Busting the burden of business rates

By Scott Simmonds, Researcher

New figures released today show that business rates collected last year increased by over £850 million to £25.3 billion, meaning small firms are still doing much of the heavy lifting in raising cash for local and national government. So why is that a cause for concern? 

Business rates are seen as being the most inflexible and unfair tax on businesses large and small. Whereas corporation tax is based on profit, allowing companies who are successful to contribute a portion of their earnings, business rates are applied regardless of the economic situation of a business. Business rates can be the single largest cost to a small and medium sized enterprise. Whereas corporation tax fluctuates with profits, falling when profits fall as so providing some relief, the burden of business rates remains unchanged, even if revenues fall.  

The implementation of business rates have a particularly long lag time, with rental values assessed every five years. This poses a problem when rental rates change between years. These calculated rates then take two years to come into effect. By way of example, the current business rates applied to firms today were set on April 1st 2017, based on data taken from April 1st 2015. This means that the next rate change that takes effect will be seven years after the initial data was taken, lagging severely behind market conditions. 

In a time of intense competition from online retailers and falling footfall, the consequences of this are immense. This causes a significant problem. Rents are generally calculated on footfall provided and the revenue from sales that this creates. February 2019 marked 15 consecutive months of footfall decline on the high street, suggesting rents, and by extension rates, should be reducing in line with footfall. 

But this is not the case. In fact, it increased again this year. The rateable value multiplier for businesses has risen from 34.8 per cent on introduction in 1990-91 to 49.3 per cent in 2018-19. This rate has now increased again to 50.4 per cent for 2019-20. Under the current system, that next rate review will not be until 2020-21 and the rates will not be altered until 2022-23 (due to the two year lag). This potentially means three more years of rate increases, combined with falling footfall for businesses. If this continues, an increase in business rates will not reflect the lower level of existing rents, leaving businesses effectively over-taxed on the locations they occupy. For your local high street, this is chaos theory in action. A failure to make adjustments at the time can strangle businesses with crippling business rates seven years down the line.  

Numerous UK industry bodies have condemned the current rates system. In May, the Confederation of British Industry criticised business rates, calling the system “uneconomical, unsustainable and frankly unintelligible”. The Institute of Chartered Accountants in England and Wales also produced a report last year pointing out the faults in the current system. Other institutions such as the Federation of Small Business and the British Chamber of Commerce have all over the last few years called for change in the current system. 

The TaxPayers’ Alliance recently proposed a small, relatively straightforward change that could help struggling businesses under the current system. If economic factors, which are currently excluded, were included in the ‘material change on circumstances’ categorisation within the Local Government Finance Act 1988, this would allow businesses to appeal and potentially reduce their business rates. 

This change would only apply where rental values are falling, any adjustment for appreciating rents would be covered in the periodic revaluations. This will benefit companies of all sizes adjusting to market conditions, while enduring excessive overheads from both business rates and rents that are too slow to adjust. Importantly, it could prevent the seven year lag dragging small firms under, before rates have had a chance to adjust. 

This is one simple change which, though not a silver bullet, would go some way to help. Business rates are just one of a number of significant burdens that come with running a business. So, later this year, we are releasing a paper examining many of the other costs faced by businesses in Britain. Look out for that work this summer.