Tax & admin · 21 September 2020

Everything you need to know about the Government consultation on Business Rates Reform

Business rates reforms explained
Leading business rates experts call for an urgent drastic reduction in the multiplier and simplification of the reliefs system.

Government consultation on Business Rates Reform – John Webber, head of business rates at Colliers explains everything small business owners need to know as part one closes. 

As the deadline for submissions for the first part of the Government’s Call for Evidence on Business Rates Reform ( covering questions over the Multiplier and Business Rates Reliefs) has now closed, what should the Government be considering about these two aspects of business rates system?

The business rates team at Colliers International, which was advising clients on their submissions, has made its own recommendations and favours a complete re-basing of the multiplier and a reduction in the time between revaluations- at least a move to 3 yearly or ideally annual revaluations and a total reform of the reliefs system.

According to John Webber, head of business rates at Colliers International, “it’s all down to the multiplier. The current multiplier has reached an unsustainable level of over 50 p in the £1, and directly impacts on the decisions made by companies as to whether they open, close or downsize their bricks and mortar estate. A tax that is now so high it impacts on these decisions, which in turn affects employment and investment, has to change.”

“Re-basing the multiplier to something manageable, that businesses can afford, will mean that the whole question of the myriad of reliefs can become simplified and resolved also.”

He calls for an urgent drastic reduction in the multiplier and simplification of the reliefs system. “Business Rates has been in existence for over 400 years – it survived the Industrial Revolution- it should be able to deal with the change in how people buy their groceries,” Webber adds.

Colliers’ arguments are as follows:

The Multiplier

  • The Multiplier ( the figure the rateable value (RV) of each property is multiplied by to create the rates bill) is just too high. At a current level of just over £0.51, it is in effect a 51% tax on the rental value of commercial premises, and for many is clearly unaffordable.  As we have seen with income tax, once the tax rate reaches or exceeds 50% the amount collected reduces significantly. In business rates this plays out with a significant increase in schemes to make the most use of reliefs to mitigate the liability.
  • The Government should re base the multiplier at every revaluation to avoid the  ‘creep’  in the period of revaluation . This also includes an amount for ‘slippage’ or reduction in the total rateable value estimated by the VOA . This amount is always over -estimated which contributes to an over estimation of the multiplier.
  • The multiplier should be reduced to the level it was in 1990 when the net amount collected in business rates represented 31% of the total Rateable Value in the Rating List. The reason it is so high is not only the “creep” but also an annual RPI increase which has inflated the multiplier for most of the last 30 years. Reducing business rates to an effectively 30% tax is much more manageable for businesses to cope with.
  • We do understand that inflationary increases take place each year to pay for public services  but as we believe the revaluation cycle should be no longer than 3 years and ideally annually- then the question about annual inflationary changes to the multiplier becomes academic .
  • We need to Introduce some political accountability for the annual increases in the multiplier.

Currently Central Government places the blame on Local Authorities’ financial mismanagement and Local Authorities rightly state that they have no control over how the multiplier is set.

There is no ownership and correlation with ever increasing bills.

A clear 3-year business plan should be set out by local authorities and explained to the electorate so people could see where the money raised by business rates is being spent.

  • Reducing the multiplier will also reduce the need for so many reliefs. Granting reliefs is often a politically expediate way of ‘buying popularity and ‘votes. Such reliefs have been introduced to counter the rise of the multiplier and high business rates bills. Ironically the introduction of reliefs has just led to the increase in the multiplier to subsidise them.

“Short term decisions to grant reliefs have been made by all political parties over the past 30 years- – it’s the reason we are in the mess we are today. Therefore, the whole question of reliefs needs to be properly overhauled and re-balanced to meet the needs of modern-day businesses,” Webber adds.

“In the post Covid world all business will assess the requirements they have for property. The old argument that lower rates will lead to higher rents has been removed as most rents will reduce in the coming months and years and most landlords will be happy to have a property occupied.”

Webber says we might also consider a system in which landlords pay something in business rates even when the premises are occupied.

Many European systems levy an annual charge on landlords and even a 5p or 10p in the £1 levy would directly involve landlords in paying for local services while reducing the incentive for higher and higher rents which inflate the Rateable Value.

Business Rates Reliefs

  • Small Business Rates Relief: Reliefs amount to £7.44bn or 23% of the approximate £32bn tax revenue.  SBRR is the smallest element of reliefs and until current multiplier levels are tackled, Colliers believes it is vital to support the economy and local people/ businesses in the community.
  •  Empty Property Rates Relief should be extended and not curtailed in the current climate.

The reduction of empty rates relief and thus increase of property tax following the Lyons review has not had the desired effect of “encouraging owners of empty property to find ways to make better use of it either through using it themselves or attracting new tenants.”.

In fact it has had the opposite.The Lyons Review was based on the premise that landowners sat on empty properties to make speculative gains from the rise in land values and so by increasing the property tax on empty property, this would disincentivise them from doing so.

The reality has been different – the significant amount of long term empty commercial property in England has not been due to an unwillingness on behalf of landlords to let properties, more so due to a lack of market demand and long-term socio-economic factors.

Indeed, the sector identified by Lyons as receiving most relief in 2006/07 (industrial and warehousing) today has the lowest void occupancy level while retail premises are a sector with growing vacancy issues which will only get worse over the coming months because of Covid-19.

  • Instead of only the warehouse and industrial sector receiving a 6 months empty rates holiday that this should be extended to the retail and office sector.
  • Review Reliefs every Revaluation cycle  Reliefs are necessary, but they have been handed out by politicians of all political persuasions over the last 30 years to satisfy short term political and not economic aims. They often become permanent and then baked into a business plan.  Colliers believe they should be reviewed at every revaluation cycle – at least every 3 years “so the drug of subsidy does not become an addiction.”
  • Reduce Relief Hand Outs Once the multiplier has been rebased at the ‘correct’ 30% level , the need to hand out so much money in reliefs which will be significantly reduced- giving  the opportunity for local authorities and business to look at targeted levy for specific infrastructure projects that landlords and tenants could contribute to.
  • Central Government still needs set the majority of reliefs to ensure an equal playing field with additional discretion (at local cost) available for those local councils wishing to encourage/support specific areas. Too much local discretion leads to a postcode lottery and could see retailers and employers concentrating on certain areas leaving others with vast amounts of empty properties, limited retailers/employers and perhaps a prevalence of charity shops.
  • Abuses The greater the rates burden and the greater the number of reliefs the greater incentive to abuse the system. The 52% tax we have today is the equivalent of income tax reaching that level and collection rates plummeting.

“This first part of the Government’s call to evidence allows us to give a generic view on the whole system,” says Webber.

“In the second part of the consultation we will be able to be industry specific and look at ways in which any reduction in the business rates tax take is to be replaced, whether by an online tax system or by other means.”

Business rates form a vital part of local authority funding. However, the system has got old off-kilter with the needs and current business and economic climate, Webber explains. A 50 % plus tax, likely to rise further is just unsustainable and will lead only to further business closures and job losses, particularly when the Covid-19 business rates holiday for the retail and hospitality sector come to an end next April.

“We welcome the call for reform – but call on the government to come to its conclusions and offer solutions quickly. In this period of pandemic, businesses are making their decisions now about whether they stay open or close.”

Increasing costs, of which business rates play a big part will be a significant factor in the decision making. Webber calls for a drastic cut in the multiplier and subsequent business rate bills and we urge that this is done sooner than later. “Next year or even by the November Budget could just be too late – and the government may find the golden goose of business rates really has been well and truly cooked.”

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ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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