Hospitality businesses wind down to avoid costly VAT bills, claims MP

Thomas, the Conservative MP for St Ives, said small hotels, guest houses and restaurants in his constituency often choose to close or slow down their business as they approach earnings of £85,000. Once they pass the threshold, they are liable for £9,000 of VAT payments, which he claims mean they would need to earn another £45,000 “just to stand still”.

He said: “Unfortunately, the inevitable and sensible decision for many businesses… is to close. That immediately puts other businesses in the area at risk, contributes to job insecurity and the challenges we face around that every year, hollows out communities, and threatens transport links.”

Thomas said that an upside to the COVID pandemic was the rise of well-paid, skilled jobs in hospitality and tourism, but they are being put at risk because of this problem. He called for business rates to be removed and VAT to be applied to all money earned above the £85,000 threshold.

Thomas said: “Tweaking business rates has actually increased unfairness and depressed growth and aspiration. Business rates should be scrapped in favour of a tax that reflects the economic activity, not the building the business occupies. To support levelling up, serious consideration must be given to the chilling impact of an arbitrary VAT threshold.”

Other MPs agreed that the business rates system is flawed and called for reforms, though they disagreed that scrapping the tax entirely would work. Peter Aldous, Conservative, said inflation and rising bills have made business rates “a fixed cost from which occupiers cannot escape”, but described a replacement system as a “holy grail that is unachievable in the real world”.

Aldous questioned the way business rates are calculated, saying many businesses now pay rents linked to their turnover, meaning they are becoming “disconnected” from the rental values used to determine their business rates bills and could be paying more in rates than rent. He added that there were concerns over the transparency of the valuation process, with evidence not shared by the Valuation Office Agency (VOA) and a long and expensive appeals process.

Aldous suggested “root-and-branch reform” of the business rate system, including the reduction of the UBR (uniform business rates), yearly revaluations, removing the “complicated” reliefs and digitalising the VOA.

However, he added that the Chancellor had made “significant” announcements on the future of business rates in the Autumn Statement, including a revaluation that will come into effect from April, freezing of the UBR multiplier, reform of the transitional relief scheme, a small business support scheme and a 75% retail, hospitality and leisure relief worth up to £110,000 per business. The Government had also committed to review business rates as part of its in 2019 election manifesto.

Kevin Foster, Conservative, said further relief was needed for small and medium-sized businesses, adding that empty premises create cost to the public purse so the Government should explore how to ensure business rates do not become a “barrier to the regeneration of our town centres”. He said: “Business rates might have been an irritant in the past, but they can often be the make-or-break factor now, especially in light of the other pressures that businesses face.”

Jim Shannon, DUP, said the problem is more acute in Northern Ireland, where small businesses already pay 30% more for the delivery of products than the rest of the UK, as a result of the Northern Ireland Protocol Bill. He said: “When rates are put up by a few per cent, it can mean business owners working for less than the minimum wage. The business rates bill for the (hospitality) sector accounts for 2.5% of total business rates paid, despite only representing 0.5% of total rateable turnover—an overpayment of £570 million.”

Shannon praised the Government for several “substantial moves”, including freezing the rates multiplier at 51.2p and removing the downward transition on relief, but questioned why a proposed online sales tax was not being brought forward.

Speaking for Labour, James Murray, Shadow Financial Secretary, also questioned the impact of business rates, quoting official data showing that more than 137,000 business closed in the first quarter of 2022, 23% higher than the same period in 2021. He said the system has “become disconnected from the realities of modern retail and retail real estate” and has failed to respond to changes in consumer behaviour, notably online shopping.

Responding for the Government, Financial Secretary Victoria Atkins said the Government had announced a significant support package for business rates in the Autumn Statement and was committed to making the system “fairer and more responsive” to changes in the market.

She said taxes on commercial property remain an important part of the taxation system and raise over £20 billion a year in England alone, which is used to fund public services.  She said: “We do not believe that there is an alternative with widespread support that would raise sufficient revenue to replace business rates. For those reasons, we do not consider there is merit in a radical overhaul or abolition of business rates, but we have delivered meaningful change to improve the system and have continued to conduct several reviews on the issue.”

The Financial Secretary added that data shows little evidence that the current tax rate discourages investment or expansion, while a third of properties in England already pay no business rates as a result of the Government doubling the small business rate relief threshold from £6,000 to £12,000 in 2017.

She said an online sales tax has been consulted on but there was “not unanimity” on how it should operate. She added: “In the Autumn Statement the Chancellor decided against an online sales tax, with the important caveat that the changes we are making to business rates, including with the revaluations, will mean that the distribution warehouses, which supply the multinationals that we are all keen to ensure pay their proper taxes, will see significant rises in their bills while we also protect the shops and microbusinesses to which he referred.”

The Financial Secretary added a new support package would address imbalances between warehouse and “brick and mortar” rates, as well as protection from facing large bill increases because of high inflation and rateable value increases.

She said: “We understand and listen to the concerns of those running businesses, and keep the operation of all tax policy under review. In the 2021 autumn Budget, we announced the outcome of the business rates review, and will shortly bring forward legislation to deliver those reforms. A core element of that package is more frequent revaluations.”

You can read the full debate here.