Sir Philip Green’s Flagship Group Wins Over the Pension Protection Fund (PPF) and Landlord Creditors - But Troubled Retailer Has Had to Negotiate £20 Million Plus Business Rates Holiday To Cope with Unsustainable 50p Tax
Arcadia Group’s success in achieving its seven company voluntary arrangements (CVAs) which was narrowly approved today comes with a double- edged sword, according to John Webber, Head of Business Rates at Colliers International and illustrates the deep flaws in the current business rates regime, which unfairly penalises retailers.
The vote on Sir Philip Green’s rescue package was narrowly approved by the companies’ creditors, including its pension trustees, suppliers and landlords. Arcadia’s majority shareholder, Lady Green, will now invest £50m of equity into the group, as per the CVA and has also agreed to fund cost of the amended rental reduction terms within the CVA proposals, as announced on 7 June.
However what has not been publicised is that the approval will also mean that Arcadia will now be able to take a business rates holiday of about 30% of its business rates obligations for the rest of the current rating year (to April 1st 2020, according to the terms of two of its CVA documents.
Colliers believes Arcadia has had to negotiate this because the current business rates system, with its 50p tax rate is unsustainable for such retailers and that if the multiplier was 30p - 35p as originally set, such a business rates holiday would not be needed.
Colliers has estimated that Arcadia’s current 480 UK stores were currently due to pay abusiness rates bill of around £80 million this financial year (April 2019/20). However, by the terms of its CVA 160 local authorities will now not receive business rates revenues on its Top Shop/Top Man stores for the rest of the year, with the hope that provided the company is turned around in three years’ time, they will then receive 5% of what they are owed. From looking at one of Arcadia’s CVA proposals, Colliers believes this means a hit to local authority finances of around £24 million for the current financial year.
John Webber, Head of Business Rates at Colliers International said, “Arcadia’s CVA has followed a precedent set out by Debenhams three weeks ago, where that troubled retailer had to virtually half its rates bill for this billing year through its CVA. It now looks like other retailers are being forced to follow suit.
Traditionally, business rates obligations were considered sacrosanct in CVA negotiations, because of the impact on local authority financings if they are not paid. However, the current business rates system is now so flawed and particularly imbalanced towards physical store-based retailers who pay 25% of ALL business rates, even though the gross value-added from retail is less than 10% (ONS, 2018), that it has come under strong attack from the sector.
The Centre for Retail Research estimate the retail sector paid a total of £7.6 billion in business rates in 2018-19. For many it has become effectively a 50% tax.
As John Webber Head of Business Rates at Colliers International, said, “ It is clear that for many retailers to survive in the near term, they cannot cope with a 50p tax along with business rates rises every year along with inflation, irrespective of whether the business is doing well or badly. If you add in that many in the sector are paying considerably more in business rates than they should be due to the onerous effects of downward phasing on their rates bills, following the 2017 Rating Revaluation, you can see that this is not a neutral tax at all.. It looks like Arcadia has had to make such demands to survive”
Webber continued, “We have a great amount of sympathy with many retailers in the current market place who are shouldering too much of the business rates burden and we have long been advocates of reform and a much fairer system. To some extent, although not the only reason, the tipping point for some companies to move into CVA has come about because of the failure of the Government to properly reform a system that has imposed an unsustainable 50% tax on many in the sector.”
“Of course, although understandable, these business rates holidays do have consequences.Through Arcadia and Debenhams’ CVAs alone, Local Authority finances will be down over £30 million this year and if every troubled retailer does what these companies have been forced to do to survive this would have a massive impact on local authority financing. Local Authorities will not have the funds they have budgeted for to run local services, which we already know are tightly stretched. It also has the effect of creating two tiers in the High Street of those paying full rents and rates set against those paying reduced rents, and now in some case no rates at all.”
Webber added, ““Unless something is done, Arcadia won’t be the end of this story. With Monsoon saying it is looking to “accelerate” the process of its store closures as it mulls a potential CVA so that it can restructure its estate, and other retailers in the same predicament, it looks like the business rates fiasco could well turn from a farce into a serious tragedy. Not an ideal scenario for UK High Street going forward.”