Business rates: where are we now?

27 February 2020: there have already been small changes announced to business rates, but will the new Chancellor deliver more significant reform in next month’s Budget, or does the government risk biting the hand that feeds it? Chris Warmoll reports.

Since the introduction of business rates in their current guise in 1990, they have pulled in a significant amount of revenue for the Treasury. In 2018/19, that figure passed the £31bn mark, up £2bn from the year before. 

When combined with council tax and stamp duty, the UK’s reliance on property taxes is the highest in the OECD – clearly a hard habit to break.

And as Chancellor Rishi Sunak gears up for his first Budget on 11 March, observers will be waiting to see if he will deliver on the “fundamental review” of the tax promised in his party’s election manifesto.
 
Yet many remain sceptical that the government will slap down the hand that feeds it.
 
The perception among traditional bricks and mortar retail industry is that business rates are unfair, disproportionate and unproductive and remain largely unrelated to sales or profits, particularly when compared to their online counterparts.
 
ICAEW’s own findings acknowledge it is clear that the current system is complicated and unfair, discourages productive business investment and holds back the economy. 
 
But it also helps fund local authority finance, which has had its central government funding cut by nearly 50% since 2010/11, according to the National Audit Office, with no reduction in its statutory obligations to provide services to its citizens.

Small changes already announced

There have already been some small changes announced to business rates, including the new pubs relief, which will kick in from April. However, this only equates to a £1,000 saving for each of an estimated 18,000 qualifying premises.

This is in addition to an extended retail discount for smaller pubs, which combined could amount to some £13,500 in annual savings. 

Other winners in former Chancellor Sajid Javid’s 25 January announcement included small shops and cafes, which will see their bills halved as the retail discount increases from 33% to 50%. 
 
Music venues and cinemas will also become eligible for the retail discount, while a £1,500 discount for local newspapers office space will be extended to 2025.

Yet even some of these modest savings for pubs look to be beset by delays. According to publican trade title, the Morning Advertiser, around 75 councils have been told by their software provider that due to technical difficulties, many will be unable to apply the changes in time for the annual billing deadline. This will force those affected to not only have to pay higher bills but then have to apply for rebates through their local authority.

Bjorn Bowles, partner in Knight Frank’s London’s Business Rates team, said, “The Conservative manifesto promised a comprehensive review of business rates but whether this happens on any meaningful level, remains to be seen”. 
 
He dubbed the initial measures announced in January as mere “tinkering that will sound good but are of little real value”.
 
According to Bowles, a more worthwhile reform would be the complete abolition of transitional relief and a dramatic lowering of the uniform business rate which at 51% was “punitive” and a more comprehensive and ambitious review of all reliefs.
 
On a more positive note, Bowles was encouraged by the government’s revaluations cycle with the trend heading down from every seven years to its current level of four and its next iteration expected to be every three years.

Going digital

To tackle the perceived imbalance between digital and bricks and mortar businesses, the government has already announced its intention to introduce a digital services tax from April 2020, following on from the OECD own proposals. 
 
While not an online sales tax, it is targeted at “digital businesses that are considered to derive significant value from the participation of their users”. 
 
Such taxes are focused on securing corporate tax revenues in relation to the creation of value not directly attributable to a permanent establishment due to the virtual nature of its activities. 
 
It will have a high threshold as a business must generate over £500m in global annual revenues with more than £25m linked to UK users. 
 
However, in order to be fair, the objectives and revenues for the tax need to be evaluated alongside the reform of business property taxes because, while the threshold is high, some retailers with an online and offline presence could be at risk of a double charge. 

ICAEW gave evidence at last year’s Treasury select committee inquiry into business rates and will be responding to the government’s review, expected to be launched in March’s budget.