VAT increase has merit over online tax to help shops – Kevin Hollinrake

It had just closed down after many years in that community. Mrs Craggs was in the audience and the questioner said: “Mrs Craggs’ business has just had to close down. She cannot pay her business rates. It is just unaffordable. What are the Government going to do about it?” The reality is that Mrs Craggs’ business was closing down not because of business rates, but because of the different shopping trends of all the people in that room.

All those people were applauding and saying we should take some action, but the reality is that fewer and fewer of us are buying that kind of stuff from shops.

So it is not about what the Government are or are not doing; it is about shopping trends.

Before the Covid-19 crisis, 20 per cent of shopping was done online but that figure has risen rapidly to 35 per cent, which is making the whole system difficult.

Most businesses look at the rent and the business rates when they first take on a premises, and then plug that into their cashflow and decide what they can afford to pay. That is what a good businessperson should do. It is not that the business rates system is anachronistic; the pace of change is the problem.

Community is very important to me and our shops are part of those communities.

It is dangerous when the Government start picking winners – I do not think that should happen.

The forces of free markets and a market economy are the best things to ensure that prices are kept low and levels of services are high for consumers. That is what is most effective. So what we have to try to do, of course, is create a fair and level playing field, and let businesses come in to fill that gap and provide services that people want. That is what we should be looking to do.

In its review of business rates, the Treasury talks about different options, including an increase in VAT, changes to corporation tax and an online sales tax.

It seems to land on the online sales tax as the solution, so let me talk about a couple of things that it sets out in the consultation.

It sets out not that an online sales tax will replace business rates, but that it will exist alongside them — that is a key thing to understand — and that it will potentially lead to a reduction for retail. So there will be two systems coming together.

But the changes in consumer behaviour are not just about retail. Uber Eats and Deliveroo, for example, deliver to people’s houses, often not from takeaway premises on the high street but from mini-establishments off the high street.

Travel agents, insurance brokers, banking – all those things are changing because of consumer habits; people do not visit shops anything like as much as they used to. Looking at the problem purely from a retail perspective is wrong; doing so does not understand the problem.

Another issue is what is online? One of my fantastic local butchers in Thirsk is Johnson’s, an order-in butchers, which has wonderful meats, but does not seem particularly the type of business that would go online.

I visited them during the crisis, because they had set up a delivery service and offer click and collect, as well as traditional shopping.

They have even set up a little bot from which you can order, which talks to you using artificial intelligence — very clever stuff and really innovative, which was great; but how would you assign an online sales tax to those different categories?

It would be hugely complex for a business to work out what was bought purely online, what was bought on click and collect and what was bought by customers walking into the store. It would make the system more complicated.

The more we try to simplify the tax system, of course, the more complicated we make it. There are some inherent flaws in an online sales tax; it is so very difficult.

The problem of distinguishing between online, click and collect and physical shopping is inherent in lots of different businesses, John Lewis being an obvious example. It is not clear how such a tax would operate without making the system more complex.

Simple and easy are two different things. The simple solution, which will not be universally popular, is to look at a sales tax. We already have a sales tax; it is called VAT. The simplest thing to do would be to raise VAT.

We could not just put a hole in the business rates system – some 30 billion quid – without replacing it with something, certainly not given where the public finances are today.

Putting 2p on VAT, would raise £12bn a year; 4p on VAT would raise £24bn a year. We could also look at the threshold system of VAT, which is a real deterrent for businesses to grow.

If we want a simple solution that is effective and crosses all the different sectors, it is there. It is fair and would keep the tax system as simple as possible.

I urge the Treasury to think about the full extent of the problems, as well as the potential quick wins. When compared with an online sales tax, VAT is a much better system to operate.

Kevin Hollinrake is Conservative MP for Thirsk and Malton. He spoke in a Commons debate on business rates – this is an edited version.