The Contributoria Tapes: A great fresh tax for your local coffee making indy?

This piece was originally published on Contributoria — find out what that means and why it is posted here by reading this note.

Article background

For my second Contributoria piece I ignored the editorial theme about the future because I don’t do futurology (though I might, in the future, you can’t draw me on the issue). It turned out that the editorial theme was not an enforced part of the pitching process. Essentially we could pitch anything we wanted, the theme was just a prompt to encourage some people to come forward.

So I know very little about economics, yet I decided to try to write something about local economies and tax. Pretty riveting, huh? Well I thought so. The story came from me seeing an advertising board for a coffee stall and spending days worrying about what it said. So I decided to think it through and call it journalism.

This was probably the straightest, hardest piece of journalism that I did for Contributoria. There was no background trolling here, no subtle satirising of the process. I had to look at several angles, talk to real people I didn’t know. A lot of my other bits were fluffy and opinionated and I was much more comfortable off in feature writing land. For this I had to work hard with things I didn’t really know anything about. It came out OK, even though I still don’t know what “the answer” is to the debates around independents and corporates.

One thing that’s worth noting is that though this was a straight up piece and I was hoping to prompt debate, I did think a little about how it would play as a pitch. My personal network was always the place where I could get backing for things, never the Contributoria community, and if there’s one thing my personal network like to bore on about it’s independent coffee shops: this would always play well to my people, and it was an easy one to pitch.

A great fresh tax for your local coffee making indy?

The tax paying little guy may not be as great for your city as that chain coffee shop that does all the sticky coffee milkshakes. Over a flat white or three, Jon Hickman finds that when it comes to coffee tax is actually very taxing.

“Great fresh coffee from your tax paying local indy” the sign said. And do you know what? It really was great fresh coffee. The sign is on the pavement outside my work most days and it points you into our lobby where a hard working guy called Rich serves flat whites, lattes and cold brew coffee from the back of a tuk-tuk.

Rich’s sign plays on one of the most well known narratives of austerity Britain, Cameron’s Britain: that big companies don’t pay tax, but little ones do. So I got my coffee from him and it was great and I knew that he was a tax paying local hero. I felt good. But as I made my way upstairs I started thinking a little more about that sign: “your tax paying local indy”. I started thinking about tax, where it comes from, where it goes, and what that means for a local community, for a city like Birmingham where Rich is based (and me too).

A few months earlier a popular local café in Birmingham shut down citing increased costs of trading from their location in an increasingly desirable part of town. The public discussion about that also touched on the battle between the tax paying indies and the tax dodging coffee chains. There were suggestions that Birmingham City Council should do something about this by reducing business rates for independents. But business rates are a tax, aren’t they? So if an indy can’t afford to pay business rates, or wants to not pay them… is that a tax dodge?

It turns out tax actually is pretty taxing because the more I thought about this the messier it got in my head. A national or international chain might have some clever tax scheme set up that allows them to reduce their corporation tax, but surely they don’t have a way of avoiding paying business rates on the premises they use? An independent on the other hand might be paying out corporation and income tax, but if they’re operating as a mobile unit or seeking rate reliefs then they’re shifting their overall tax burden around just as much as a chain. Could it be that actually everyone is paying out about the same thing but into different buckets? Thinking deeper into this, what does it mean to pay more into the rates bucket as opposed to the corporation tax one? If we are paying rates to our council, do they get to spend that money? Because if they do it means that a chain paying lots of business rates on a big premises could be worth more to a city than an independent that asks for their rates to be waived or which operates from no fixed (and rateable) abode.

Business rates and cities

The first piece of this puzzle is to understand what business rates are and where they go. Business rates, actually called National Non-Domestic Rates (NNDR), are a tax collected on non-residential properties that have a commercial use.

So where do they go? Rates are collected locally but flow towards the central government from where they are then redistributed back to councils as part of their grant funding which is carefully allocated to budget lines (for things such as the emergency services, the roads, social housing, education, etc.). The distribution of business rates back to councils is calculated using a system called ‘formula grant’. The formula grant for funding local government is complicated, but is based on needs for expenditure rather than on revenue generation; historically there has been no incentive towards generating more revenues from business rates purely for raising money to run a city. However, the Local Government Finance Act 2012 has partly changed the way this all works. Under the Act some money is retained locally – the ‘local share’ of business rates under the Business Rate Retention rules is currently 50%. That means that half of the rates collected by any council flows to central government and is then returned through a formula grant, but half stays under local control in the place it was raised. For a city like Birmingham suddenly there is a financial incentive to collect more business rates, and there is a financial risk too for any council whose NNDR receipts decrease.

Rethinking the ‘local tax paying independent’

It’s not as simple as I first thought, but there is still a significant incentive for councils to fill business units. More than that, there is an incentive to fill them for the best return, and with the lowest risk. The Local Government Association publication Business Rate Retention – The Story So Far considers both the opportunities and risks that rate retention poses for councils, risks such as rate avoidance, rating appeals and becoming overly reliant on income from less lucrative rate payers (charities receive 80% relief on their NNDR, and councils are looking for ways to challenge charitable relief). So, is my local tax paying independent a desirable business for a council? Is my latte producing a good deal for Birmingham?

Simply put the incentive for our cities, towns, and villages is to fill space; councils can afford to be neutral to issues related to corporation tax and income taxes. The ideal business to set up in any council area would be able to take on long leases on high rateable value buildings and with as few NNDR reliefs as possible. Hypothetically, for a finance officer in a council the ideal business to want to set up in your town is a Starbucks on the most prestigious street, or a huge Asda superstore; pay as much corporation tax or PAYE as you like, but if you’re a small business with an uncertain future and your response is to ask for a cut in NNDR so that you can operate from prime real estate then you’re not contributing to the city’s coffers in quite the same way as a chain would in the same place.

‘The city does nothing to help’

On the main pedestrian route from Birmingham New Street, the second city’s mainline station, to The Mailbox, an upmarket shopping centre fronted by Harvey Nichols and gateway to the canal side bars, restaurants and clubs of Brindley Place and Broad Street, Café Blend propped up one corner of the Orion Building, a residential development that made a splash at launch with interiors by John Rocha. Soon ‘New’ New Street will be open, bringing with it the Grand Central Mall and Birmingham city centre’s first John Lewis, while on neighbouring John Bright Street long neglected Victorian buildings have become a new hub of nightlife, led by the arrival of craft brewers Brewdog and a city centre branch of local indepdent Cherry Reds. Business is booming in this part of town, optimism is high, and yet Café Blend has closed – a fact that Sophie Highfield, the former proprietor, puts down, in part, to business rates and to a system that favours larger chains: “if it were not for business rates, if they were not in the equation, I would have had a profitable Café Blend” she told me. “Each year you wait for that invoice and know that, for someone who sells something at £3.50 per head on average, well it does not take a genius to know what how many more customers you need to cover an increase of thousands of pounds a year just to pay for business rates”.

Although the exact story behind Café Blend’s rise and fall, from 2009 to 2014, is complicated and quite personal for Sophie, battling to pay NNDR bills are a major part of it – as is her sense that there could be a large competitor waiting in the wings to take over the space. She started the café when the area was much less desirable and says she developed it through some very tough times, only to lose it just as the area was coming to life.

“In March I had appealed for the rates to be reduced based on hardship because of the impact of the closed retail section of The Mailbox and to this day, despite chasing them (Birmingham City Council), I have heard nothing. But, if they had reduced it (the rates), I could have paid the landlords some rent and we would possibly not be having this conversation. I tried everything I could over four years to keep it afloat with the costs of being in that location.”

Of course the setting of rates are outside of a council’s control as they are set nationally along with the rules for applying relief and hardship funding, but nonetheless Sophie’s story does strike a chord and speak to this problem of taxation and independence. Whilst we need to be careful not to leap to conclusions as to who might be about to take on her old premises, her story is an example of the difficulties faced by independent retailers in taking on the costs associated with larger premises, and of the risks now faced by councils as they try to increase their income from business rates; the idea of a national chain being lined up to take on the unit may just be conjecture at this stage but if they were to come in they would have the capital behind them to operate, and to contribute rates, without difficulty.

Coffee – without the bean counting

Of course to look at the value of independent retail purely in economic terms is to overlook other things that a vibrant indie scene can add to an area. Tim Wilson runs Coffee Birmingham, a blog that is “raising the profile of Birmingham’s independents” in the local coffee scene. I spoke with Tim about the other benefits that the city gets from its local, tax-paying, indies. He points to “independent coffee shop culture” as being a valuable thing of itself. That culture is about a community of people, an ecosystem of traders in an independent and predominantly local supply chain, and the provision of valuable public space for meetings and co-working. Talking to other brummie coffee drinkers, this last point, about space seems something that’s on a lot of people’s minds.

Laura Craven told me “the independent coffee scene offers an awful lot to the city, over and above just being somewhere to go for a really good coffee. Independents, and not just the coffee shops, tend to be more open to allowing people to use the space to build a sense of community and they offer a relaxed alternative to a pub for an after-work drink.” This idea of a third space – beyond pubs or a public hall in a faith building – almost pushes the humble coffee shop into the role of a public service. In a multi-cultural city like Birmingham a non-faith meeting space that isn’t focussed on alcohol sales does seem important and worthy of support, as another user of the indie coffee shops, Marc, told me “before the coffee shop boom semi-public spaces where people could meet and mingle where primarily pubs or other alcohol-centric venues. Coffee shops provide a more inclusive, welcoming alternative.”

The champions of the independents also see a vibrant, mixed high street as being a draw that brings people to towns and cities: “identakit cities full of chain store coffee shops and clothing brands don’t encourage people to come from further afield and spend time in them” Laura says, “whereas independents give the city more flavour and help reflect its population. Independents seem more willing to open up their space to events and exhibitions, creating and nurturing much more of a community – and I can’t think of a reason why the city wouldn’t want to encourage this.”

Against this all is a sense that this is just a shallow exercise in hunting cool. “They serve coffee” web developer Mark Steadman told me “and, if we’re not careful, snobbery too”. It’s not hard to see why anyone who just wants “an ordinary coffee with milk” (seen on the menu at a mobile coffee stand at Lichfield Trent Valley railway station, below the usual espresso, flat black, flat white, etc.) would accuse their local tax-paying indie of being “a homebase for hipsters”, as Laura reflects “I think that’s incredibly dismissive”. “There are plenty of articles out there that go someway to explaining the economic benefit of small businesses on local economies” Tim adds.

The council perspective

I put the specific issues that Sophie had raised to Birmingham City Council, but they were not able to respond to the individual case of Café Blend and its application for hardship. I also asked if the council showed a preference to work with larger organisations who are simpler to manage as they do not need support and are seen as lower risk in terms of paying rates. No answer was forthcoming by my copy deadline.

The council spokesman was however able to outline a raft of support that Birmingham City Council offers to local businesses. This cocktail of funding and support includes the business rates hardship which Sophie had applied for as well as funds for specific types of activity, or to support businesses to operate from specific locations. The spokesman said “Birmingham City Council places great emphasis on the importance of enterprise”, which is a very broad statement. The devil, then, is in the detail, and within the detail we should note that there is no specific mention of retail, or of independence.

What contributions are chains making to cities?

The idea that a chain might be better for your town then an independent is a hard one to even begin to engage with because we are now so used to the narrative them being critiqued for their tax affairs, and for being symptomatic of the problematic homogenised, identikit high streets of British clone towns.

When I spoke to Starbucks I don’t think they believed me when I said that I was going to give them a chance to claim the moral high ground in a conversation about coffee and tax.

“Starbucks pays corporation tax. We listened to our customers who were really clear with us about their expectations. We took away some of the deductions we were allowed and were then able to calculate how much tax we would owe over the next two years. We are now paying that amount and as the business moves into profit we will continue to pay corporation tax” a spokesperson told me. Really I wanted to know how much they were paying per year in business rates, and how much to Birmingham itself as half of that was money that they directly put into the council’s pockets through the local share. How many school places had Starbucks funded last year? I could work that out, if they could tell me how much NNDR they’d paid. Sadly my spokesperson couldn’t provide that sort of information. They could well be missing a trick by not being able to promote their value to a community in terms of their contribution to local share.

I wondered more generally what other contributions Starbucks made to the city. “We employ 241 partners in the Greater Birmingham district” I was told (all staff are called partners at Starbucks). So there’s a contribution in terms of employment. Some of those partners will be on work based training, such as the Starbucks Apprenticeship programme, which also has some social value. I wasn’t told how many of those apprenticeships might be in Birmingham, but its the sort of thing that can operate only because of scale – it’s the sort of thing that an independent might struggle to provide.

Real variety – indies and chains together

Although some independent coffee shop owners are keen to play an “us v them” line with the chains, during this work people I spoke kept pushing against this idea; most people want a mixed economy in their high street and actually see a chain as a viable choice, as a part of a real, genuine mix. “I love the indies, but I think there’s room for chain coffee shops too.” Laura Creaven admits “They offer a comfortable reliability – you always know what you’re getting in one, even if it’s never going to rock your coffee-shaped world.” Tim Wilson agrees “I think there are different marketplaces at play here. I think it’s important for independents to shout out load about the benefits and positives of what they do and not focus on or adopt an ‘us’ vs ‘them’ mentality, especially when getting into issues of tax or rates terms. I don’t think that’s productive. We should support individual business with custom based on its merits, not on an over-simplified notion of ‘indies good, big business bad’.”

Laura actually on certain things chains have a slight edge: “I think they tend to be a little better for the more ‘disco’ coffees with syrups and added flavours. I love a good gingerbread latte, but adding a syrup to one of Urban Coffee Company’s single origin filters would be a complete waste. And sad as it is to admit, I think chains are often better for dietary requirements…several of the chains have embraced same-price for soya milk in coffee where a lot of the indies are still charging.”

Of course an occasional coffee flavoured drink as opposed to a complex and expertly crafted chemex brew, doesn’t mean that Laura has abandoned those other things she really values: those semi-public, third spaces, the coffee making craft, the community. Sometimes you just need a coffee, as Stuart Harrison reflects “When I am in town in the day, I tend to be shopping, so will generally go for a Starbucks, mainly because the independents are tucked out of the way.”

And why are they tucked out of the way? Because the rents are cheaper, because the council is allowed to (and has to) offer reliefs on buildings that have been out of use, and because those rateable values are cheaper in the first place. The map is drawn on these lines. It does mean that the playing field is uneven, that Starbucks can survive near a shopping mall or mainline station where an independent might struggle. We could ask to review the tax burdens, and start to redraw this map but then we risk pushing out the cash cow chains by subsidising artisanal drink stops on the main high street. The genie is out of the bottle now, councils have to generate hard cash and the best way to do that is to charge bigger companies full rates for premium property whilst hoping that independents will rejuvenate secondary and tertiary retail premises, making them productive once again.

Like most of the people I spoke to, I’m pretty happy with that mix. I’m happy to head slightly off the beaten track and invest time in something a little better, and I’m glad that people are doing interesting things, creating communities and new public spaces meanwhile the chains can push money into the city through the spaces that get more footfall. There’s something for everyone, the mix is about right and the city gets a good deal. Sophie’s story though, at Café Blend, should be a cautionary tale for us because we might see more things like this in the near future: if independents head to the cheaper parts of town, they regenerate the buildings and they bring a district back to life then eventually those districts reach a tipping point where edgy and hip becomes premium real estate with a culture ready to be absorbed into the economics of the high street. On paper this is just a simple recalibration as the independents roll out again, pioneers heading to the next regeneration spot, replaced by the settlers, the chains; in the real world though of coffee, community and relationships, groups disperse and hard working, tax paying local indies are put under huge financial pressures. Human stories get lost in the spreadsheets. The mix of business might stay the same, and the revenues for the city might grow, but real people who tried to contribute something get lost, get squeezed, get hurt. As Sophie told me:

“Please remember that within those walls is a person with a vision; a vision that offers local economy, employment, training and opportunity – not to mention a great place that no chain could ever provide in the same way.”

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