When the UK government announced its fundamental review of business rates, there was hope among organisations that we would finally see reform to the tax. The rates system can be traced back to its origins in the Poor Laws of 1572 and 1601. Business rates as we know them can be traced to the Local Government Finance Act 1988 but in some respects, it reflects law stretching back to 1601.
The 1988 law was the last attempt to reform local government finance and is remembered as a disaster. While modern business rates were successfully implemented, its domestic equivalent the Community Charge led to the poll tax riots and, ultimately, the downfall of the then Prime Minister Margaret Thatcher.
That event has cast a long shadow. As a result any kind of tax reform, particularly local government taxation, has been approached with trepidation. Will we see some real reform this time?
“This is not the first time fundamental reform has been promised,” says John Boulton, Director, ICAEW Technical Policy. “Long-term, such reforms would ideally involve a comprehensive look at local government financing and how business activity is taxed locally. Even if you don't go as far as introducing a different tax for local business activity, there's widespread recognition, including by the government itself, that rates need proper modernisation.”
One example cited by Boulton is the issue of revaluations, which he feels should be more responsive and timely. “There was a promise we were going to be moving to three-yearly revaluations” he adds, “but the most recent set of revaluations was postponed because of coronavirus.”
The last revaluation period of five years was also postponed by an additional two years, from 2015 to 2017, so the issue of timely revaluation is not just pandemic-related. By the time businesses were reassessed in 2017, bills were based on 2010 data and in some cases significantly out of kilter. Other regions such as Hong Kong and the Netherlands already revalue properties on an annual basis, using technology to make this more achievable. This was one of the key topics covered in the Call for Evidence published last July.
“This year’s Budget contains a commitment to putting some money behind digitising business rates,” says Boulton “That's got to be a good thing. But are we actually going to get a system that is more transparent and reactive to ratepayers? Is it going to let them see how their assessment is completed? They need to be able to predict what their assessment will be if they open new premises or make changes, and be able to easily challenge it if it's wrong. These are all things that are problematic with our current system.”
The government’s recent Spending Review froze the business rates multiplier for another year. While this can be seen as a positive for struggling businesses, it was somewhat disappointing for those calling for wider reform. ICAEW has been calling for a significant reduction in the multiplier, considering that it has increased linearly since the 1990s. “It is now more than 50p in every pound of rateable value - that’s simply too high”, says Boulton.
“It's time to look again at whether the system can deliver rates at that level. Although the pressure for the multiplier was recognised in the spending review and the multiplier freeze was budgeted for, there's nothing else in the Budget indicating any relief from rates.”
The pandemic has created a great opportunity for tax reform, to ensure the system is efficient and robust enough for the modern era, particularly as digital technology allows people to work from anywhere. But it’s an uphill struggle, says Boulton.
“We've seen the political difficulty of achieving fundamental reforms, particularly in local government taxation. The government’s appetite to tackle this area historically has never delivered the necessary adjustments to the system. It subsequently raises the reliance of local government on rates as a source of funding. You’ve got the attractiveness of property as a very easily identifiable basis for tax. You put all that together, and the prospects for reform, look less likely.”
While real reform might still be elusive, pressure from ICAEW and others has resulted in greater recognition of the issues businesses face. ICAEW’s 2018 thought leadership piece Business Rates: maintain, demolish, rebuild or refurbish laid the groundwork for serious debate about the efficacy of Business Rates.
“We gave evidence to the Treasury Select Committee, and it was encouraging to see the conclusion we had reached, that it was ripe for reform, was picked up by the Treasury, which culminated in this call for evidence,” concludes Boulton. “It's good to see in the Spending Review that the government has identified that the multiplier needed action, even though it didn’t go as far as we would have liked.
“It's good to see that some money has been put towards digitalisation. An online platform for billing, as discussed in the Spending Review, could be really helpful as long as it gives access through one centralised platform and not left to each local authority. We are making tentative steps towards some kind of meaningful change, even if we don’t get full reform yet.”
Read more from our Future of Tax series here.
Future of Tax
As HMRC launches its review of the system that underpins the tax system, we take a look at the pressing issues and challenges.
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- HMRC needs more resource to rebuild the UK's tax system
- Identification and registration of taxpayers must be a priority, says ICAEW
- In-year tax estimates wouldn’t be an accurate basis for payment, warns ICAEW
- Join up HMRC systems to provide a better taxpayer experience, says ICAEW
- ICAEW considers an extension on VAT relief for energy saving materials
- Tax news in brief 31 May 2023
- Changes to self assessment criteria
- EU Council reaches agreement on exchange of information for crypto assets and advance tax rulings for high-net-worth individuals
- HMRC additional needs working group
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