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Business rates: maintain, demolish, rebuild or refurbish?

As business rates in the UK, not least in London, become increasingly unpopular as a form of taxation, John Boulton highlights some of the issues raised in a recent ICAEW report, “Business rates: maintain, demolish, rebuild or refurbish?”

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John Boulton

August 2018

Property makes a good target for taxation. Its location is fixed, its ownership recorded and, valuation complexity aside, the tax liability can be calculated with relative certainty and consistency over time. Given these advantages, it is unsurprising that business property forms an important part of the tax base in many countries.

Yet business property taxes are becoming increasingly unpopular. The advent of online business models that can operate with a smaller physical presence has led to criticism that some businesses are being taxed unfairly. At the same time, the system for assessing the tax liability can be extremely complex, difficult to understand and correspondingly costly to navigate.

The situation is particularly acute in the UK where some businesses are suffering real hardship from business rates bills that do not scale with ability to pay. All of the main UK political parties have committed to reform, and the government has already made or proposed a series of changes to the system to address some of the pressures.

However, for many businesses, the 2017 revaluation in England and Wales made the situation more acute. While the smallest businesses benefited from generous relief in the 2016 budget, others, including many high growth entrepreneurial enterprises that are the backbone of future economic prosperity, have received limited or no respite.

The new ICAEW thought leadership report Business rates: maintain, demolish, rebuild or refurbish explores the issues.

Common criticisms of business property tax highlighted in the report include the following:

  • The digital economy is putting increasing strain on the retail sector, one of the biggest contributors.
  • The system entails additional, unrecognised, costs for businesses. In the UK, rate-payers must themselves take responsibility for initiating the review of valuations. Although the new ‘check, challenge, appeal’ system might reduce incidences of appeals, if it induces businesses to accept a level of inaccuracy in valuations, they might not consider it a cost saving.
  • Elements of the system discourage economically productive investment, such as where plant and equipment or other movable property is included.
  • Property taxes fail to scale with profitability, which differentiates them from other taxes that track the business cycle. When the next downturn arrives, this will place additional strain on the economy and could lead to the failure of otherwise viable businesses.

What do you think? What experience has your business or clients had with business rates? Are there reforms that would be helpful? Let us know at londonaccountant@icaew.com

John Boulton is Manager, Technical Strategy at ICAEW and Chair of the Financial Reporting Discussion Group.

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