3 reasons why business rates reform would help firms as well as cities

Changes are needed to make the system fairer and more transparent for businesses

Business rates are a frequent subject of tension between businesses and the Government. The tax is often referred to as a “burden” to businesses, representing their third largest cost after rent and staff. The Federation of Small Businesses and the Confederation of British Industries both consider the tax to be unfair, not flexible, and impeding investments.

Our latest briefing Business rates: maximising the growth incentive across the country shows how the system could be improved to ensure more cities benefit from it and are rewarded for improving their economy. However, the paper’s recommendations would not only benefit local authorities, they would also address some of the main issues businesses have about business rates, in three ways:

1. Making the calculation of rate fairer to businesses

The way business rates are calculated is unfair on businesses because of two reasons: the infrequency of revaluations, and the varying multiplier.

Business rates are based on properties’ rateable values, which are estimate values of rent prices on a given date. These values are usually updated every five years, although the last two revaluations were seven years apart.

This means that until a new revaluation occurs, business rates bills are based on outdated prices that do not reflect economic change. As a result, between 2010 and 2017 some businesses ended up overpaying rates because actual property values had fallen since rateable values were assessed, while others were underpaying for the opposite reason. Moreover, the gap between revaluations creates major cliff-edges for businesses in terms of the level of rates they pay, one of the chief sources of frustration for firms.

In addition to this, the multiplier – the rate applied to the rateable value of a property to determine business rates – is not fixed, but changes at each revaluation. This is to ensure the same amount of money is generated nationally, unrelated to economic changes. For the Government, this guarantees a stable source of revenue. But for individual businesses, this makes the bill even more disconnected to local economic changes, and creates more uncertainty.

The combination of these two elements makes business rates irresponsive to change, with bills being difficult to predict across revaluations. The Government can do two things to address this issue. Firstly, it should carry out revaluations on an annual basis (rather than every three years as it recently promised to do). Secondly, it should introduce a pre-determined and fixed multiplier. These steps would make business rates bills considerably more accurate, fair and predictable for firms.

2. Improving the transparency of the business rates system

Because of the complexity of the system, and its lack of responsiveness to local economies, business rates tend to be widely unaccepted by businesses. Since 2005, firms have submitted almost 2 million appeals to challenge their bill, with only a third of resolved cases resulting in a change in rateable value. Yearly revaluations would clarify the system, increase acceptance of the system and reduce the number and cost of appeals. In the Netherlands, the progressive shift towards a yearly revaluation process led to a significant decrease in appeals, because property taxes became more transparent and easier to understand.

3. Bringing more tangible benefits in return for rates

Businesses would also be more willing to pay if they could see actual benefits from their contribution. As proposed in our briefing, the Government should incentivise local authorities to capture the change in property value by allowing them to retain or lose business rates resulting from changes at revaluation. This would encourage them to improve the quality of their business environment, for instance by improving their public realm, infrastructure and transports. As such, firms would get direct benefits in return for paying their rates, therefore aligning their interests with those of local authorities.

All this could make business rates a fairer, easier and more efficient tax to businesses. This would however not reduce the “burden” of the tax, i.e. the fact that it accounts for a high share of businesses’ total costs. Yet this is not down to the system itself: bills are high simply because they are the reflection of high commercial prices. And lowering rates would only result in rental values adjusting upwards, with occupiers paying in rent what they used to pay in tax.

So while there are broader economic challenges to be addressed, making the business rates system fair and efficient will benefit both firms and local leaders – and both should be pushing the Government to make these reforms.

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