Imagine this scenario. It’s March. You inspect the morning post and see a hefty, official-looking envelope. The Council Tax bill for the year ahead. You open it and run your eye down to the total at the bottom of the page. And it’s three times higher than the year before. Reeling from the shock you look closer. You see charges for the satellite dish you installed, the garden path you laid. You pick up the phone and dial the helpline to lodge your appeal. You learn that your case is in a very long queue, but still you must pay. Imagine how you would feel in that moment; imagine the financial impact all this would have. Imagine what it would do to your enthusiasm for home improvement.
This is a bit far-fetched. The only way you could experience an increase like this would be if you moved home: from a property in the lowest value band to the highest. And you don’t pay extra for home improvements that leave the footprint of your property unchanged.
But to the firms that pay Business Rates, this scenario isn’t fantastical. Rates are the local property taxes businesses pay. And as the bills landed ahead of the 2017 payment schedule, BCC’s mailbag bulged with such cases. Companies that installed new equipment or repurposed spaces whose new bills exceeded the commercial gain of those investments. Firms whose properties remained the same but whose value had rocketed. This prompted a renewed push by BCC and other business groups for fundamental reform.
Why do rates matter to the economic development of our towns and cities? They are an upfront cost that property-dwelling businesses must pay before they turn over a single pound. They help determine the minimum sales a firm must make to survive. Set them too high and businesses will fail or not get started in the first place. Make the system too complex and you get lots of appeals – a problem for ratepayers and for the resource-constrained authorities that administer rates. Levy them on plant and machinery and firms will invest less.
Are business rates too high? Well, as a share of national income the amount raised by taxes on non-domestic property in the UK is triple the OECD average and the highest of G7 countries. Is the system too complex? The 2017 revaluation of properties that burst BCC’s mailbag has, at the time of writing, generated over 100,000 ‘checks’, the first-stage of formal appeal. Rate bills levied under the previous revaluation of 2010 generated over one million appeals. Have rates discouraged investment? This is harder to prove, because many factors weigh on investment choices. But UK firms invest less than their international peers and some types of capital spending are subject to business rates. When the BCC surveyed Chamber members last year 35% responded that they were likely to cancel or reduce investments because of the April rates increase.
The impact on high streets is visible and well-documented. Each month we hear of shops and restaurants that close their doors for the last time. It’s true that consumer habits are changing with the move to online sales. High streets face many challenges. But rates have not adjusted to reflect this. Quite the opposite: as sales move online, bricks-and-mortar businesses shoulder more of the local tax burden. Retailers and eateries are the most visible victims of a broken rates system, but the net goes much wider. Manufacturing, warehousing and distribution facilities, offices and other non-retail sites pay the bulk of the tax.
So doing nothing is not an option. But what can we do to improve the system? As someone who has campaigned for reform of rates for years, I can tell you that achieving it isn’t easy. Reviews of the system over the last decade promised much but delivered little.
The sticking points in reform are always the same. Rates generate a lot of revenue for the public purse – around £30 billion each year; about the same as Council Tax. This is a major source of funding for local government. Any significant changes here will have wider implications for local government finance.
Business rates are the most predictable revenue stream that government has. Each year, the Treasury decides how much it would like to raise then sets the multipliers and reliefs to achieve the total. No other business tax ‘floats’ in this way. This is why previous reviews required that the revenue raised did not change. This guaranteed a zero-sum game in which the winners were always balanced out by the firms that saw their bills go up.
For all their complexity, taxes on property are straightforward to collect. The alternatives proposed from time to time, like land value taxes, local sales taxes or taxes on energy use, need wholly new administrative machinery. Some would be impossible to collect at a local level. When you kick at the tyres of the alternatives, they often fall apart. So an evolution of rates, rather than their complete replacement, looks like the best bet for reform.
The coming review must abandon fiscal neutrality as a goal: this is the signal that businesses must see to believe it will be different this time. And it must work for local government too. Britain is a low-tax economy overall, but central government controls more of the revenue than in comparable countries. We must shift the balance back towards local government to compensate councils for loss of rates revenue. It is possible that some form of online sales tax will be introduced in the future to address the ‘bricks versus clicks’ imbalance. But such a tax could only be collected at the UK-level. Understanding how this could work with the grain of devolution is just one of the many challenges policymakers would face.
Businesses need several things from this review. The financial burden rates place on business is unacceptable and must come down. We need to move away from annual ‘uprating’ and the Treasury’s ability to pre-determine revenue – a bizarre and unfair anomaly in the UK tax system. Revaluations must be more frequent so the tax is more responsive to economic conditions. When the property values that determine rates were updated in 2017, the changes in the UK commercial property market since 2008 were passed on in one go, blunted only by some transitional reliefs. Annual revaluations should be the end goal, but only if this goes hand-in-hand with a much simpler system for calculating and paying rates. We must reduce the complexity of reliefs – granting them automatically where possible. And the disincentives to invest must go, with plant and machinery excluded from valuations.
There is a huge opportunity with this review to make our economy work better. The government should seize it.
Mike Spicer is Director of Policy at the British Chamber of Commerce. He directs the BCC’s policy research and survey programme. Mike represents the BCC externally on business policy and matters relating to local economic development.
This blog is published as part of an occasional series by guest experts to provide a platform for new ideas in urban policy. While they do not always reflect our views, we consider them an important contribution to the debate.