How Do You Solve a Problem like Business Rates?

We are at a crucial moment for tax. Government must listen, and be seen to be listening, to the concerns of businesses and individuals.

Public debate about the level of taxation on business is heavily focused on corporate income tax. However, property tax – or business rates - accounts for a significant and growing source of government income from business. It is now the third-largest tax borne by businesses, yet remains largely unrelated to sales or profits.

PwC’s Total Tax Contribution (TTC) survey of the 100 Group found that, in 2017, business rates accounted for 19% of taxes paid by FTSE 100 companies.

Fairness

Business rates have been very successful at generating tax revenue, having outpaced total tax revenue growth and wider economic growth over the past decade. This has been in part down to the pegging of rates to the RPI - a mechanism which has now been shifted to the CPI. They have also grown with property development.

Proper consideration of the impact and fairness of business rates is now urgently needed. Although reliefs were introduced in 2016, particularly for the smallest businesses, for many there has been no respite. There are now significant concerns being raised.

Business rates are not distributed equally among businesses. They are paid predominantly by businesses that intensively use property, for example those in the retail, hospitality and manufacturing sectors.

The digital economy is steadily shifting value away from bricks and mortar and into the virtual space. This creates a two-pronged problem, threatening the revenue stream generated from business rates, and putting even greater pressure and responsibility on those paying them.

The revaluation system can also produce winners and losers, even when there has been no underlying change in a business’s operations or profitability. These problems lead to inherently unfair results.

Reforming the System

Government has direct control over the policy levers affecting business rates, and therefore has the power to address the problems.

Our recent report, “Business rates: maintain, demolish, rebuild or refurbish?”, examines how a number of reforms might work in practice.

For example, government might consider:

  • The scope for linking new measures to tax the digital economy, with relief for business rates;
  • Further rolling out 100% business rate retention and examining the tariff and top-up system to turbo-charge incentives for development where there is market demand for it;
  • Considering whether incremental revenues from encouraging development might fund further, targeted reliefs that support government policy objectives;
  • Partly or fully exempting new investment in plant and machinery from business rates, to encourage investment and boost productivity;
  • To help prevent business rates from causing business failure, what could be done to link business rates and profitability. Struggling businesses might be able to renegotiate their rent and other expenses, but apart from very limited hardship relief, rates remain fixed.

There are some hard choices to make, but overhaul of this part of our tax system is long overdue.

Anonymous
  • the simple solution as the tax isn't easy to replace is the says the treasury needs to raise £30bn divide that by the sq metre of all the physical properties then presto it means amazon pays as much as Harrods.  the size of a property is already measured so the data exists.  until someone has a better idea, this could be a quick fix.

  • Its becoming very clear that retail rents are now too high when one consider all the chains that are using administration to negotiate lower rents.  that means rateable values are way out of line with rent.  it demonstatres that the compliced and expensive farce of revalutions are just not possible anymore.  the inclusion of plant in the vauation just helps move manufacturing abrad, shoot ourselves in the foot.  all governamens have been very good at that as the civil servants cant think out of their small boxes.

  • If you go back to the 60's it was accepted that unless a business made at least 5% operating profit it was not trading with a view to profit. Turn that on its head and make refund of your Vat payments dependent upon, over the last three years on average,  accounting for corporation tax an amount at least equal to 5% of your annual sales.

  • Charges at present levels will continue to accelerate the demise of the bricks and mortar retail sector, no doubt about that.  If this government is happy with that, so be it.  In the small shops sector, one often sees a shop close with a notice in the window saying the trader has moved wholly on-line.  These small units cannot all be occupied by charities.  There are secondary shopping areas where many shop-fronts have been filled in with a front door and windows!!  The space is far more valuable as residential and landlords know it.  Once a few units change over, the footfall reduces and within ten years or so all the commerce is lost in the entire street.  Government will note that council tax is much lower than business rates and that there is no barrier to the change of use.

    Further, in some regional areas business rates are higher than rents, because of the difficulty of obtaining fair RVs.  This problem has been much enhanced by the changes to the appeals procedure, which make appeals far more costly and time-consuming.  Government doesn't want people to appeal, because they know many RVs are far too high.

    Equally clearly, government needs to find a way to tax the on-line economy.  Since it will be difficult to compel overseas companies to submit accounts and costly to check them, an enhanced sales tax is probably the answer, reinforced by banning uncompliant traders from business and making it illegal to buy things from them.  It has been said that a sales tax is regressive but if the seller pays it why is it more regressive than corporation tax?