Businesses in Scotland are avoiding key decisions on budgets and investments as they prepare for possible tax hikes in 2017, following the surprising reformulation of business rates in England & Wales, according to leading property consultancy JLL.
In December 2015 former Finance Minister John Swinney promised to review the business rates regime following multiple calls from business groups to create a fairer, more competitive system. His successor, Derek MacKay is set to reveal provisional rates in early January, before the new rateable values come into force from April 2017.
JLL predicts that Scotland’s revised business rates could extend the existing competitive disadvantage between businesses in Scotland and the rest of the UK.
The warning comes following the publication of draft Rateable Values (RV) for the 2017 Revaluation in England & Wales which, in a surprise move, upgraded the overall average RV of non-domestic properties in England & Wales by 9.1 per cent. Rates which businesses pay are calculated by multiplying the value of the property (RV) with the Uniform Business Rate (UBR).
Since the announcement of business rate reviews back in 2015, ratings experts have been predicting a steep rise in the UBR as non-domestic property rental values, certainly outside of London, are still recovering from years of austerity.
The calculation for business rates in 2017 is based on how rents stood in 2015. The current ratings framework, introduced in 2010, is based on 2008 rental levels when rents were at high levels after several years of sustained commercial growth. Given that average rental values have struggled since the start of the 2008 recession, the UK Government has altered the formula by which rates are calculated to offset this. Under current legislation, the amount collected by the UK Government from business rates is kept constant in real terms, regardless of how the UK economy is performing.
Following the draft rates for England & Wales, which JLL argue has been lopsided by eye watering property prices in London, Chancellor Phillip Hammond’s Autumn Statement revealed that the UBR will fall to 46.6p in the £ for “small” properties, rising by 1.3p in the pound for “larger” properties to 47.9p in the £. Scottish businesses currently pay more than those in England – an additional 1.3p higher than English properties for “large” spaces. Currently the rate poundage – the Scottish equivalent to UBR – for 2016/17 is 51p in the £ for large businesses and 48.4p in the £ for smaller organisations.
The decision has raised fears that a similar formula might cause businesses north of the border to pay a disproportionate level of tax. Coupled with the fact that draft rates for Scotland have yet to be announced by local assessors, JLL argues that businesses are being forced to put their plans for budgets, investment and staffing on hold until clarity over the new rating assessments are reached.
David Burke, Director of Rating at JLL explains: “When you look at the regional breakdown of property values, it is clear to see that commercial property in the North of England hasn’t increased since 2008. Indeed, most of the English regions outside of London were poor performers relatively speaking, only saved by the Capital’s disproportionate effect. Had London also suffered, then the total RV wouldn’t have risen and the UBR would be high, in line with our predictions.
“One of the issues in Scotland is that we don’t yet know the draft 2017 Rateable Values, which creates more uncertainty. By not releasing the draft 2017 Rateable Values, businesses in Scotland are already at a competitive disadvantage in that budgets, investment decisions and risks are harder to quantify. The other more glaring issue is that Scotland doesn’t have a London cash cow to offset depressed prices elsewhere in the country. This issue is compounded by the ongoing challenges faced by Scotland’s oil & gas industry, which has previously provided some much needed relief.
“There has been a history of harmonising rating law and practice both North and South of the border. Until now, Scotland has matched the UBR in England since 2007, and if Scotland wants to restore a competitive position it must at least match England & Wales. At a time when Brexit looms large and Scotland’s public finances are under considerable pressure, the £2.8billion or so collected from business rates is crucial. However, the Scottish Government must realise that there is a fine balancing act and Scotland cannot afford to be uncompetitive for business.”