Counting the cost of new business rates

“For practice owners, business rates are particularly galling.” That’s the verdict of Dominic Watson, a consultant at Myers La Roche, responding to news of rate rises from 1 April 2017 that are set to pose another challenge for practice owners and businesses with the job of balancing the books.

“Business rates, or more correctly non domestic rates (NDR), are another way of taxing businesses – with few services rendered in return. It is, therefore, no surprise that when business rates are reassessed, the topic generates some pretty negative sentiment and sensationalised headlines,” concluded Mr Watson, when speaking to OT (20 February).

Following criticisms within Parliament on the proposed plans, Prime Minister Theresa May confirmed at Prime Minister’s Questions (22 February) that that she has asked the Chancellor, Philip Hammond and Communities Secretary, Sajid Javid, to provide additional help for those firms worst affected by the upcoming changes to business rates.

Speaking in the Commons, the Prime Minister acknowledged that some businesses would be “particularly adversely affected” by the changes and said that the Chancellor and Business Secretary had been tasked by her to make sure there was “appropriate relief” available.

Responding to the PM’s comments, the Federation for Small Businesses’ national chairman, Mike Cherry, said: “I am reassured to hear that the Prime Minister has personally intervened in this extremely worrying situation for many small businesses.

“Many of our members have contacted us to say that they are facing completely unfair and disproportionate increases in their tax bills, with some considering whether to close or scale back their business. That would clearly be in no one’s interest.

He added: “Previous interventions by the Government, backed by the Federation, have resulted in 600,000 small businesses receiving 100% relief and therefore protected from the current business rate changes. But the extent of loss faced by some small businesses who are still in scope has created an unacceptable situation and I look forward to hearing the Chancellor’s proposals at the Spring Budget in two weeks’ time.”

Chief executive of Leightons Opticians, Ryan Leighton, told OT at 100% Optical this month that “any rise in rents, rates or fixed overheads is obviously a concern for anyone who is running a private business.”

Mr Leighton added: “As a retailer in the UK with over 30 stores, we are obviously going to be looking very carefully at how these rates might impact our business. We are working with a specialist surveyor who will look at all of our rates, and appeal any of those where there is an uplift.”

Independent practice owner and AOP councillor for East Midlands, Tushar Majithia, said: “This is a very real concern for those small practices who will face steep rises as a result of the proposed changes. Independent practices will have to manage and adapt to an increase in cost that will be a greater proportion of their turnover compared to the larger retailers. They will also suffer a further competitive disadvantage, for example, compared to online retailers that do not have the same level of overheads in terms of business rates."

He added: "Another concern is that this may accelerate the trend for larger retailers to move their operations to out-of-town locations, where overheads will be lower, leaving more empty shops on the High Street.”

In the picture: the reality of rate changes

Dominic Watson of Myers La Roche provides OT with the background to the rate rises, and what they could mean for optical businesses

How are business rates charged?

Business rates are payable based on the rateable value of a property with a multiplier applied. At revaluation, all properties are given a new rateable value and multipliers (‘poundages’ in Scotland) are revised. New values will not necessarily incur higher bills. Some areas of the UK will see reductions, improving a building's viability and a company's bottom line. Economic recovery, particularly in London and the South East, will fuel business rate increases, which are likely to cut into profits. 

On 1 April 2017 the delayed new business rate regime comes into play, with the likes of Amazon and fashion company ASOS having the business rates bill on their regional warehouses actually reduced.

This has pushed some local authorities to criticise the Government for unfairly favouring online giants, who do not need bricks-and-mortar premises, over High Street companies. Director general of the Institute of Directors, Stephen Martin, said recently: “The goal must be a much more level playing field that treats both High Street and online businesses fairly.”

How will practices be affected?

When it comes to independents in premium city areas, their business models are frequently very different from the mainstream. Practices in prime locations tend to operate either as a Harley Street-style eye care model, with chair-time charged at a premium and can be highly profitable in their own right, or as exclusive retailers of eyewear fashion, selling expensive premium products that are more akin to a high-end jeweller. 

Some of the most highly successful practices combine the best of both worlds within exclusive, high rent and high rate areas.  

This exclusive, lower volume, high yield operational model means that higher property costs are counteracted by much lower than average staffing costs, with enviable revenue per full time employee statistics more than offsetting their much higher than average occupation costs.

While keeping fixed costs in check is important for most firms, the answer to profitability and ultimately viability lies with sales revenue. For optical firms, a focus on boosting sales rather than reducing costs is the key to success. NDR changes are likely to have a bigger effect on the multiples with primary positions, higher patient volumes and larger premises – all of which make the burden of rate costs higher than independents.

For the small number of independents in London and the South East facing big rate rises – and where these are genuinely likely to bring business viability into question – the blame is likely to be with a fundamentally flawed operating model, with the practice sailing far too close to the wind prior to rate rises.

The other counter-intuitive aspect of the NDR systems is that improving your premises such as installing air conditioning might increase the value of the premises and consequently the rateable value and corresponding business rates payable.

Are there any positives from the move?

The Small Business Rate Relief will double from 50% to 100%. Businesses with a property with a rateable value of £12,000 and below will receive 100% relief. This will be a boost for smaller optical practices.

When is the change taking place?

The change to business rates comes into effect on 1 April 2017, with rateable values based on rental levels assessed as at 1 April 2015. 

For information on the current business rates, visit: https://www.gov.uk/introduction-to-business-rates/overview

Figure 1

Rent and rates of the independent optical sector in 2016 as a percentage of net annual turnover. Source: Myers La Roche / TMR Data from 2016