By Scott Simmonds, researcher
With current restrictions wreaking havoc on the high street, it is easy to forget another unpopular constraint to businesses that has been around a lot longer – business rates. The amount paid in rates has been accelerating at a fast pace for the past decade due to the rapid rise in something called the business rate multiplier. This multiplier is used to calculate business rates charged on most non-domestic properties. It’s up for review in 2021, the first time in four years.
As can be observed in chart 1, this multiplier has increased by a staggering 10 per cent over the last ten years - even after a revaluation in 2017, which saw a rate reduction. The 2020-21 rate has been frozen for 2021-22 by the government due to the coronavirus pandemic. Businesses in the retail, hospitality and leisure sector in England also did not have to pay business rates for the 2020-21 tax year due to the coronavirus pandemic.
Whilst this rate hike is staggering enough in isolation, the English business multiplier rate shown in chart 1 is, in fact, the lowest rate within Britain. The City of London, Scotland and Wales all pay even higher rates, as shown in table 1. Northern Ireland’s rate is calculated in a different manner, using an additional district rate in addition to the regional rate, making regional comparison difficult.
So how does the multiplier effect business tax rates? The Valuation Office Agency (VOA) values a property at a certain point in time. This is based on rental evidence from previous rent agreements, square meterage, type of building etc. The current rate that applies to England and Wales, for example, was the open market rental value of a property on 1 April 2015.
Councils then multiply this VOA amount with the applicable multiplier, seen in table 1, set by central government to calculate a businesses’ rates. In England and Wales, if a businesses’ rateable value is under £51,000, then the small business multiplier applies. In Scotland, this amount is £35,000.
For example, a small business in England with a rateable value of £20,000, using the multiplier (20,000 x 0.499) the company will have a business rate tax bill of £9,980 in 2020-21. This same business in 2010-11 would have paid £8,140. A larger business valued at £100,000 will have a business rate tax bill of £51,200 in 2020-21. This same business in 2010-11 would have paid £41,400.
These large increases in tax rates have been supplemented by a large raft of exemptions and reliefs, such as rural relief, transitional relief, local newspaper relief; all of which reduce the amount a company is liable to pay. Small companies can even be granted exemption depending on their size. This leaves us with an inefficient and counterproductive dichotomy, in which the government dramatically increases taxes with one hand, whilst creating ever more ways to not pay these same taxes with the other. Clearly the easier a system is for business owners to navigate, the easier it is for HMRC and the government to enforce. This is a classic example of overcomplicating the tax system, creating holes in the system, meaning we now have a tax code longer than 18,000 pages. To put that in perspective, Leo Tolstoy’s first published edition of War and Peace was a tiny 1,225 page in comparison.
There is hope for change however, as it seems that the government now recognises this issue. Reforms such as shortening the VOA revaluation cycle to every 3 years, rather than every 5 years, and reducing the current cycle of five years by one year to 2021 are welcome. But we can go further. The TPA has previously highlighted the need for reform of business rates, and last year helped hundreds of business owners take part in the government’s consultation through our Rate Expectations campaign. Our proposal, first made in December 2018, was to permit economic factors to be considered under the Local Government Finance Act 1988. Allowing a material fall in rent to be categorised as a ‘material change in circumstances’, currently not the case, would allow businesses to appeal to the VAO and potentially reduce their business rate assessment. This could be a possible change in 2021 to bring immediate relief in the coming year for businesses coming out of lockdown, with the retail sector being a significant beneficiary when they are once again expected to pay rates.
In the longer term, a more detailed plan is needed for this area of taxation. A 10 per cent increase in 10 years underscores the fact that this tax rise is unsustainable. It is time to seriously consider an overhaul of a tax that is becoming increasingly complicated. Lower, simpler taxes would be easier to understand and easier to implement, for government and business owners alike.