Traders are to be hit by a sharp rise in their bills, as much as 177% in five years in some cases, prompting fresh calls for reform of the system

Shopkeepers in Southwold are braced for a tough year. The picturesque seaside town in Suffolk is the area of Britain worst affected by the revaluation of business rates. On average, companies will see their tax bill increase by a staggering 177% from April – but for some the impact will be far worse.

Clare Hart, who runs Chapmans newsagents on the high street, says she is nervous rather than angry at the increase: “We are scared and bewildered,” she says. “It’s so ludicrous, it’s difficult to be cross.”

Chapmans will pay £4,831 in rates from April, up from £2,280 in this financial year. The tax bill will keep rising until it hits £11,427 for the 2021-22 financial year: five times as high.

Hart calculates that Chapmans will need to increase its sales by £50,000 a year to cover the increase, but its average transaction is between just £3 and £3.50. “We can’t put up prices because we won’t be competitive,” she says. “We are already competing with chains like Joules, who also sell sticks of rock and buckets and spades.”

Hart was one of a small collection of business leaders who met the local MP, the Conservative Thérèse Coffey, on Friday morning to discuss their fears. “She said she was going to help us,” Hart says.

Local businesses in Southwold, including Chapmans, have launched a campaign against the increase. Their stores are decorated with posters showing how a 177% rate rise would affect the price of the products they sell.

Mills & Sons, a family-run butcher, has put up a banner reading “SOS – Save Our Shop”. It includes a quote from Theresa May about family firms and small businesses being the “backbone of our country” and that building an economy that “works for all” means “working with and listening to small firms”. The banner then adds: “Dear Mrs May – please listen to us urgently before we’re gone.”

George Mills, who runs the butcher with his brother and father, says: “It is not dramatising it to say we would have concerns for the future of the business” if the proposed rates increase happens. “We would certainly have to downscale.” Mills & Sons is set to see its business rate bill surge from £7,000 a year currently to £19,000.

“I know as a nation we are cash-strapped and no-one is flush,” Mills adds. “But I am convinced nobody would want a high street that these measures will end up with. It will be a homogenised high street.”

Businesses in Southwold are facing this increase because the rental value of commercial property in the town has been increased dramatically in the latest revaluation by the Valuation Office Agency (VOA). It is an affluent town that attracts tourists during the summer and a number of nationwide brands have opened in the area in recent years.

Business rates are calculated as a proportion of the rental value. The rental value is supposed to be measured every five years, but the previous revaluation was controversially delayed by the government in 2015 for two years, making the changes that will come into force from April more pronounced.

The revaluation is not supposed to increase the tax take for the Treasury but adjust the burden of business rates so it reflects the shape of the economy. As a result, London will pay more under the revaluation while struggling high streets in northern England will pay less.

David Gauke, chief secretary to the Treasury, defended the business rates system last week, accusing critics of the tax of “scaremongering” and claiming nearly three-quarters of businesses will see no change or a fall in what they pay.

However, these comments have infuriated small businesses facing an increase even more. Tom Innes, who runs a wine shop in Monmouth, south Wales, is facing an increase of £2,000 a year. “You could probably fit my shop sales area into Mr Gauke’s sitting room.

“I think he sits in Westminster, does a lot of sums, and overall it is a zero sum. But everyone doesn’t come out zero. It doesn’t work out equal for people like me: I fall through the cracks. But he doesn’t care about that, does he, because the sums work out.”

Gauke’s comments were also contradicted by a survey by the Federation of Small Businesses (FSB), which found that business rates were the most important issue facing three-quarters of small firms in London, above economic uncertainty and hiring staff.

The FSB is pushing for the threshold that businesses pay rates to be increased and for more helpful transitional measures to be introduced to stop the so-called cliff-edge that many firms are facing. At present, buildings with a rateable value of £15,000 or less enjoy a discount on business rates or pay nothing at all. However, the revaluation has pushed many businesses – including Chapmans in Southwold – over the threshold.

The government has capped the potential increases in business rates in the first year after the revaluation at 42%, but this is far higher than the 10-12% cap enjoyed in the past and there are also caps in place for those businesses that will benefit from a fall in their rates.

“The significance of what is happening in April is now dawning,” says Helen Dickinson, director general of the British Retail Consortium. “The basic problem is that the burden of the property tax is way higher than it is in other countries.”

Retailers, who pay the biggest share of business rates, have led calls for a complete overhaul of the tax, not least because high street stores are facing big bills that online retailers with vast warehouses do not have to pay.

Facebook Twitter Pinterest A sign at Two Magpies Bakery in Southwold. Photograph: Sarah Lucy Brown/East Anglian Daily Times

A report three years ago led by John Rogers, now the boss of Argos, and accountancy firm EY outlined four alternatives. These include measuring energy usage rather than property values; offering discounts for employing workers; linking business rates to corporation tax; and tweaking the existing system by introducing more frequent revaluations. Another idea that was mooted by Justin King, the former boss of Sainsbury’s, was to replace business rates with a sales tax.

Despite pledges by George Osborne, the former chancellor, to consider an overhaul of rates, no major changes have yet occurred. Osborne announced in the 2016 budget that from 2020 the annual inflation-based increase in business rates will be calculated using CPI rather than RPI. He also proposed more frequent revaluations, but the details of this are yet to be revealed.

The problem for the critics of business rates is that the tax has become one of the Treasury’s biggest and most reliable sources of income, bringing in nearly £29bn last year. The tax is also at the centre of the government’s drive to hand more powers to local authorities. By 2020 some councils will be able to keep 100% of the business rates raised in the local area, up from 50% at present.

According to John Webber, head of ratings at property agent Colliers International, local authorities are increasing communications with the liaison officers at the VOA, because of concerns that successful appeals will lead to a black hole in their budgets. The VOA has a backlog of around 280,000 appeals.

“The elephant in the room is localism and the devolution of business rates back to local authorities,” he says. “Local authorities cannot afford to see big drops in rateable values. They are not quite pulling the strings, but they are in background telling the VOA they can’t afford [successful appeals].”

Councillor Claire Kober, chair of the Local Government Association’s resources board, adds: “Councils currently fund half of all business rates refunds on appeal and have been forced to divert £2.5bn over the past five years to cover the risk of appeals and refunds. This means vital resources being diverted away from stretched local services, such as caring for the elderly, supporting businesses and boosting local growth.”

The call for changes to the business rates system is now starting to gain political momentum. Gareth Thomas, shadow minister for local government, and Jim McMahon, his fellow Labour and Co-operative MP, have tabled amendments to the local government finance bill calling for the government to consider offering discounts to hospitals – which face a £322m increase from April – and schools, and also for the business rates system to be fully reviewed before local authorities are allowed to keep 100% of the tax.

Thomas says: “Because of the challenges that schools and hospitals are facing, this is a way of offering relief to vital services that are under heavy financial pressure. We want to test the minister’s thinking on that.”

Thomas says he is also concerned about whether councils “will have enough in the pot” after the changes to the business rates system.

“It does raise a question about the long-term finances for local authorities,” he says. “I think there is a growing recognition that local authorities are under heavy pressure – the social care system is clearly in crisis.

“There are a growing number of MPs who are concerned that if you devolve business rates and other responsibilities, will social care be properly funded after 2020 and will they be able to fund other services?”

The amendment is scheduled to be debated in parliament on Tuesday. Despite the government’s protestations about scaremongering, the debate about business rates may only be getting started.

Case studies: ‘The system is totally broken, disproportionate and unfair’

Jane Morrissey

Rosehill nursery, Bolton

Jane Morrissey said her business rates bill would go up to about £20,000 a year, from £16,000. “I’ve asked for assistance for the previous one and it’s been declined by the council. I’ve appealed each time it’s gone up.”

She said the private nursery, which looks after 70 children on a part- or full-time basis, would have to get an extra eight children to cover the increase in business rates. But this would mean hiring another nursery worker, or three more if the extra children were babies.

Her staff get paid at least £15,600 a year, the living wage, but Rosehill prides itself on employing fully qualified staff, who earn graduate wages. The nursery employs 18 people. Morrissey said: “I don’t know what I’m going to do.”

She said nurseries should be treated differently from shops and offices over business rates. “They don’t rate us on education but on the income we could get if we rented our building out. We are looked at like retail, like offices. We are not in our own category.”

Nurseries also pay the full VAT rate of 20%, while schools only pay 5%. “It’s not a level playing field.” Morrissey added: “It’s really difficult to balance the books at the moment. I think it will see me going out of business in the next few years.”

Nurseries cannot charge more than £4 an hour for childcare, and the amount of free childcare available to parents will double to 30 hours from 15 hours a week from September. “The £4 doesn’t cover all the costs that are being imposed on us,” the nursery manager said.

Nurseries can increase top-up costs, such as meals and activities, but there is a limit – “you can’t say it’s £20 per dinner,” Morrissey said. “If a child wants to paint a picture, you can charge for the paint and the paper,” she said – but she doesn’t want to do that.

She noted that two nurseries in Bolton had gone under in the last fortnight (one of them was not-for-profit and did not even have to pay business rates).

Morrissey has spoken to her local MP about her concerns and will lobby the government this week, taking part in a Save the Children campaign to improve the quality of childcare. “They can’t put us all out of business. We’ve been set up to fail. For me, business rates are the biggest problem.”

Philip Davey

Western Maritime Training, Plymouth

Davey, whose Plymouth-based company trains people for the merchant navy, cruise ships and other vessels, said his annual business rates bill had nearly doubled. It has gone from £4,400 in 2009 to £8,400 this year. He said: “The system is totally broken, it is disproportionate and it is unfair.” As a training company, Western Maritime needs a lot of space, and its rateable value has increased from £70 per square metre to £90. A nearby business that used less space but turned a higher profit was taxed less, he said.

Davey suggested replacing business rates, a property tax, with a tax on gross profits. “Those who make more, pay more – it’s cost neutral to the government.”

He deplored that “the reduction of business rates has really only affected micro-businesses, rather than small businesses,” adding: “We are training and developing people. The rise in business rates will affect our profitability, our investment and our ability to recruit staff – and this is an area that is going to be crucial after Brexit.”

Julia Kollewe