As the Government fiddles, the high street burns

Debenhams is the latest victim of business rates that are totally out of step with the reality of retail

Technology is changing the world at frightening speed; like it or not, we must embrace this transformation or be left behind. The problem occurs not because we are inherently resistant to it – as consumers we are, after all, its main facilitators – but because deep-seated change in the marketplace is not being matched in the tax, planning and institutional structures that overlay it.

A classic case in point is the desolation of our high streets. Round our way, scarcely any retail business lasts for more than two years. Some of the few that do are charity shops, spreading like a rash across the degradation of money laundering nail bars, fly-by-night pound stores and the depressing conformity of the big coffee chains.

There is a good reason for this: it’s called business rates. Better for a landlord to allow charities, which enjoy discounted business rates, to occupy their premises rent free than pay the full whack themselves on their otherwise empty shells.

Back at the turn of the century, little more than 1 per cent of all non-food retail sales were online. Today it is 23 per cent; within 10 years, it is projected to be approaching a half. The rates system, a form of property tax originally introduced in the Elizabethan Age, has utterly failed to keep pace with this metamorphosis.

Actually it is much worse than that. Increasingly, business rates are treated not as a conventional tax – whose yield will normally be determined by the variables of earnings, sales and capital gain – but as a money machine for the Treasury, such that, almost uniquely for a tax, the Government decides how much it wants to raise and then sets the parameters accordingly. Thus it is that the burden on those liable keeps on rising, even as the revenues and property values that sustain them fall.

The unfairness in the system – and the distortions it creates – are obvious. Amazon, now Britain’s fifth largest retailer, with ambitions to become its biggest within 10 years, is reckoned to pay just £14 million a year in business rates; Debenhams, which this week announced record losses and the closure of 50 stores, pays £80 million a year. Its flagship store on London’s Oxford Street alone pays £5 million.

But it is not just the tax system that is failing to keep pace with changing times. Rents, too, live in a bygone age. Again taking the example of Debenhams, 50 of its 170 stores are on leases that pre-date the foundation of Google, and 30 of them the internet itself. Many landlords live in a semidelusional “pretend, delay and pray” world where the puffed-up valuations on which the business rates are levied bear no relation to the rents that can realistically be charged to tenants not already locked in to a pre-existing contract. More than two years after BHS went into administration, a third of its stores still stand vacant. This is the harsh reality of today’s high street.

Small wonder that shares in some property companies are trading at such big discounts to claimed net asset values. These values increasingly look like make-believe.

What is plainly a catastrophe for retailers and landlords is becoming equally threatening to the banks, many of which have lent against property collateral which is no longer worth what they thought it was. We are fast reaching a tipping point, where what up until now has been a process of steady degradation turns into an outright crisis.

The Chancellor, Philip Hammond, knows as well as any that the current system is unsustainable, yet at nearly £30 billion annually, business rates are one of his biggest sources of revenue, and the foundation of local authority funding to boot.

There’s a Budget next week but, beyond addressing some of the more perverse anomalies in the system, he is not expected to embark on meaningful reform. It’s just all too difficult.

Two potential remedies stare us in the face. First, the planning system needs adjusting to allow for speedier change of use, so that redundant retail space can be put to better purpose, for instance as inner-city housing developments.

More importantly, we need urgently to shift from a tax based on property to one levied on sales. Today’s savvier retailers are often a mixture of online and physical, in symbiotic relationship with one another. A small levy at point of sale, or alternatively with online sales at point of delivery, would theoretically allow similar levels of revenue to be raised for local use. Councils could be given the freedom to vary these taxes according to perceived local and competitive needs.

Hope springs eternal, but I wouldn’t bet on anything quite as bold or rational as this emerging from the stir craziness of our present Government. They know what needs to be done, yet find themselves so tied up in knots by backstops, transitions, customs arrangements and all the other obsessions of Brexit that they cannot think seriously about anything else.

Trapped in a prison of its own making, the Government drifts wantonly towards its own destruction, apparently oblivious to the extreme structural changes erupting all around. And this is meant to be the party of business?

follow Jeremy Warner on Twitter @jeremywarneruk; read more at telegraph.co.uk/opinion