The business rates system needs reform, but the eventual solution may end up being a very English compromise.
There is a growing political and industry consensus that business rates need to change. However, reforming business rates for the retail sector may have a knock-on effect on other parts of the economy and public finances.
Business rates pressure
Business rates are required to be fair, consistent with economic conditions and to support growth and fair competition in all business sectors. More recently, in 2013 business rates were also commandeered by central government to fund shortfalls in local government funding through the business rate retention system. Local income from business rates has effectively replaced the previous revenue support grant and is worth almost £30bn per year to local governments.
Any change in favour of one interest has the potential to undermine the others. For example, the decision by central government to maintain a consistent or increasing business rate multiplier following national property revaluation has helped retain more business rates for local public funding purposes. Also, the continued push to remove small rate payers – typically retail concerns – from the business rate system has helped to support the high street.
However, the consequence is that this higher business rate burden is shouldered by an ever-decreasing number of businesses with larger floorplates, rather than smaller businesses that are taxed at a lower rate and often benefit from rate relief or a tapered arrangement. This is particularly acute for the manufacturing and engineering sectors, which operate from space-hungry premises (although it also affects large-floorplate retail and office sectors).
To put this in context, following the 2000, 2005 and 2010 national revaluation exercises, the business rate multiplier was reduced to between 41.6p and 42.2p in the pound. Following the 2017 revaluation exercise, the multiplier was only reduced to 47.9p and quickly increased to 49.3p in 2018 – one of the highest levels on record.
Business rates reform
Business rate reform should not be led by the retail sector alone. Rather, the opportunity should be taken to take stock of the current situation and unite the various considerations and priorities (in the public and private sectors) that are reliant on or demand a reformed commercial property tax in England. This will then provide the opportunity to work backwards to understand how a new system of property tax could be implemented. These considerations and priorities include:
- being responsive to economic conditions and incentivising investment in property and business;
- being sensitive to the new world of work that favours leaner, hybrid business models that mix bricks and mortar and digital transaction interfaces;
- the need for transparency, legibility and simplicity;
- sympathy for how business rates fall on various property sectors and locations – for example, retail, leisure, office and industrial, all of which experience property tax in different ways;
- tackling the perversity inherent in empty property rates that at times rewards vacancy more than occupation and has driven a sub-industry in empty property rate avoidance techniques;
- the demand for local government financing, which is only projected to increase as society lives longer;
- the need to capture the value created by public spending on physical, social and knowledge infrastructure in local areas.
In facing up to the demand for business rate reform, there is a concurrent interest in land value tax as an alternative tax arrangement. In contrast to business rates, land value tax is based on location and is levied on the value of land (with or without in situ property). The central contention is that the value of land is defined by what is happening in the immediate location and wider region. For this reason, land value tax is considered progressive because it captures value invested by society in a given location and aids current calls for local wealth building and inclusive growth.
However, England should be wary of viewing land value tax as a panacea for concerns with business rates. A great deal of land simply has no value and demands a certain degree of investment for development readiness. This suggests that there will still need to be a complex system of equalisation between locations and grant funding.
Similarly, reducing property tax will not help the high street if the demand for certain products simply does not exist anymore in conventional bricks-and-mortar formats.
Concurrently, it is not clear how land value tax would deal with the new world of digital platforms that do not have physical footprints, nor the dynamic reality of commercial businesses that increasingly must switch between use in quick succession.
Perhaps the biggest obstacle will be political. A switch to land value tax would shine a light on the deeply ingrained practice of wealthy property owners, who may not take kindly to disturbance.
A very English compromise
The eventual reform may be a very English compromise. For example, a semi-permanent transition that combines elements of land value, property and turnover-related tax. This balancing act would be similar to the split-rate tax (where land is taxed at a higher rate than property) seen in North America but also include elements of business gain not easily captured in bricks and mortar – for example, a digital sales tax – designed to capture value from firms that shift sales and profits between administrative jurisdictions.
It is tempting to feel sorry for business rates. A simple property tax based on a periodic Treasury assessment of rateable value is being asked by government policy makers and the Treasury to face in multiple directions at once – pleasing no one. Going forward, the opportunity to reform business rates should be taken. However, this is a very complex process now that business performance is no longer clearly associated with floorplate or land value.
Kevin Muldoon is a lecturer in built environment adaptation and investment in the department of architecture and built environment at Northumbria University
