Simon Green presents his election wish-list for business rates reform.
With the ink barely dry on the Non-Domestic Rating Act 2023, the approaching general election provides an opportunity for all parties to take stock of the recent reforms to the business rates system and question whether further changes are necessary to create a system that businesses can support.
The 2023 Act represented the conclusion of multiple consultations and “fundamental reviews” carried out over recent years and throughout the process, the demands of businesses have been consistent. Ratepayers want a system that is fair, responsive and transparent, which supports growth, provides certainty, and is easy to understand. While there have been some positive developments, these largely have been outweighed by accompanying administrative burdens. The result is that rate bills seem to have become more difficult to challenge, while putting more reporting obligations onto businesses with very little delivered in return.
Business rates is an efficient tax, raising circa £30bn a year (before reliefs) and, at 96.8% for 2022/23, has one of the highest collection rates of all taxes.
The Labour Party, as part of its five-point High Street Plan, has said it will “replace business rates with a new system of property taxation which rebalances the burden and levels the playing field between our high streets and online giants”. But, to date, we have seen no detail around these proposals, which sound very much like business rates under a different name.
So rather than putting at risk a significant and efficiently collected tax take, we would urge any new government to look at the reforms that have been made so far and consider some simple changes that would redress what is currently the uneven balance between the ratepayer and the government (in the form of the Valuation Office Agency).
More regular revaluations
The most positive changes from the most recent set of reviews were the scrapping of the downwards transitional scheme, which limited reductions in liability for those whose rateable values reduced at revaluations, and the move to a more regular three-yearly revaluation cycle. The shorter revaluation interval should mean that rateable values more closely follow market changes, which will hopefully avoid some of the imbalances that we have experienced in the past between rateable value and rental value.
However, there is still a two-year gap between the antecedent valuation date, which is the date at which rental evidence is fixed, and the date the revaluation takes effect, meaning that by the end of a three-year list the evidence on which the rates are based is five years out of date. Reducing the AVD gap to one year would help to alleviate this and potentially pave the way to even more frequent revaluations.
Transparency
The introduction of the check, challenge, appeal system in 2017 has not delivered a more efficient or fairer appeals regime. The system has never been easy to navigate and there are too many trip wires for ratepayers, who can easily lose the right to challenge their assessment by inadvertently falling foul of the complex procedural process.
The CCA system is set to become substantially more onerous for ratepayers and property owners with the planned introduction of new duties to inform and notify the VOA of changes to their properties. The 2023 Act introduces the enabling legislation that will require ratepayers to notify the VOA of changes to property, whether it be physical, tenure or occupation related within 60 days, together with an annual confirmation that these duties have been complied with. The government promised that it “will not activate the duty until we are satisfied that ratepayers can reasonably and efficiently comply” but businesses should be aware that these duties will be accompanied by a compliance regime with fines for failure to adhere to the rules.
While it is reasonable to expect ratepayers to provide information to the VOA to assist in maintaining the rating list, the current intention risks putting many businesses into the realms of non-compliance and leaving them open to unscrupulous rogue agents. There will be no obligation on the VOA to act on information in a timely manner – it seems that these duties are all very much one way and the VOA needs to be put under similar obligations with consequences for under-performance.
The fundamental review and subsequent technical consultation promised improved transparency from the VOA and a further consultation on “transparency and disclosure” followed, but there has been no government response with any feedback or conclusions, more than a year since the end of the consultation period.
Greatly improved transparency from the VOA would bring substantial benefits to the rating system. There has been a genuine concern from ratepayers for many years that business rates are the only tax where the taxpayer is not in possession of the information and data on which the tax is based.
Ratepayers want to be confident that the rateable value of their property is fair and reasonable having regard to the relevant evidence. Under the current disclosure provisions, no evidential information is shared prior to the challenge stage. A ratepayer can only obtain this information from the VOA once they have gone to the expense and time of working up and submitting a challenge document. Earlier sharing of information would allow ratepayers to make a more considered decision as to whether their assessment is fair and reasonable and should therefore reduce the number of challenges made. There is a strong argument that, if the VOA justified its valuations by sharing the key rental evidence on which an assessment is based at the outset, most ratepayers would be satisfied and not wish to proceed with a challenge.
Simplicity
The system has become increasingly complex, due to the large number of reliefs and exemptions that apply. Many of these have been brought in to try to counter perceived unfairness, but they add to complexity and make rate bills very difficult for the average ratepayer to understand.
There is a strong argument for a full review of these reliefs rather than concentrating on trying to police existing measures. The recent consultation and conclusion on empty rates avoidance and evasion focused on plugging gaps in the current system rather than looking at the root causes of the problem. There was minimal avoidance of empty rate charges when most ratepayers only paid 50% of their liability after an initial rate-free period, and there is little evidence now that landlords purposely keep their properties empty in the hope of achieving a higher rent. Along with the conclusions of the most recent consultation, yet another consultation was announced on a general anti-avoidance rule.
The uniform business rate is too high
Last, but very much not least, the next government must address the fact that business rates are substantially too high – among the highest recurrent local property tax in the world and unresponsive to changes in economic wellbeing. At 54.6p per £ of rateable value (ie a tax rate of 54.6%) the standard multiplier is far too high despite having been frozen during the pandemic years. When first introduced in 1990 the multiplier was 34.8p. The staggering growth in the tax since 1990 adversely effects the profitability of the occupation of physical properties and stifles new investment in our towns and cities.
If the purpose of a revaluation is to adjust rate liabilities to market conditions, the principle of the total tax take being fixed needs to be dropped. The multiplier should be reduced to a more sustainable level – say 40p – and then fixed like most other taxes. Businesses will then be able to see direct correlation between their rate liabilities and rental levels – if the economy of a sector or area suffers a downturn then rate liabilities would reduce proportionally and, likewise, in an area that might be seeing a boom, it is only fair that rate liabilities should increase. This would address the current imbalance, felt particularly by those in the retail, leisure and hospitality sectors, who consider that too much of the burden rests on them and not the “online giants”.
Simon Green is head of business rates at Gerald Eve
