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A perfect storm spells dark days for the high street

When Roz Davies, the owner of a haberdashery shop in Primrose Hill, north London tore open the letter from the Valuation Office, she returned to bed and pulled the duvet over her head.

“I just thought 'sod it, I can’t do this any more, it’s just too much’.”

Ms Davies, who has also run workshops for the community at her Sew Much Fun shop for 10 years, had been suckerpunched with a business rates revaluation, meaning she would suddenly have to find another £6,700 to keep her shop afloat, despite only making £80,000 a year in sales.

“There is no logic to the rates revaluation, I am being judged on the same rate as a main high street player. Rates will be two thirds of my rent and I’m not getting anything for it. I still have to pay the council to have my rubbish collected,” Davies fumes.

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Up and down the country, shop owners are swinging from depression to rage in anticipation of the new business rates system, which arrives in April, with many facing a steep jump in bills.

Over the past few weeks the clamour has reached fever-pitch as the public grasped that business rates rises threatens to put the nail in the coffin for pubs, hotels and retailers already battling other headwinds.

After the high-profile collapses of BHS and Austin Reed last year, restructuring experts are warning of a wave of further casualties. Agent Provocateur, Blue Inc and Clinton Cards are among those struggling. A slew of other retail names are having urgent talks with landlords and consultants about how to weather the current downturn.

In the first six months of 2016, 2,656 shops closed across British high streets, a rate of 15 a day, meaning more closed than opened. A tax on property has existed since the Elizabethan Poor Law of 1572 was introduced. But even though the current system is based on a 1988 Act, critics say it fails to grasp the modern era of retailing which has seen the rise of online shopping and the boundaries between online and physical shops blurred.

The business rates system is calculated based on the rateable value of the property and the idea that the size of a shop or business is linked to its prosperity. But as the recent wave of Christmas trading updates has shown, the bulk of retail sales growth is coming from online sales rather than physical stores. Despite this shift, traditional retailers are due to pay £2bn more over the next three years than they did in the past three.

Business rates experts at CVS found small shops will see their rates bills rise by £1.6bn over five years, as Asos, Amazon and Boohoo will see bills on distribution centres come down. Last week, David Gauke, chief secretary to the Treasury, hit back at “scare-mongering” around business rates.

Three quarters of the country would enjoy lower business rates, he claimed. However, campaigners argue that the quarter who do face a rate rise are being unfairly penalised and shouldering the burden for the rest.

“It’s only getting worse,” says Jerry Schurder, an analyst at Gerald Eve.

Helen Dickinson, chairman of the British Retail Consortium, argues that the sector shouldn’t be bogged down by the split between warehouse centres and high street shops: “It is the tax that is fundamentally broken, the whole thing needs to be overhauled.”

The £26bn the Government is due to rake in means that it is unlikely to relinquish this money without slashing spending on something like the NHS or education. Since the Conservatives came to power, the Government has made a concerted effort to make Britain more appealing to business by lowering corporation tax to just 15pc, the lowest of the G7 countries. However, many companies argue that business rates are a bigger drain on finances than corporation tax.

According to the BRC, in the “best case scenario” the steep jump in business rates will mean there will be 8,073 fewer shops by 2020, putting 80,000 jobs at risk. Added to this, a recent survey by Conlumino showed that business rates were the biggest reason for international retailers to shun the UK. It is not just business rate risess that the retailers are having to face, but the general shift in spending habits towards restaurants and holidays, rather than on clothes.

Where shops close, coffee shops are reopening in their place, with 6,000 new cafes in the past five years. Fashion sales, the biggest chunk of the retail market, suffered a 2pc slump last year, the steepest decline since 2009. While traditional retailers are undertaking far-reaching reviews of their shops, online rivals are gradually moving into the high street.

Brands such as the fast-fashion brand Missguided and the furniture retailer Made.com are opening showrooms to lure shoppers, but they will not make up for the rapid pace of store closures.

Retailers will also have to face the prospect of a spending squeeze as shoppers tighten their belts and become even more discerning about what they spend their cash on. Earlier this month official figures revealed that pay growth slowed to 2.6pc as inflation hit a 2½-year high of 1.8pc in February.

Inflation is creeping back, partly because of the pound’s slump since the EU referendum, which has seen sterling lose around 16pc against the dollar. The retail sector is particularly vulnerable to weaker sterling because the bulk of fashion goods are made in Asia, and paid for in dollars, while the grocery trade imports roughly half of all food produce.

Rising import costs have already caused profit warnings at Laura Ashley and Next, while Primark has said it will take a hit on profits to ensure it can continue to sell cheap clothes. Retailers now face the dilemma of choosing between raising prices, which could make shoppers reluctant, or taking a profit hit.

On top of the cost pressures, retailers are also having to fork out millions more in wage increases through the national living wage, due to rise to £7.50 an hour for workers over the age of 25 in April, and the apprenticeship levy.

The British Retail Consortium had campaigned for the levy to be delayed until next year, arguing that the over-hasty introduction of the £3bn tax came during an “intense period of change which was in turn already having a dramatic impact on the workforce”, but it is thought to have fallen on deaf ears.

The combination of pressures spells dark days for the nation’s retailers.

Damian Webb, a restructuring advisory partner at RSM, says he expects more casualties. “There are a lot of pressures coming down the tracks which will mean that companies have to find savings elsewhere just to stand still,” he says. For many, though, that will not be an option.