Although I would like to write otherwise, Labour seems to be backtracking on its policy on business rates, despite its pre-election pledge to “abolish the tax” and thereby “save the high street”.
Now in government, the politicians have realised that getting rid of a tax that raises £30bn for the government’s coffers and provides fundamental funding for local authorities might not be such a good idea, particularly considering the £22bn black hole that needs to be filled.
So far, Labour has skirted around the issue. Not only was the subject of business rates absent from the King’s Speech, it hardly featured at all in the recent Labour Party conference. It warranted a mention just once – in a fringe event hosted by the British Retail Consortium and attended by James Murray, secretary of state to the Treasury, who was there for 10 minutes.
Murray spoke of the need for a thriving high street for both community cohesion and economic growth. He also said it is not right in principle that a retailer should be paying business rates before a penny has been spent in the shop. Perhaps this may be an indicator that he has been listening to retail campaigners and has in mind a lower multiplier just for retail. Or he might be considering new occupier relief – although he needs to bear in mind the limitations of state subsidy rules.
Murray also said he wanted to see action to level the playing field between online sales and the high street, in line with the Labour manifesto commitment. To be fair, chancellor Rachel Reeves has now reinforced this, promising to lower the burden on bricks-and-mortar retail, the sector hit the hardest by the high rate of tax. This suggests the government might well look at introducing a permanent discount for retail property as called for by the BRC. Only last week, 71 retail chief executives wrote to the chancellor suggesting a rates corrector which would see rates paid on retail properties fall by 20%.
And perhaps Labour might consider raising the digital services tax, as mooted in the past to pay for this.
Murray also emphasised his keenness to consult people outside the government, after the Budget – a hint that, while some business rates reform may come in the Budget itself, the government might put off the really big choices it needs to make until later in the parliament.
The fact Murray noted that any reform to the system would create winners and losers, because the changes must be revenue-neutral, again indicates we may just see tinkering around the current system rather than a fundamental reform. A far cry from abolishing business rates altogether.
The need for reform
At Colliers we have been fundamental supporters of reform rather than abolition. There is nothing wrong in a property tax per se – indeed, in every major economy in the world it provides a regular and easily understood form of income to government. But in their current form, business rates have been widely recognised as unfit for purpose.
A tax at more than 50p in the pound and a multiplier that will continue to increase with inflation every year is basically too high and is deterring businesses from expanding and investing. Instead, high business rates encourage downsizing or even the closing down of bricks-and-mortar estates.
Nick Stowe, chief executive of Monsoon and Accessorize, echoed this at the same Labour conference fringe event. He said that when you put the financials together on whether to open a store in a particular location, the level of business rates “puts a hard brake on the project”. He said he is opening many more stores in Europe instead.
We therefore believe the system should be fundamentally reformed to create a fair property tax that would be affordable, transparent and easy to administer. This is what we would say in any consultation – and, let’s face it, we have had enough of those.
The way forward
We believe the government should:
- Address the multiplier Rebasing the uniform business rate used to calculate rate bills to a sensible level that businesses can afford. A rate of 54.6p is unsustainably high, and should be re-based to 35p, near its historical level. As time moves on and the multiplier rises with inflation, this figure will continue to increase unless the government intervenes. This will lead to more business distress across all sectors. It certainly does not bode well for the high street.
Nowhere else in Europe do businesses pay half the rental value of premises in property taxes. A lower UBR would reduce barriers to entry, expansion and innovation for businesses and encourage growth. However, unlike the BRC and other retail commentators, we do not agree there should be a lower multiplier just for retailers. While we understand the argument that it is unfair that the retail sector represents 5% of gross value added but pays 21% of the business rates bill, we believe we need a lower multiplier across the board to encourage investment in other sectors too.
- Reform the reliefs system Re-basing the multiplier to something affordable means the whole question of reliefs can become simplified. Reliefs were introduced because rates bills were just too high. Now roughly 700,000 properties out of a tax base of 2.15m are exempt and, in some places, there are business rates deserts. More reliefs given, in turn, add pressure to increase the multiplier, creating a vicious circle. We believe everyone who benefits from public utilities and local services should pay something towards them – but at a fair rate.
- Look at ways to make up for the lost revenue Ideally, the government would recognise that the burden of business rates is simply too high and would cover the cost of reducing the UBR with other fiscal measures. However, as it has stated any changes should be revenue-neutral, it could consider: looking at increasing the digital services tax on the global tech giants; some form of online sales tax or local sales tax; charging a low/reduced business rate to every small business that currently does not pay anything at all or receives relief; landlords/owners making a contribution to the business rates bill; and, finally, reforming council tax, looking at a pooling system so that some funds can be redistributed nationally, as per the business rates system (see www.egi.co.uk/legal/is-council-tax-the-answer-to-business-rates-conundrum).
The new government needs to be imaginative and help spread the load so we do not end up with a small number of contributors increasingly squeezed and, ultimately, unsustainable.
- Extend empty property rates relief to 12 months for all sectors The government should extend the three- and six-month empty rates holidays to 12 months for all property types, including retail and offices, to encourage owners to keep properties in the rating list and maintain the tax base for the future. If the government is genuine that a retailer should not be paying business rates before a penny has been spent in a shop, then this is a must.
- Introduce annual revaluations This will ensure that business rates bills accurately reflect values, allowing occupiers and local authorities to benefit.
- Review plant and machinery All plant that is an integral part of the trade process should be exempted from business rates, as should investment in new technology that makes businesses more green/ sustainable. We want to encourage investment not deter it. A de minimis rule should also apply instead of the ridiculous situation of counting CCTV cameras on every rating appeal.
- Improve transparency from the Valuation Office Agency Currently the only way occupiers dissatisfied with their rateable values can access this evidence is by challenging the valuation through the lengthy and costly “check challenge appeal” system. This should be addressed.
- Reform the appeal system The system is costly and unwieldy. Only those companies that can afford professional advisers get to the right answer. The system should be transparent, easy to access for all and allow appeals to be resolved in 12 months.
- Address rogue rating advisers by regulation It is crucial to make sure the cowboys and criminal element that prey on such businesses are kept at bay.
The time to do all of this is now: Labour has a real opportunity and five years to introduce key reforms to the business rates system – a system which, in its current form, is not working. We just hope it does not do what its predecessors have done: hide behind numerous consultations and kick the “too difficult” can down the road yet again. Only time will prove if Labour, despite its former claims, really has the mettle to do otherwise.
John Webber is head of business rates at Colliers
