06Implications

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

This analysis is built up from three parts of each city: city centre, suburb and hinterland. It also makes a distinction between four types of cities: London, large cities, medium cities and small cities.

City centres are defined based on all the lower super output areas (LSOA, the lowest geography available from census data, roughly equating to a neighbourhood) that fall within a circle of:

  • London – radius of 2 miles;
  • Large cities – radius of 0.8 miles;
  • Medium and small cities – radius of 0.5 miles.

Suburbs are the rest of the Primary Urban Area, a standard statistical geography which reflects the continuous built up area of a city.6

Hinterlands are the areas around a city that are within commuting distance. They are bespoke to each city, and are dependent on the average distance travelled by those who live outside of the city but commute into the city. In Plymouth, for example, the radius used is 56 km; in Bradford it is just 30 km.

The majority of this research is built from census data from 2011 and, where comparable, from 2001 in order to understand the demographics of these areas. For a full explanation of the data used, refer to the appendix.

Footnotes

  • 5 Louise McGough and Hugo Bessis, Beyond business rates (December 2015) https://www.centreforcities.org/publication/beyond-business-rates-how-fiscal-devolution-can-incentivise-cities-to-grow/
  • 6 For more details about the Centre’s use of PUAs, please visit centreforcities.org/city-by-city/