a level playing field between internet and high street retailers?
Finance minister Sammy Wilson believes this is unrealistic, as it would potentially breach UK and EU law. “It is doubtful whether NI has the legal competence to change to a basis of local taxation that so resembles a national tax and this is enshrined in the Northern Ireland Act,” he says.
“So, it would be for the Westminster Government to decide if there were to be any change in this position. Furthermore, the legality of a local sales tax for Scotland was looked at about six years ago and it was considered that any tax that was much like VAT would run a serious risk of breaching EU law as Europe does not permit differential tax rates within states. This would clearly present a similar issue for Northern Ireland.”
In fact, says Wilson, the reality is that we probably have to accept business rates, even while recognising their imperfections. “Changing from rates to a different form of local taxation would present a variety of legal, administrative and revenue issues, that would have to carefully considered,” he argues.
“This was something that was done back in 2007/2008 when the Executive looked again at the domestic rating system and alternatives to it. None were taken forward. Furthermore, I would question the wisdom of moving away from a system of business taxation that operates throughout the British Isles.”
In addition, it might displace trade to the Irish Republic, the minister points out, or even push more trade online, depending on how it was implemented.
“Other alternatives, such as attempting to reconstruct the rating system with reference to profits would be very difficult indeed,” Wilson continues. “Some parts of the business community would be able to conceal profit, for example by shifting profit outside NI; small local business would not have that advantage. The recent row over Starbucks is a case in point.
“In addition, these sorts of taxes are proportionate to economic activity and the revenue yield would be difficult to predict and the system would simply be too volatile to use as the basis for funding essential local and regional services and investment. Finally, either system would be extremely expensive to administer for both government and business
“Whilst the rating system we have in place is far from perfect it has to be viewed in the context of its fit with other taxes on business and I do not believe that the business community would welcome radical change. Whilst I can understand why many struggling businesses would be attracted by any ideas that raise the prospect of paying less tax, I think such thoughts are governed by the principle that the only fair tax is the one that someone else pays.”
Wilson points to targeted alleviation measures to reduce the burden of business rates as the best approach. This includes the Small Business Rates Relief Scheme, which now applies to almost half of small firms; the 50% rates concession for the first year of a new business; and the revaluation, which is to take place in Northern Ireland in 2015, compared to 2017 in the rest of the UK.
While NIIRTA welcomes those measures benefiting their members, its desire for an upward re-rating of out-of-town shopping centres’ car parks is resisted by Wilson. “Charging car parks in out-of-town shopping centres a separate rate is a difficult thing to do within the rating system because the value of individual shops already reflects the advantages of free car parking and other common facilities such as the covered mall,” says the minister. “It’s not that they don’t pay – it is part and parcel of the values placed on the individual shops, but it isn’t separately shown.”
Business rates, it seems, are a tax that nobody loves but which we can perhaps not do without.