At a glance
- Retail, Hospitality and Leisure Relief (RHLR) to be reduced to 40% from April 2025
- Small businesses likely to be hit the hardest, while we could see exits by larger firms
- Medium-sized businesses set to be the winners
- More comprehensive reform needed, say experts
The government’s plans to transform the business rates system to make it fairer, and make sure it “protects the high-street, supports investment, and is fit for the 21st century” were outlined during October’s Budget.
A somewhat debated tax, business rates are levied on property used for business purposes such as offices, shops, pubs and warehouses. They can end up being a significant overhead for businesses with physical premises, and have been criticised for unfairly impacting smaller businesses.
The RHLR scheme was a lifeline for many businesses during the COVID-19 lockdowns, and the decision to reduce the relief to 40% has sparked mixed reactions among experts. We explore these responses and look at the potential impacts of the change on businesses.
The smallest businesses will be impacted the most
There are concerns that the change will considerably impact the smallest businesses that relied on the 75% rate to remain viable. Simon Green, Head of Business Rates at Gerald Eve, said the decision to slash the RHLR scheme is “absolute madness”, and will see rates bills more than double overnight for 250,000 small businesses, leading to business failures and job losses.
“Many in the sector will quite rightly feel betrayed, given Labour’s manifesto promise to ‘level the playing field between the high street and online giants’,” he said.
Tina McKenzie, Policy Chair at the Federation of Small Businesses (FSB), agreed that many small businesses will see their rates bill increase. However, she feels that extending the relief at 40% will go some way to protect many of those in some of the toughest sectors from a potential cliff-edge tax hike.
“More needs to be done to shield small firms from the burden of business rates, and to put structural SME discounts on a more permanent basis than changing every 12 months, so that small businesses can see their likely cost base for more than the current year,” she said.
Large retailers may leave the UK to seek better rates
Mark Tan, International Tax Partner at Spencer West LLP, said that larger businesses which are often excluded from relief due to caps will continue to feel the burden of high rates.
Les Roberts, Business Comparison Expert at Bionic, agrees, added that if the government makes tax cuts in 2026-2027, money will need to be pulled from elsewhere to pay for it.
“Labour has said it intends to fund the permanent cuts by introducing a new higher multiplier for properties with a rateable value of over £500,000,” he said.
“This is aimed at corporate giants but will also affect large businesses just over the threshold.
“As a ripple effect, large retailers may rethink their investment in the UK, which could hurt our economy in the long run.”
Medium-sized businesses are set to gain the most
For Tan, the winners in this situation are the medium-sized businesses, who will still be likely to benefit. “Those with rateable values around the £45,000 range will see significant savings, which could improve cash flow and support reinvestment,” he said.
Tan said despite these businesses being set to gain from the changes, questions remain about whether these measures are enough to tackle systemic issues like regional disparities, which remain a pressing concern.
Competition with ecommerce remains a problem
The structural gap between physical and ecommerce businesses continues to be an issue. Physical retailers deal with high rents, staffing costs, and business rates, while ecommerce businesses often lower costs by operating in cheaper areas or avoiding UK taxes by being based abroad.
“While the extension of RHLR offers continued support to some businesses, it does little to address the broader inequities in the system. True reform requires a fundamental rethink of business rates, balancing the needs of physical retailers with the realities of an increasingly digital economy.”
Mark Tan, International Tax Partner, Spencer West LLP
“The proposed reforms do little to address this imbalance, and measures like the oft-discussed ‘online sales tax’ remain in limbo,” Tan said.
He said proactive preparation is crucial for businesses that think they will be impacted by the changes.
“Businesses that engage early with these challenges are often best positioned to adapt and thrive, even in a rapidly evolving landscape,” he said.
More comprehensive reform needed
For some, the government’s promised permanent reductions from 2026 are a step in the right direction, but they are only part of the solution. Tan said true reform requires a fundamental rethink of business rates, balancing the needs of physical retailers with the realities of an increasingly digital economy.
“While the extension of RHLR offers continued support to some businesses, it does little to address the broader inequities in the system,” he said.
“Measures such as an online sales tax or a dynamic property tax system could be part of the solution, but these must be implemented carefully to avoid unintended consequences.”
“With the current review into business rates underway, we’ll be pressing Government to use the final legislation to improve the system and encourage more growth and investment by smaller businesses,” McKenzie said.
For real, lasting change, businesses, policymakers, and international partners should come together and work on practical solutions. Bringing together different perspectives and expertise can lead to practical solutions, fair reforms, and policies that help ensure long-term economic stability and growth.