Rates: the key to saving physical retail in an online world?

Online retailers don’t pay commercial rates but VAT shares the burden across all retailers

Grafton Street, Dublin: Waterstones MD James Daunt points out that online retailers don’t pay commercial rates because they don’t have shops, but VAT is meant to be charged on all purchases. Photograph: Matt Kavanagh

Grafton Street, Dublin: Waterstones MD James Daunt points out that online retailers don’t pay commercial rates because they don’t have shops, but VAT is meant to be charged on all purchases. Photograph: Matt Kavanagh

 

Commercial rates have long been a bugbear of retailers, who claim the charges decimate their bottom lines. So here’s a novel idea from James Daunt, the managing director of the bookselling chain Waterstones: in the age of online shopping, simply abolish rates for bricks and mortar retailers and adjust VAT to plug the gap.

Daunt’s thesis – he was arguing against rates in the UK but his points are just as relevant in Ireland – is a simple one. He highlights there has been a massive shift to online shopping on sites such as Amazon. Online retailers don’t pay commercial rates because they don’t have shops, but VAT is meant to be charged on the purchases.

Therefore, Daunt argues, bricks and mortar retailers are paying a disproportionate share of the overall taxes levied on the retail activity, in the form of the rates that their competition, the online retailers, simply don’t have to pay.

The logical extension of his argument is that this disproportionate burden will forever make physical shops even more uncompetitive against their online peers, further accelerating the shift to online. It will only get worse over time. It’s like a negative feedback loop for bricks and mortar retailers – there is no escaping the trend.

“[Rates] was based on a belief that all retail was going through the high street... and therefore it was a reasonable way to extract tax,” said Daunt, in comments first reported in the Ireland edition of the Times. “Well VAT does that, thanks very much, and we should just stick to that because VAT hits the online guys just as much as us.”

Has he got a point? It is hard to argue that traditional bricks and mortar retailers aren’t hamstrung by the current set-up. Online retail sales, while still barely more than a tenth of overall retail sales, are growing at six times the rate of face-to-face shopping. The domestic economy may be rebounding, but the biggest vibrations are felt online.

Traditional shopping

The Central Bank estimates that, in 2015, online sales were more than €9 billion, although that comprises more than traditional shopping. It has probably risen by 50 per cent since. Retail Ireland, a division of Ibec, recently estimated that total e-commerce sales in Ireland for 2017 will come in at near €16 billion, although that figure, too, includes more than pure online shopping.

Whatever the correct total is for pure online shopping, it is large and getting much larger. Virgin Media, in its digital insights report, estimated a year ago that online retailing in Ireland was worth more than €7 billion, and will double in four years. Irish retailers complain that between 60 per cent and 70 per cent of the value of all of the online shopping by Irish consumers goes to foreign retailers, such as Amazon.

We all know how this story goes: online will inexorably eat up a bigger and bigger share of the retail market, as it has in other sectors of the economy. Soon, this will be no country for old retailers. Like the wind and the tides, you can’t stop what’s coming. Traditional retailers will need to migrate online to compete. But it is hard to compete when you’re hampered by a legacy tax that isn’t levied on your competition. It’d be better to just shut your shop. And then what would our main streets look like?

Local authorities across Ireland collect and spend all of the near €1.5 billion in rates paid by businesses, a large chunk of which comes from retailers. Perhaps the biggest bugbear of retailers is that business rates are often used by the local authorities to plug any and all funding gaps in their budgets, paying for services that have nothing to do with retailing at all.

For example, Fianna Fáil recently proposed adding 1.5 per cent on to business rates in Dublin city to pay for 2,000 affordable homes. A laudable objective, for sure. But why should retailers and other businesses be stuck with the bill for perennial failures in State infrastructural planning and a dysfunctional residential property market?

If rates were scrapped, could that shortfall really be plugged by VAT collected centrally by the State, and then, presumably, redistributed to pay for local services?

The exchequer returns this week for 2017 recorded a total of €13.3 billion for VAT. To increase that yield by more than 10 per cent to plug the gap, Paschal Donohoe, the Minister for Finance, would have to add a few percentage points on to the standard rate of VAT. If he did that, he might need to buy himself a helmet and some ear muffs to cope with the backlash afterwards. I hear there are some great deals online.

******

FOOTNOTES

– Declan Ganley’s telecoms infrastructure company, Rivada Networks, suffered a stunning reversal last week in its attempts to salvage bits of a huge US federal contract to build a network for the emergency services. The Galway businessman had been banking on the plan to fund exponential growth at Rivada.

Declan Ganley’s Rivada Networks lost out on business from New Hampshire. Photograph: Andreas Solaro/AFP/Getty Images
Declan Ganley’s Rivada Networks lost out on business from New Hampshire. Photograph: Andreas Solaro/AFP/Getty Images

Rivada lost out earlier in 2017 to its rival, AT&T, for the contract for the system, known as Firstnet. All 50 US states, however, had until the end of December to opt out of Firstnet and instead, build their own.

Ganley managed to convince New Hampshire last month to formally opt out, in the hope that others, such as Colorado or possibly even California, might join it. But as the post-Christmas deadline loomed last week, the Granite State stood alone. In the end, it did a U-turn, giving AT&T a clean sweep and leaving Rivada out in the cold.

“While Rivada’s plan remains the better option for New Hampshire, I have determined that the additional risk associated with being the only state to opt-out creates too high a barrier for New Hampshire to continue down the opt-out path alone,” said the state’s governor, Chris Sununu.

Back to the drawing board for Ganley.

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INM shareholder Denis O’Brien’s stake is down by about €15 million. Photograph: Niall Carson/PA Wire
INM shareholder Denis O’Brien’s stake is down by about €15 million. Photograph: Niall Carson/PA Wire

Independent News & Media lost about more than a quarter of its market capitalisation last year, finishing 2017 at about €127 million. The company, which is the subject of investigations by regulators concerned about its corporate governance and data security, lost about €50 million in value.

That’s incredible, when most of its market value is tied up in the €100 million or so in cash sitting in its bank account.

On paper, Denis O’Brien’s stake is down by about €15 million and Dermot Desmond, whose nominee just walked off the board, is down by €7.5 million. How long will it be before other the shareholders step forward and ask what on earth is going on?

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