The revaluation of commercial properties is welcome because it eases the tax burden on business in struggling cities, many of which have been overpaying in recent years. While much of the recent discussion around the revaluation of business rates has been about how businesses – and especially retailers – will be hit by the changes, the reality is that the changes will actually bring some relief to business in most parts of the country.
That business rates are increasing in cities principally in the Greater South East should come as no surprise. As the most successful part of the country, demand for land in these places is very high. And as business rates are a tax on land usage, any adjustment to the system should reflect this.
The bigger issue is not that some businesses will pay higher rates to reflect the fact that they are in strong economies – the focus is of much attention to date — but that the delay in revaluation has meant that many businesses have had to pay more than what they arguably should have been for a number of years. This business rates cut — assuming that landlords do not put up their rents in response — should come as a relief to those businesses and high streets in the places that are struggling the most.
The issue therefore is not the revaluation itself, but that it does not happen often enough. This creates huge uncertainty for businesses. For some, it leaves them facing a substantial jump in business rates that a more frequent revaluation would avoid. For others, it means that they pay higher business rates for a number of years than they would with more frequent revaluations. And it means a number are likely to struggle because of a flaw to the policy. The flip side of course is that those businesses that see the largest increases have avoided paying more tax in recent years, a point largely ignored in recent commentary.
The legal requirement that the overall amount of business rates must remain fixed is also flawed. This causes two main issues. Firstly, it makes the system is inflexible to changes in the economy. Business rates do not fall if the economy enters recession, nor do they rise off the back of a growing economy. This means that the business rates tax bill for businesses does not alter if trading conditions they face change.
Secondly, it means decisions to give tax breaks to certain businesses necessarily increases the tax burden on other businesses. And while big businesses will see the largest changes, all firms eligible for business rates pay more than they would otherwise have to because of the breaks given to the smallest businesses.
Both of these issues hurt London businesses in particular. The delay in revaluation means that they have to deal with a single large jump in their rates, rather than a steady increase. And the fixed cap means that those not eligible for Small Business Rates Relief have to make a greater contribution to the system when exemptions are granted elsewhere.
The falls in business rates in many cities is good news for businesses, but not for the cities themselves. The exemptions and reductions reduce the size of the business rates tax base, which local authorities will use, through devolution, to fund social care. These cuts will constrain the budgets of a number of local authorities in the coming years.
By the same token, Business Improvement Districts (BIDs) in these areas will also see their budgets shrink. BIDs are collections of businesses in specific areas – commonly city centres – that pay a levy on their rateable values (usually 1 per cent) to raise money to improve their areas. Cuts to rateable values mean a cut to BID budgets, and a squeeze on what they are able to do. To offset this, the BID would need to increase the number of businesses within its boundaries paying rates, which may be difficult in places with weaker economies.
Both these findings and previous work by Centre for Cities, contrary to a lot of commentary on business rates in recent weeks, provide a number of messages for the Chancellor as he prepares to deliver the Budget:5
- Firstly, he should resist calls to delay or scrap the revaluation, while still ensuring that there is some transitional relief. While there is something to be done to smooth tax changes for those seeing the largest increases, this should not distract from the fact that this is the outcome of revaluations occurring too infrequently.
- Secondly, this means that he should introduce more frequent revaluations on a yearly or bi-annual basis, to make the system more accurate and timely, reduce volatility, and to maintain the legitimacy of the tax. More frequent revaluations would also have the additional effect of reducing the significance of appeals.
- Thirdly, the Government should replace the fixed yield with a fixed rate. The requirement that total business rates generated must remain fixed is not helpful. Removing the cap on business rates and moving to a fixed rate system would make it more responsive to the wider economy and the ability of firms to pay.
Box 1: Methodology
The Valuation Office Agency’s (VOA) summary dataset on individual hereditaments has been used to calculate the estimates presented in this briefing. The postcodes for each property have been assigned to city centres and wider areas of the 58 cities that we look at across England and Wales. The summary dataset contains those properties – around 80 per cent – that have had an individual inspection. A secondary dataset from the VOA, the list entry dataset, also includes properties that have not been inspected because their rateable value is not calculated based on floorspace. While there are properties in this final 20 per cent that will be occupied by private sector businesses, many are publicly-funded services such as schools, universities and museums. Because this briefing is concerned with looking at the impact on businesses of changes in business rates in line with recent commentary, we have used the summary dataset.
The business rates bill of each hereditament was calculated according to the rateable value assigned to that hereditament multiplied by the relevant multiplier, dependent on the size of the property and where in England and Wales it is.
To calculate the average change, the total business rates bill for each city was divided by the total number of properties with a rateable value of £6,000 or above to give a weighted average change. £6,000 represents the threshold for 100% Small Business Rates Relief in 2016/17. This threshold was used for the 2017/18 data too, despite the threshold increasing to £12,000, to capture all the properties that benefited from a 100% fall in their rates as a result of the raising of the threshold.
In the course of estimation it was not possible to identify where a property was occupied by a multi-branch business. We note that multi-branch businesses are not eligible for Small Business Rate Relief. Properties in enterprise zones, which are exempt from business rates for five years, were also not excluded. The Government also intends to offer transition rates relief to help businesses that have been adversely affected by rates changes, which may be changed in the Budget. This relief has also not been included as it could not be identified for specific properties. We expect these exclusions to make little difference to the figures presented in this briefing.