Senior Partner Stephen Salloway's Business Rates Review

A radical review of Business Rates, first mentioned in the 2014 Autumn statement, has been launched with findings due in time for the 2016 Budget.

The current system has been in place since 1988 – Business Rates are based upon the rental value of the premises which are revalued every 5 years.  The last scheduled revaluation date was due to be 2013 with the new rateable values taking effect in April 2015.  However, these dates have been postponed for two years.  Current Rateable Values are therefore based on the last valuation date which was back in 2008.

Political perspective:

The Prime Minister says that Business Rates is businesses', particularly small businesses', number one complaint.

Coalition's Danny Alexander says they want to ensure that the business rates system is fair, efficient and effective.

Labour's Shabana Mahmood says business rates need more than a review – they would cut and freeze business rates for 1.5m small businesses.

Business perspective:

John Cridland of CBI says the business rates system is outmoded, clunky and regressive. Suggests removing small firms from the system and having more frequent valuations.

 

Some of the more radical suggestions include basing Business Rates on energy use, charging more to non-UK tax payers and devising a system based upon number of employees.

Business Rates are seen as a businesses highest cost after wages and rent and they are higher in England than in any other EU country.  Any review is likely to be fiscally neutral (not intended to raise any more money).  Revenue from Business Rates in 2012-13 was £26.1bn, very similar to the £26.3bn raised from Council Tax.

 

Do you think the current system is really in need of radical reform?

Yes, I think it is.  5-yearly revaluation periods are too infrequent in a rapidly changing business and property environment.  The decision to delay the 2013 revaluation was odd to say the least as many businesses – particularly in the retail sector - desperately need the downward adjustment many would receive from a revaluation to help them through the high street malaise.

Furthermore, the appeal system takes far too long – years in many cases.  Although the business rate payer will receive a back-dated refund if the appeal is successful, it has to continue paying the wrong amount until the appeal is determined.  This can be a major financial burden to businesses which is outside their control.

Reliefs to help small businesses and transition mechanisms to help smooth out any major changes to the amounts paid after revaluation are welcome but can result in complicated billing which is difficult to understand.

More fundamentally, the use of commercial property is changing and other factors mean the value of a property can fluctuate and the most successful businesses do not necessarily occupy the most valuable property.  Businesses that trade on the internet may pay little or no business rates.

So yes, I believe a review is necessary and the sooner the better.  I also believe that the review should include a better understanding of the services Business Rates fund which could help build better links between businesses and the community in which they are based.

 

What changes to the system would you like to see?

I think there should be a progressive system, in some ways similar to Council Tax, where the amount paid per pound of rateable value increases over a number of rateable value bands.  For example, where the amount that needs to be raised is averaged at 50p in the pound, Band A would pay say 30p, Band B 40p, Band C 50p, Band D 60p and Band E 70p.  Band A could be for rateable values up to say £5,000, Band B for £5,000 - £10,000, Band C for £10,000 - £20,000 and so on.

 

Would this be fair?

I think it is fairer than the current system and would simplify billing.  It shouldn't be too difficult for the Local Authority to calculate.  However, it does make an assumption that the businesses occupying higher value properties should pay more which might not always be fair.

The evolution of the internet means that many businesses can be extremely successful by conducting more business 'online' than from premises.  An online business can be located almost anywhere and can potentially generate far more revenue and profit from relatively inexpensive offices and warehouses than from a string of high-value high street shops.

 

How do you deal with these anomalies?

In my view the best way to overcome these inconsistencies would be to apply a two-tier system - part based upon the rental value of property, as is the case now and as outlined above; and part based upon a company's profits, with a local-services supplement (tax) chargeable to companies whose turnover or profits are above a given level.  This additional tier of tax could be collected by HMRC, alongside Corporation Tax, perhaps.

 

Would you change the current system for collection and distribution of business rates?

Yes.  The current system is that Business Rates are collected by Local Authorities from businesses in their area and the money is pooled for Government to redistribute it according to its formula.  Using my suggestion of a two-tier system, the Government would collect the revenues directly from the profits-based tier and distribute them, as now, through its LA formula.

The property-based tax element would continue to be collected at local level but my opinion is that the whole of the amount collected should be used by the Local Authority to provide local services as it sees fit (within guidelines).  The amount charged would be set by the LA who would be required to be completely transparent in their budgeting and as to how the money raised was spent.

 

What benefits would come from the Local Authority controlling all of its revenue from this source?

There should be a duty on the LA to consult with the business community so that businesses have a more democratic role in determining the amount of the levy and the way the money is spent.

For example, should a lower rate be set to encourage businesses to invest and to attract inward investment or should a higher rate be set so that the LA could invest in major infrastructure projects?  These decisions would be taken at local level with full business engagement.

My suggestion is devolution of a kind.  I thoroughly support the shift of power away from central to local government, with appropriate safeguards.  It will be interesting to see how Manchester fares with its new autonomous status.

 

Do you have any other thoughts on how the system might be improved?

I would like to see some real simplification of the system.  For instance, the introduction of self-certification of Rateable Value – surely a professional valuation from a Chartered Surveyor would be sufficient to establish the Rateable Value figure, even if it only applies to lower RV's?  This could be appealed by the VOA but the business would continue to pay at its certified level until an appeal determines otherwise.  And if the appeal isn't lodged within say 30 days of self-certification, the ability to challenge is lost.

I think revaluation should take place at least every 3-4 years.  This will undoubtedly place a huge burden on the VOA.  Consequently, why not split the Valuation List into categories – for example, retail, office, industrial, warehouse and 'other' and set different revaluation dates for each category.  The high street seems to be the most fluid in terms of its changing character and value shifts; thus it might be practical to revalue the retail category every three years but other sectors every four.

I say amend or better still abolish the payment of business rates on empty business premises where the owner is demonstrably trying to sell or lease the property.  It is an unfair financial burden on businesses and it is a disincentive to speculative development and investment.  For example, would a successful growing business risk committing to a move to newer, larger premises to further the development of its business if it has an unknown empty property rates liability on the premises it vacates?  Empty property rates are unfair and counter-productive.

Footnote:

Lastly, it is important to remind businesses that if they are intending to appeal their business rates in the current list, they are advised to do it by 31st March 2015 so that any benefit can be backdated to April 2010.  Otherwise, refunds will only be calculated back to 1st April 2015.

Stephen Salloway
Contact Details:
Tel 01332 298000

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