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Abolish Business Rates for high street SMEs and introduce Online Delivery Tax

Reform UK · what the evidence says

An independent, source-checked look at Reform UK’s policy “Abolish Business Rates for high street SMEs and introduce Online Delivery Tax” — what it would actually do across the things that affect your life. Every claim below quotes the source behind it. How this works.

Tax & the money you keep — Mixed picture

moderate · low confidence

High street SME owners and entrepreneurs would keep more of what they earn through rate abolition and a lower capital gains rate, but an online delivery tax would likely be passed on to consumers as higher prices, reducing real take-home for ordinary shoppers. The net effect depends heavily on how much of the business rates saving landlords absorb and how broadly the delivery tax raises prices.

The evidence

Biggest unknown: Whether landlords capture most of the business rates saving through higher rents (as the IFS suggests) would determine how much SME owners actually gain, and whether the online delivery tax revenue covers the cost matters for fiscal sustainability.

Our reading: This policy creates genuine O11 effects in both directions, affecting different groups. For high street SME owners, abolishing business rates is a direct reduction in their tax burden, improving take-home return on their businesses. However, the IFS projects landlords will respond by raising rents, potentially capturing most of the saving — meaning the actual O11 gain for SME operators may be considerably smaller than the headline suggests. This undercuts confidence in the 'improves' signal for this group. For entrepreneurs, cutting the qualifying CGT rate to 5% from a scheduled 18% is a substantial reduction in tax on business disposals. This clearly improves O11 for those who sell qualifying businesses. However, the benefit is concentrated among a relatively small number of high-value exits rather than broadly distributed (as the pre-2020 reform history suggests). For ordinary consumers, the online delivery tax is the critical countervailing force. Oxford Economics projects the majority of a delivery/online sales tax is passed to consumers via higher prices. While this affects O2 (cost of living) most directly, to the extent it functions as a de facto consumption tax with costs borne by households, it effectively reduces real purchasing power — relevant to O11's 'take-home pay' lens. The revenue raised is also projected to fall well short of offsetting the full cost of business rates abolition, which adds fiscal uncertainty. On balance, the policy improves O11 for SME owners (partially) and entrepreneurs (more clearly), while worsening it for the wider consumer population through price pass-through. Both effects are supported by cited evidence, making 'mixed' the correct direction. Confidence is low because: no official costing exists, the landlord-capture mechanism is material but contested in scale, and incidence modelling is uncertain.

Public finances & the next generation — Hurts

moderate · moderate confidence

The policy abolishes a tax raising £26–30bn a year for SMEs and tries to offset it with an online delivery tax that independent estimates suggest would raise only £1–3bn — leaving a large unfunded gap. The entrepreneurs' tax cut adds further cost with no identified offset.

The evidence

Biggest unknown: The precise cost of the SME business-rates abolition is uncosted by any official body, and the yield of a 4% online delivery tax is highly uncertain; if the gap is smaller than estimates suggest, the fiscal damage would be less severe.

Our reading: The policy rests on an offset claim — that a 4% Online Delivery Tax will cover the loss from abolishing Business Rates for SMEs. The evidence does not support this. Total business rates yield £26–30bn annually; even accounting for existing reliefs already reducing SME bills, the residual SME liability is likely several billion pounds. The best available independent estimates for an online delivery tax — ranging from £1bn (HM Treasury, 1–2% rate) to £3bn (IPPR, 3% rate) — fall well short of plausible SME rates relief costs, let alone the full obligation to compensate local authorities who depend on rates revenue. The Oxford Economics figure (£1.6bn) should be treated with caution as it was commissioned by Amazon, but it points in the same direction as independent estimates. A structural funding gap therefore appears likely on near- and medium-term horizons. The entrepreneurs' tax cut to 5% adds a further uncosted cost: the 2020 decision to tighten the same relief was projected to raise £1.8bn by 2024–25, implying a reversal plus deeper cut would cost at least that much annually. No funded offset is identified for this element. Taken together, the policy package presents a pattern of unfunded tax reductions — not borrowing to invest in productive capacity, but reductions in recurring tax revenue without credible replacement funding. This worsens the debt path and passes costs forward. The IFS caveat that landlords may capture business rate savings via rent increases (E8) is a real-world dampener on any economic benefit, but does not change the fiscal arithmetic. Confidence is moderate rather than high because no official body has costed the specific proposal.

Prosperity & living standards — Mixed picture

minor · low confidence

Abolishing business rates for high street SMEs could help small firms invest and survive, but the tax saving may largely flow to landlords rather than businesses, and the offsetting online delivery tax is unlikely to cover the revenue gap while also raising consumer prices. The net effect on overall prosperity and living standards is uncertain and probably small.

The evidence

Biggest unknown: Whether the IFS's landlord rent-capture argument holds at scale — if landlords absorb most of the saving, the benefit to SME investment and high street dynamism is largely negated.

Our reading: This policy has three components: abolishing business rates for high street SMEs, introducing a 4% Online Delivery Tax on large multinationals, and cutting entrepreneurs' tax to 5%. On O13 (prosperity and living standards, productivity, business dynamism), the story is mixed but leans toward modest or uncertain upside. On the upside: the current business rates system is measurably burdensome on bricks-and-mortar businesses relative to online rivals, contributing to high street decline. Relief from this burden could in principle free capital for investment and improve business dynamism. A lower entrepreneurs' tax rate could marginally improve incentives at exit and encourage risk-taking. On the downside: the IFS's landlord rent-capture argument is the central challenge — if rents rise to absorb the tax saving, the productivity and investment benefit largely evaporates and the gain goes to property owners rather than productive businesses. The 4% Online Delivery Tax is unlikely to fully offset the revenue cost (prior HM Treasury estimates for a 1–2% levy yield only ~£1 billion; the policy needs to replace several billion), and Oxford Economics finds most of that tax is passed to consumers, creating a welfare loss of ~£1.3 billion. If central government must compensate councils for lost rates revenue, the fiscal pressure would crowd out other growth-enabling spending. The entrepreneurs' tax cut, while directionally pro-dynamism, has contested effectiveness: IFS has previously questioned whether such reliefs efficiently reach genuine risk-takers at scale. Absent this policy, high street SMEs continue facing a structurally heavier tax burden than online rivals — a genuine market distortion. But the degree to which abolition actually improves their investment and survival prospects (vs. being captured by landlords) is the crux. The near-term effect on living standards is limited; the long-term effect depends on whether SME dynamism actually improves. Net verdict: mixed, minor in magnitude, with low confidence.

Inequality & fair shares — Hurts

moderate · moderate confidence

Cutting entrepreneurs' tax disproportionately benefits high-value business exits concentrated among wealthier individuals, while the online delivery tax is likely passed onto consumers through higher prices — both effects widen the gap between the richest and the rest. The business rates relief for SMEs is the most equalising element but may be partly captured by landlords raising rents.

The evidence

Biggest unknown: How much of the entrepreneurs' tax cut accrues to a small number of very high-value exits versus genuine small-scale entrepreneurs, and how much of the online delivery tax is absorbed by large firms versus passed on to consumers.

Our reading: Three distributional channels operate here, pulling in different directions but with a net regressive skew. First, the entrepreneurs' tax cut to 5% is the clearest channel worsening inequality. Analyses including by government have projected that the existing relief already concentrated its benefits on a small number of high-value business exits — meaning the richest sellers of businesses gain most. The IFS and IPPR position reinforces this: they favour abolition or rate alignment, not deeper cuts, precisely because the relief is poorly targeted. A cut to 5% amplifies this concentration of benefit at the top. Second, the online delivery tax is the intended offset, but Oxford Economics projects the majority of its burden will be passed through to consumers as higher prices. Consumer spending as a share of income is higher for lower-income households, making this a regressive incidence — the policy's funding mechanism disproportionately falls on ordinary households rather than on the multinationals it nominally targets. Third, the business rates abolition for SMEs is the most equalising element: it benefits small business owners rather than large capital. However, IFS analysis projects that landlords will likely recapture much of the saving through rent increases, meaning the distributional benefit is materially eroded before it reaches SME owners. Taken together: the largest fiscal gain (entrepreneurs' tax cut) flows to a narrow group projected to be high-value business sellers; the funding mechanism (online delivery tax) is largely passed to consumers in a regressive pattern; and the most progressive element (SME rates relief) is projected to be partly neutralised by landlord rent capture. The net distributional effect widens the gap between the richest and the rest. Confidence is moderate because the magnitude depends on uncertain pass-through rates and the actual distribution of entrepreneurs' tax claims.

Cost of living — Mixed picture

minor · moderate confidence

Scrapping business rates for high street shops could help keep prices down on the high street, but a new tax on online deliveries would likely be passed on to shoppers as higher prices. The net effect on what ordinary people pay for essentials is probably small and pulls in two directions.

The evidence

Biggest unknown: Whether the Online Delivery Tax is passed through to consumer prices in full, and whether business rates savings flow to customers or are absorbed by landlords raising rents.

Our reading: This policy creates two forces that affect cost of living in opposite directions. On the upside, removing business rates for high street SMEs could reduce overhead costs for small shops, potentially helping to keep high street prices lower — which could benefit consumers. However, the IFS evidence suggests this gain is likely to be largely captured by landlords raising commercial rents rather than passed through to shoppers. On the downside, the 4% Online Delivery Tax is the more direct cost-of-living concern: Oxford Economics research finds that most of the burden of such a tax is passed to consumers as higher prices, with an estimated welfare loss of around £1.3 billion. Given that online shopping is now a primary channel for essentials — food, household goods, clothing — a price rise here hits ordinary and lower-income households who shop online most for value. The revenue arithmetic is also uncertain: HM Treasury modelled a 1–2% online sales tax raising only around £1 billion, casting doubt on whether a 4% rate offsets the multi-billion pound cost of abolishing business rates for SMEs, which could create fiscal pressure on local services (an indirect cost-of-living concern). The entrepreneurs' tax cut has negligible direct bearing on O2 for ordinary households. On balance, the policy is mixed: a modest potential upside for high street shoppers, offset by a more direct consumer price increase from the online delivery tax, with the net effect likely small but slightly negative for online shoppers and lower-income households who rely on online retail for value.

Good work & fair pay — Mixed picture

moderate · low confidence

Abolishing business rates for high street SMEs could help protect and create local jobs, but the benefit may be partly absorbed by landlords raising rents rather than reaching workers. The online delivery tax could hurt consumers and some smaller online sellers, muddying the picture.

The evidence

Biggest unknown: Whether landlords capture most of the business rates saving through rent increases, which would strip the policy of its main benefit to high street employers and workers.

Our reading: The policy's main lever for O4 is relieving high street SMEs of business rates, which could lower operating costs and support employment in local retail and hospitality. If businesses retain that saving, it frees resources that could support wages or job creation on the high street. However, the IFS projection that landlords will capture the saving through rent increases is a serious caveat: if that holds, workers and employers see little net gain. The online delivery tax is meant to level the playing field, but evidence suggests it would largely be passed to consumers, potentially reducing real purchasing power and dampening demand broadly. It could also disadvantage smaller businesses trying to operate online, offsetting any high-street benefit. The entrepreneurs' tax cut to 5% could encourage business formation and risk-taking in principle, but the evidence suggests such reliefs disproportionately benefit high-value, high-wealth exits rather than the typical worker or small employer — making the wage/employment spillover modest and regressive in distribution. On balance, the policy has a plausible mechanism for improving high street job quality and security, but credible projections undercut each of its three components: rent absorption limits the business rates benefit, consumer pass-through limits the online tax equity gain, and the entrepreneurs' relief skews toward the wealthy. Both positive and negative effects are evidenced, hence a mixed verdict at moderate magnitude, but confidence is low given the absence of any official costing or behavioural modelling specific to this proposal.

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