Following last month’s Budget, we look at which of the Chancellor’s announcements will have the most impact on the retail sector.
From 1 April 2018, two years earlier than planned, annual business rates increases will be linked to the CPI as a measure of inflation rather than RPI. Business rates were due to increase by 3.9 % next spring, but will now rise by 3% in line with the lower CPI.
A change to the pattern of revaluations for business rates will also be introduced, which could result in business owners facing more frequent increases in the future. The next revaluation for business rates is due in 2022. Thereafter, revaluations will take place every three years. Implementation of this measure will be subject to consultation in Spring 2018.
BDO view: While both proposals will be broadly welcomed by retailers, the Chancellor could have done more to help traditional bricks and mortar retailers, who are seeing margins squeezed by increased property, labour and import costs. For example, the Chancellor could have frozen the business rates multiplier, but there was no mention of this.
To increase housing density in urban areas, the Government will consult on introducing policy changes to support the conversion of empty space above high street shops. In addition, the Chancellor proposed the scrapping of stamp duty for first time buyers on homes costing less than £300k may relieve some of the pressure on those operating in the home and furniture retail space.
BDO view: This may benefit retailers with underutilised space, as well as boosting spend within the homewares sector
Anti-hybrid rules and corporate interest restriction
The corporate interest restriction rules as a whole came into effect from 1 April 2017, following Finance (No.2) Act 2017 receiving Royal Assent on 16 November.
A few clarifications and technical amendments have now been made to these rules, which will largely be welcomed by private equity backed retailers. In particular, a clarification has been made to the anti-hybrid rules, which should result in a proportional disallowance of UK interest deductions when the downstream structure does not involve a hybrid instrument and only certain fund investors participate in the structure via a hybrid entity, or treat the fund partnership in such a way it is deemed to be a hybrid entity itself. For example, there should only be a 15% interest disallowance where a UK target company is funded by shareholder loans which are not hybrid instruments and only 15% of fund investors participate via partnership that is a hybrid entity (eg one that has elected to be treated as a corporation for US tax purposes).
BDO view: While the classifications are likely to be broadly welcomed, increased scrutiny of forecast profit profiles will be required during the course of private equity investment, in order to inform structuring choices on acquisitions.