Comment: Business rates need more than a tinkering

IT’S unfair. It lacks transparency. And it’s in urgent need of an overhaul. Thus did the respected Institute for Fiscal Studies let rip last week.

Bill Jamieson believes fundamental change is needed to business rates. Picture: TSPL
Bill Jamieson believes fundamental change is needed to business rates. Picture: TSPL
Bill Jamieson believes fundamental change is needed to business rates. Picture: TSPL

It normally grabs the headlines with its earnest strictures on the macro economy. But this broadside was delivered on an area of tax policy that more directly and immediately impacts on millions of small and medium-sized businesses: business rates.

The IFS attack, delivered by economist Helen Miller as a side dish to the presentation of the Green Budget last Wednesday, is a damning assessment of the current regime. She said the “temporary tinkering” of business rates by the government was storing up more problems and creating uncertainty for companies. “This is clearly no way to make policy,” she declared.

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For those who dismiss business rates as a marginal issue, of no interest other than to grumbling grocers and temperamental tapas bar owners, the figures in this outstanding presentation, available on the IFS website, will quickly disabuse them. The amount raised by this little-discussed tax totalled more than £26 billion in 2012-13 – almost as much as council tax and equivalent to more than half the money raised by corporation tax.

The revenues are high by international standards, higher as a share of national income than in France, Germany, the Netherlands and, indeed, the OECD average. And the most controversial feature of all is that the business rates levy is not responsive to economic conditions.

As a general principle, the level of taxation should be related to the ability of businesses to pay. But rates are charged without reference to fluctuations in revenue and profits. In fact, while thousands of retail businesses across the UK have failed over the past five years and the plight of decaying high streets has become a major social issue, business rates revenue has consistently risen as a share of all revenues since 2007.

If you are looking for an explanation as to why many promising small businesses fail and why we struggle to inspire an entrepreneurial culture, here is a major cause of the malaise.

In Scotland, the Holyrood administration has sought to help with its small-firms rates relief scheme. It claims that record numbers of business properties in Scotland are benefiting from Small Business Bonus Scheme rates relief. Around 92,300 firms are thought to have benefitted in 2013-14.

Commendable though this is, the broad charge still holds true. The Scottish Government’s Draft Budget for 2014-15 shows that the revenue from business rates has risen by £359 million since 2010-11. Moreover, it is projected to rise from £2.4bn in 2013-14 to £2.9bn in 2015-16 – an increase of circa £450m in cash terms. Thus, over the period 2010-11 to 2015-16, the levy will have risen by 38 per cent or £800m.

Put another way, the much-vaunted Small Business Bonus Scheme has not stood in the way of the Scottish Government relentlessly increasing its overall tax take on business. The tears it sheds for the plight of small town high streets are those of the crocodile – after devouring another tasty meal.

Property-intensive retail businesses are in the front line. The retail sector, with 53,000 premises, is estimated to contribute around a quarter of all non-domestic rate revenues. While the SNP administration has restrained council tax and the Westminster government has cut corporation tax, both still bank on rising revenues from Non-Domestic Rates.

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Scottish Retail Consortium director David Lonsdale says: “The £95m large retailers levy has been a blot on the Scottish Government’s claims to have the most competitive business rates regime in the UK. Finance Secretary John Swinney’s commitment to neither extend nor replace the tax beyond 2015 is very welcome. However, that shouldn’t be the end of the discussion on business rates. One need only look at any high street in Scotland to see why.”

The SRC and the wider BRC are now working on a detailed analysis and plan to present fresh proposals for reform. “Doing nothing on business rates”, he warns, “could lead to the country missing out on investment, career opportunities and innovation. Doing nothing is not an option.”

The Federation of Small Businesses’ Scottish policy convener Andy Willox was disappointed at the Scottish Government’s response to the review of the Scottish business rates system. “Their response to this challenge looks timid. We’re pleased the Small Business Bonus Scheme will be retained and the appeals process will be examined before the next revaluation in 2017, but we’re slightly disappointed a bolder reform plan hasn’t been developed. The FSB will be writing to the Scottish Government urging them to flesh out their plans to make the system more transparent and comprehensible to the small business community.”

At Westminster there is cross-party agreement on the need for reform. Meanwhile Chancellor George Osborne continued to tinker, with a range of small reliefs and extensions in the December Autumn Statement. A “comprehensive review” of the system is due to begin in the spring. The IFS has called for business rates to be replaced by a land-value tax, an annual levy on the underlying value of land that would mean businesses would not be penalised for improving properties. But Miller conceded that a land-value tax was “politically difficult” and would be hard to implement.

Meanwhile, she said: “Short of such a radical revamp, business rates should be reformed so that rateable values reflect as closely as possible the up-to-date market rental values of properties.”

That at least is a conclusion we dare not ignore.