The Chancellor’s Autumn Statement is likely to announce a freeze or cap to business rates during the Autumn Statement, in order to help struggling businesses cope with the slow return to recovery. Business rates are a tax on business property, which is uprated by inflation each year. On the surface, limiting business rates appears to be a straightforward answer to a business problem. But is it the right answer?
What are the benefits of setting a business rates limit?
- A freeze or cap would reduce financial pressures on business, especially small and medium firms. Many businesses argue that business rates are a high fixed cost (as it does not vary based on the firm’s revenues) which are hitting profits. This problem is acute for smaller firms where property costs are a much higher proportion of their total cost and turnover.
- A limit could adjust prices for business rates to better reflect the market.Because the last revaluation was at the property market peak (2008), values used for the tax are out of sync with local economies. Limiting business rates would bring the tax closer to what it should be given current property values.
- Savings can be reinvested, passed on to consumers, or kept by firms. By reducing financial pressures on firms, they can reinvest that money into making the business successful or pass on savings to consumers. Both options would help local economies. Else, some businesses may choose to keep the funds for themselves with little local economic benefits.
So, why not just go ahead and freeze or cap business rates?
- A limit on business rates will result in a cut to already strained council budgets. A freeze or cap would cut councils’ retained rates and their Formula Grant as well (which is funded through business rates). The British Chambers of Commerce believes a two-year freeze will leave a £1.7bn hole in the tax take.
- The limit would be difficult to fund, as it puts pressure on the “safety net.” A “safety net” in the business rates system provides emergency funding for councils which would see a budget cut of 7.5 per cent in any one year from their business rates. Unless there is a mechanism to deal with this, considerably more councils would need to call on funds from the already strained safety net.
- A Business Rates limit is a rather blunt instrument. All businesses are potentially eligible for the tax freeze or cap even if they do not really need it. In turn, businesses are getting tax “discounts” at the expense of funding local services.
Three alternative solutions
- Incentivise councils to use their discretionary relief powers. Councils already have the discretionary power to offer support to any business that needs it, and government supports some mandatory relief as well. However, councils may struggle to fund additional relief, choosing between struggling businesses and funding local services.
- Revaluation. The last valuation took place in 2008 when property prices were at their peak. More frequent revaluation would keep the tax better in line with the local economy. However, doing so would add much uncertainty to the new rates retention system put in place this year.
- Diversify the tax base. The business rates system creates challenges for many cities and focuses too much on taxing property rather than the output of a business or consumption of customers. Low corporation tax has in part been possible due to higher income from business rates. The UK needs a more diversified taxation system on business and a more diversified tax income system for local government in order to create stability and fairness in taxes.