Another financial year and another review of the business rates system with the Government finally publishing, albeit belatedly, its call for evidence yesterday.
But it’s time to be optimistic with meaningful reform now within our grasp, writes Robert Hayton.
There has already been 156 policy papers and consultations published on business rates in England during the last decade, including previous major reviews undertaken by HM Treasury, Department of Housing, Communities and Local Government and the Treasury Select Committee – all within the last 5 years.
Despite this, the Government’s approach this time around builds upon its manifesto commitment at the last General Election to reduce the overall burden on businesses. A distinct difference to previous revenue neutral reviews. Couple that with how the Chancellor has harnessed the business rates system to help negate the economic impact of coronavirus through £22.55 billion of help with rates holidays and grants, there are reasons to be optimistic.
A total of 731,893 retail, leisure and hospitality premises in England are currently paying no business rates at all through a combination of both the enhanced retail discount and existing small business rates relief rules which have permanently exempted eligible properties with a Rateable Value of less than £12,000 since April 2017. With the discount set to end on 31st March 2021, businesses cannot afford another review which fizzles out with a whimper, leading to no meaningful change.
The underlying fundamentals of the business rates system are actually sound but this is eroded by a number of easily reformable measures. With this in mind, the primary focus for the Government should be one of reform rather than wholesale change entering into uncharted waters.
Business rates is a tax on physical property, calculated by reference to market rental values. It supports the long-term stability of the economy, funding public services in a much less distorted way than other taxes. Business Rates are difficult to avoid and easy to collect.
But, in 1990/91, the standard rate of tax for business rates was 34.8p. That rate was comparable to other tax rates at the time. UK Corporation tax was 34%. Whilst Corporation tax today stands at 19%, in contrast, the standard rate of tax for rates rose to 51.2p on 1st April for 2020/21, a near 50% rise.
The continuation of indexation, the annual increasing of the tax rates, even at the lower measure of CPI inflation, will ultimately lead to more being paid in property taxes than rent culminating in the tax rate eventually exceeding £1 an effective 100% tax rate on open market rents.
Encouraging and supporting investment and growth is a far better way for Councils to grow their revenues. Removal of the annual CPI adjustment is a deliverable meaningful reform that can be funded by the growth in the tax base.
Other corporate taxes do not rise with inflation. Removing annual inflationary rises from business rates would make them more predictable for businesses and would be a fairer way to ease the burden across all property sizes and sectors of the economy.
The phasing in of large property tax rises after a Revaluation is undoubtedly a good thing. It acts as an important shock absorber and it allows businesses time to adjust to higher liabilities. But paying for that by denying the correct reduction on properties in areas and sectors where values are falling simply burdens those least able to afford to pay.
Downward transition is a simple mechanism for balancing the cost of transitional relief but it is also simply wrong and unfair. A small supplement on all bills would spread the burden equally. It would be an insurance premium against sudden liability increases.
Taking from those sectors that have struggled isn’t the answer, affords them no respite to recover and rebuild and certainly doesn’t aid the levelling up of prosperity.
Further key reforms can revitalise the system and enhance the core essentials of fairness, certainty, swift correction of errors and, over time, affordability. Meaningful reform is now within our grasp and is achievable.
Fully costed changes, which will bring maximum benefit to ratepayers in the longer term, with fairness at their core, is how we can drive change.
Robert Hayton is Head of UK Business Rates at the real estate adviser, Altus Group