A LEADING academic on retail studies has hammered home the need to radically reform Scotland’s business rates system, branding it a “historical anachronism”.

Leigh Sparks, professor of retail studies at the University of Stirling, told The Herald that there is an urgent need to change taxation policy to help drive the recovery of Scotland’s country’s town and city centres.

Professor Sparks, who recently wrote and chaired the A New Future for Scotland’s Town Centres report for the Scottish Government, said: “You have got a system that penalises high streets; penalises businesses that want to renovate properties, and privileges those that want to build new buildings on greenfield sites, and want to trade online.

“For me, if you think about the national performance framework, [and] the aims the Scottish Government has, then there will come a point they have to have the non-domestic rates system working in alignment with national policies. Currently for me they are not.”

The comments from professor Sparks come amid renewed focus on business rates in Scotland, with firms in the retail, hospitality and leisure sectors poised to pay the local authority property tax in full again following a period of relief due to the pandemic.

READ MORE: Hospitality trade on ‘cliff edge’ as rates bills poised to ramp up

Some critics say the business rates system, a form of local taxation firms pay based on the rateable value of their premises, has become out of date given the huge shift to online retailing in recent years.

The hospitality sector argues it is treated unfairly by the current system because assessors use a hypothetical turnover figure in arriving at their bills, which the industry argues does not accurately reflect how profitable businesses are and how much they can afford to pay.

A New Future for Scotland’s Town Centres recommends amending the rates system and changes to value-added tax, the latter to encourage the redevelopment of existing buildings in town centres. It also suggests the introduction of a digital tax, an out-of-town car parking space levy and a moratorium on out-of-town development to help stimulate the high street.

Professor Sparks said: “We need to think about what element of a property tax we should have, we need to change both property taxes for in-town and out-of-town, we need to think about VAT on renovations and in-town businesses, and we need to think about [a] sales or online tax.

“It is the balance and mix of all of those together which reflect the nature of the economy.

READ MORE: Alarm bells sounded over delay to major business rates changes

“If you have got 25 per cent of retail sales now going online, and the taxation system isn’t catching up with that, then your taxation base doesn’t reflect the economic realities. And that I think is a problem for any government in the longer term because that will continue to privilege that (online) type of business.”

He added: “There comes a point where you have to ask big questions of rates, and that will come in the next few years I think.”

The idea of an online sales tax has attracted support from leading business figures such as Sir Tom Hunter. Although he admits it is a “thorny issue”, Sir Tom contends that there should be a “level playing field” between high street and online retailers.

Stuart Mackinnon, head of communications and public affairs at the Federation of Small Businesses, expressed caution over the move, noting that it could undermine small firms that had moved into online retailing to stay afloat during the pandemic.

“We would not like to see businesses that pivoted online during the disruption of the last three years punished,” Mr Mackinnon said.

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The Scottish Government is in the process of making some changes to the business rates system, which flowed from the Barclay Review in 2017. Among the biggest changes will be to increase the frequency of valuations from every five years to every three to help ensure property values better reflect prevailing market conditions.

Changes have also been made to streamline the appeals process. These reforms will come into place next year, when the next revaluation of non-domestic property takes place.

Mr Mackinnon said: “Barclay has initiated a number of changes which will come to fruition next year. It will be a test of his reforms whether they will stand up to the stresses of the next revaluation.”

Professor Sparks expects the Scottish Government to focus in the short term on bedding in such changes, and on addressing the “data gaps” he said had been thrown up a report by the Fraser of Allander Institute on the small business bonus scheme.

He suggested that there may be a reluctance among politicians to interfere with business rates because there is a “predictability” of how much they raise, which in turn gives certainty to “what they can afford and can’t afford to do”.

Professor Sparks added: “The second element is there is not a lot of votes in non-domestic rates. People don’t get too exercised about it – it is not something everyone is campaigning about. The business owners clearly do. It is trying to make that link to… the good things (they are trying to do) in town centres.

“Businesses are often fighting with one hand tied behind their back because of the system. It is trying to get that point over as something people treat really seriously. We have lost a lot of things because it is so much more expensive to work in town centres.”

Meanwhile, Scottish Retail Consortium David Lonsdale has voiced disquiet over the recent signal from the Scottish Government that it plans to raise the poundage – a figure of pence in the pound multiplied by property valuations to calculate rates bills – north the Border.

In a spending review and medium-term financial strategy published at the end of last month, the government said an increase in the poundage “would be required” to ensure the next revaluation of non-domestic property is revenue-neutral in real terms.

Ministers said this was because the non-domestic rates deficit had increased “due to relief provided through the pandemic support and other factors including higher-than-expected levels of NDR income lost to write-offs, bad debts following Covid-19 and emerging 2017 revaluation appeals losses”.

Mr Lonsdale said: “The prospect of a further increase in the business rate, which is already at a 23-year high, sounds ominous and will set alarm bells ringing across retail and other sectors with a significant property footprint in Scotland.

“A further rates hike next Spring, immediately following revaluation when it normally falls, is unnerving. The only fixed point in a world of flux for retail seems to be rising supply-chain and government-imposed costs, which are increasingly difficult to absorb and ultimately add to the pressure on shop prices.

“A shift in mindset is needed on business rates, with a switch from trying to squeeze tax revenues from commercial properties to one which encourages investment into retail destinations.”