Comment: Spare applause for step towards reforming rates

THREE cheers for Finance Minister John Swinney. He has boldly announced that Scottish councils will have the power to cut business rates from the end of this month.

Swinney: devolution of power. Picture: Getty

Hang on. Make that two cheers. This may not be quite as straightforward or helpful as it looks. Actually, on second thoughts, make that one cheer. It may end up making Scotland’s poorer councils more disadvantaged than they already are.

Scotland’s business rates system is in dire need of reform. And business lobbies have been queuing up to urge big changes to the system – CBI Scotland, the Federation of Small Businesses Scotland, the Scottish Chambers of Commerce, the Scottish Tourism Alliance and, most vocally, the Scottish Retail Consortium.

But first, credit where credit’s due. Swinney has not let the grass grow under his feet after the declaration by Chancellor George Osborne earlier this month that local authorities down south would be allowed to keep a greater proportion of business rates and allow them to lower the levy to attract more business if they wished.

As with the Land and Buildings Transactions Tax, this shows a responsiveness on the part of the Finance Minister to changes at UK level and a keenness to ensure that Scotland remains competitive and is not left behind.

It should be particularly good news for our major city centres as it holds out the prospect of lower business costs. And it should help to counter the slowdown in economic growth and continuing problems of decline in many of Scotland’s high streets. It will also be seen as a boost to localism and a counter to charges that the SNP administration has become overbearingly centralist in its approach.

But what is the argument for change? And how are Scotland’s councils likely to respond to the new latitude they have been given?

Business rates are collected by local authorities, with the distribution of proceeds largely determined by the Scottish Government in Edinburgh, allowing no discretion either on the level of tax or areas of exemption.

Business rates have become the silent scythe on Scottish enterprise. They generated £2.37 billion in 2013-14. The out-turn for 2014-15 is forecast at £2.66bn and this is reckoned to rise in 2015-16 to £2.84bn. Since 2007 the total take has risen by 40 per cent. Indeed, rates will become the second largest source of revenue under the control of the Scottish Government after the introduction of the Scottish rate of Income Tax in April 2016.

The chief problem about business rates is that they are not levied on the basis of company earnings or profitability. In the wake of the financial crisis and recession, rates have continued to climb along with rental valuations. Small firms in particular struggled when business revenues fell. This problem has been ameliorated by the Small Business Bonus Scheme – but only partly so.

Now, from the end of this month, councils will be able to reduce rates bills on the basis of criteria chosen by themselves – such as the type of property, its location, occupation or activity.

However, this is set to throw up a number of problems. First, local councils are already struggling with constraints on their budgets and have had to make unpopular cuts to services. In this environment, many will be reluctant to opt for a reduction in business rates.

The experience down south is not too encouraging. The coalition government’s Localism Act of 2011 allowed councils to create discretionary discount schemes for business rates. Few were crushed in the stampede to take advantage. By 2013 only 18 out of 326 had done so, offering total discretionary relief of just £2.5 million.

Over time, revenue from lower levels of business rates would be expected to increase as businesses move in or expand their operations. But the immediate effect will be to reduce revenue.

Second, the aim of the change is to encourage competition among councils to attract companies. No harm at all in this. But it would encourage businesses to set up in areas of low rate charges, prompting concerns of a “race to the bottom”.

There are big variations between Scotland’s 32 councils in the revenues through business rates. Major cities inevitably have a far higher rates income than rural areas such as the Highlands and south-west Scotland.

One perverse effect of the new latitude would be to exacerbate differences in wealth between the already well-endowed and poorer councils. The better off could afford to cut their business rates to attract more firms. Poorer councils would be less able to respond, potentially exacerbating inequality. Some form of re-distribution of funds between richer and poorer councils would thus need to be retained.

Nor does the announcement address glaring anomalies in the current system – particularly the continuing iniquity of empty properties attracting a rates liability. Landlords continue to pay rates with only a small amount of relief in the early stages of a vacancy, so there’s little incentive for councils to reduce rates on empty properties. And small retailers may experience little relief at all from the double challenge of low growth in household discretionary income and the rise of internet shopping.

Little wonder that the response from business lobbies so far has been guarded. David Martin, head of policy and external affairs at the Scottish Retail Consortium, says the announcement, while welcome, is “a missed opportunity to arrest the cost pressures and structural deficiencies in the system which undermine existing businesses and hold back new investment”.

And Colin Borland of the FSB Scotland said, “We need to be careful that we don’t boost areas which, by accidents of geography, have lots of high-value business premises and are already doing well, at the expense of areas that are struggling.” The announcement, he added, “doesn’t get rid of the need to modernise a business rates system that’s no longer reflective of how we trade in 2015 Scotland.”

There really is no substitute for a root and branch review of the current system, drawing on research from across the UK and continental Europe and providing comparative analysis comparing non-domestic rates with all other revenues. We have a first step from Swinney. But there is still a long journey ahead. «