“Whichever the outcome of the General Election on Thursday, the new government cannot afford to continue brushing business rates reform under the carpet.” says John Webber, Head of Business Rates at Colliers:
The current system which provides £30 billion a year for local authority funding, “is not fit for purpose” and, with election day approaching, both political parties need to adapt their policies to encourage businesses to expand and invest rather than downsize or even close down their bricks-and-mortar estate.
Business rates must be fundamentally reformed. Reform should culminate in a fair property tax that would be affordable, transparent and easy to administer.
At Colliers, we have long been campaigning for change. Having launched our first Business Rates Manifesto in August 2018, we have made constant revisions, petitioning MPs on both sides of the house to listen.
We believe any new government should have the following 10 key action points on its agenda.
1. Address the multiplier
The uniform business rate used to calculate rate bills should be rebased to a sensible level that businesses can afford. Currently at 54.6p in the £1, it is just too high, and should be re-based to £0.35, near its historical level. The 2023 list was the first Rating List that started with a multiplier over 50p. As time moves on and the multiplier rises with inflation (Consumer Prices Index), this figure will continue to increase unless the next Government intervenes. A regular shorter Revaluation cycle has removed the need for annual changes to the multiplier since the inflationary change to rental values will take into account that growth.
Nowhere else in Europe do businesses pay half the rental value of premises in property taxes. Set at this level, business rates deter new investment in business. A lower UBR would reduce the barriers to entry, expansion and innovation for businesses and encourage growth. It could enable a broadening of the tax base, thus plugging any gaps in revenue for the Exchequer caused by a lower UBR.
2. Reform the reliefs system
Re-basing the multiplier to something affordable means the whole question of reliefs can become simplified and resolved. The Government introduced the complicated series of reliefs because rates bills were just too high and now roughly 700,000 properties out of a tax base of 2.15 million, are exempt. More reliefs given, in turn, put pressure to increase the multiplier, creating a vicious circle. In the absence of reform, the Government will have to ask for ever higher contributions from an ever-shrinking base of non-domestic ratepayers, if it wants to maintain revenues. This is not sustainable.
Whilst Small business rates relief is vital to support the economy and local businesses while the multiplier is so high; in some places we have business rates deserts, and this is inequitable. We believe everyone that benefits from public utilities and local services should pay something towards them-but at a fair rate.
Reliefs should be reviewed at least every 3 years or at each revaluation cycle.
3. Look at ways to make up the lost revenue
Ideally, the next Government would recognize that the burden of business rates is simply too high and would cover the cost of reducing the UBR with other fiscal measures. However, if the Government decided it had to find the funding from within the business tax system it could consider a number of options including looking at:
- increasing the digital services tax on the global tech giants until the review on international corporation tax has been completed;
- some form of online sales tax or local sales tax
- charging a low/reduced business rate to every small business that currently does not pay anything at all or receives relief (those in premises with a rateable value of under £15,000). We have never met the owner of a small business that does not feel they should have to pay something toward local authority services.
- Consider landlords/owners making a contribution to the business rates bill
- Phasing out the Retail, Leisure and Hospitality Relief long term -as the level of the UBR multiplier is reduced, this should not be needed.
- Reforming council tax and looking at a pooling system, so that some funds can redistributed nationally, as per the business rates system
These options are all completely dependent on the Government reducing the multiplier to £0.35p. These options should not be seen as an additional tax grab.
4. Extend Empty Property Rates Relief to Twelve Months for All Sectors
The significant amount of long term empty commercial property in England is due to a lack of market demand and long-term socio-economic factors, not because property owners want to keep their premises empty. It takes a landlord on average a year to fill a property with a long-term tenant when it falls empty. Taxing them for that reduces the investment that they can make in upgrades.
A three-month rate-free period for occupiers (a so-called “new shops bonus”) would not incentivise long term occupation, because most new occupiers already enjoy a rent-free period as part of their deal with the landlord.
The next Government should instead extend the three- and six-month empty rates holidays to twelve months for all property types, including retail and offices.to encourage owners to keep properties in the rating list and maintain the tax base for the future. In the first year, extending Empty property relief to 100% for 12 months could cost the Exchequer £3bn per year, based on 2023 values; but over time, it would result in higher property valuations and more revenue for the Exchequer as the rating list becomes more valuable.
5. Introduce annual revaluations
By introducing annual revaluations, business rates bills will accurately reflect values, reducing the likely significant shift in liability following a revaluation, and allow occupiers and local authorities to benefit. The increased occurrences of significant and unforeseen events, such as Brexit, the Covid-19 pandemic and the war in Ukraine, further emphasise the need for a system that can more accurately react to rapidly changing economic landscapes.
6. Review plant and machinery
There should be a wholesale and then regular review of what is or is not rateable in relation to plant and machinery. All plant that is an integral part of the trade process should be exempted from business rates, as should investment in new technology that makes businesses more green/ sustainable. This would allow the rating system to complement government policy and targets. The amount of time spent arguing about the value of a CCTV camera or an air conditioning unit in a small shop highlights the ridiculous situation that has been created.
7. Improve Transparency from the VOA
The valuation process that allocates properties their rateable values is not transparent. The VOA does not share the evidence that it uses to form the basis of its valuations. The only way occupiers dissatisfied with their rateable values can access this evidence is by challenging the valuation through the “check challenge appeal” system (CCA), a lengthy and costly process for the occupier. We expect that many challenges to the valuation process will be submitted over the coming months following concerns that the VOA uses flimsy evidence when conducting property valuations. The VOA have not been held to account sufficiently in recent years – they make the rules up as they go along leaving ratepayers fighting an opaque bureaucracy.
8. Reform the Appeal System
The current system makes it too difficult for businesses to appeal their assessments. Recent tinkering with the CCA system and plans to remove the ‘Check’ part of the system has only added to the confusion. The request for the annual provision of information from the ratepayer, not only confirming physical details of the property on an annal basis, but also updates on rent and lease and trading information will also add a significant administrative burden.
We believe the current system of appeals is not fit for purpose – only those companies that can afford professional advisors get to the right answer. The system should be transparent, easy to access for all and allow appeals to be resolved in 12 months.
Over 13% of appeals at Challenge stage are excluded on technical grounds such as filling in a form incorrectly. This has meant circa 20,000 businesses on the 2017 Rating List have been prevented from getting a fair tax bill and natural justice.
9. Take a proper look at local authority financing
The government must investigate new funding sources for councils as confidence in the current system dwindles. The government should also consider reforming council tax funding, a tax that has not had a revaluation for over 30 years. A funding model similar to Non-Domestic Rates where all receipts are largely pooled should be considered.
10. Address Rogue Rating Advisors by Regulating the Ratings Industry
Unhappiness with rates assessments and a complicated process of dealing with appeals system has driven smaller businesses into the arms of rogue rating agents who promise to negotiate lower bills, but often disappear after taking an upfront fee. Unlike advisors in other financial disciplines, business rates advisors do not require a license to practise.
We urge the next Government to regulate the industry and set up a register of rating advisors, similar to the Financial Conduct Authority to make sure the cowboy and criminal element that prey on such businesses are kept at bay. Until reformed, businesses need the best advice from professional advisers if they are to navigate the complex appeals (CCA) system. We believe the issue of rogue traders will only get worse when the government introduces annual returns and imposes “the duty to notify” since this will put extra administrative burdens on rate payers who will need even more help to negotiate the system.
The time is now
A new government has a real opportunity to introduce key reforms to the business rates system – a system which, in its current form, is not working. Over the past 30 years, various governments have over-complicated this tax, made it more opaque and increased its level disproportionately, leading to a growing chorus of criticism and contributing to destroying the high street.
Webber concludes, “We need a well-managed and transparent business rates system that supports growth, not hinders it; and we need it now. That is why we have been campaigning to all parties. British business needs meaningful reform -not shallow sound bites”