David Adams 2 Jun 2017 11:30am

How new business rate valuations are affecting small firms

Ongoing controversy dogs the new business rates valuations in the UK. David Adams asks what effect this is having on small business and whether the system requires wholesale reform

Caption: David Adams asks whether the business rate valuation system requires wholesale reform.

Some businesses across the UK are currently trying to cope with a big rise in their business rates bill following the 2016 revaluation. Chris Powell, for example, landlord of the Royal Oak pub in Bath, has seen his bill rise from £9,800 to £25,500, an increase he says he cannot understand – it seems well out of line with much smaller increases for other pubs nearby – and that may put him out of business.

Case studies like these began to feature in the press during the run-up to the Budget in March.

The government Department for Communities and Local Government (DCLG) responded by saying that almost three-quarters of businesses would either see no change or a reduction in rate bills. DCLG also drew attention to a transitional relief system that will phase in increases over five years.

Figures for average changes in bills in different parts of the country seem to back the government’s case. They show a reduction in every part of England outside London, including average reductions of 10% or more across regions in northern England. Only in London is there an average rise – of 11%. But averages can be misleading and are of little comfort to businesses struggling with big increases. High street retailers hit with big increases may feel particularly hard done by, as some of the online businesses with which they compete will pay much lower rates for out-of-town warehouses and distribution centres.

Revaluations have also been taking place in Scotland and Wales. In Scotland, businesses in the hospitality sector in particular have reported big rises. But Scotland also has the most generous business rates relief in the UK. Its Small Business Bonus Scheme offers 100% relief for properties with a rateable value up to £15,000; and 50% for values between £15,001 and £18,000.

In February, the Welsh government announced a £10m relief scheme for retailers facing big rate rises – 100% Small Business Rates relief is already available for rateable values up to £6,000, with tapered reliefs running down to zero for rateable values between £6,001 and £12,000. Under the new scheme, eligible retailers with rateable values between £6,000 and £12,000 will get a £500 discount, or have the bill cut to zero if it is less than £500. Those with rateable values between £12,001 and £50,000 will receive a £1,500 discount.

Reliefs will be gratefully received by eligible businesses, assuming they can negotiate the complexities of the system. But many business owners will certainly agree with Mike Cherry, national chairman for the Federation of Small Businesses (FSB), when he describes business rates as “an unfair, regressive tax, not linked to a firm’s ability to pay”.
Helen Dickinson, chief executive of the British Retail Consortium (BRC) says the current system “is no longer workable”; and “at odds with the government’s aspiration for a low tax economy”.

In the Spring Budget, the chancellor Philip Hammond announced a £300m discretionary support fund that local authorities could use to support businesses facing the greatest difficulties; and said that tenant businesses set to lose small business rate relief would see business rate bills increase by no more than £50 per month. He also provided a £1,000 discount on business rates for pubs with a rateable value below £100,000.

The BRC said that although new reliefs were welcome they also made a complex system even more complicated. The FSB’s Cherry also raises concerns about the appeals system, which has become more expensive and may mean companies are fined for mistakes made by other parties during valuation or appeal processes.

So what could or should the government be doing to improve the system? One important change many want considered is increasing the frequency of valuations, a change that could involve some form of self-assessment system for smaller businesses. Arguably the main reason for the current row is that there have been no valuations for seven years, rather than the usual five.

Clive Lewis, head of enterprise at ICAEW, notes that most of those who are happy with the current system still believe the frequency of valuations should increase. He thinks a self-assessment system should be considered: “With the ratepayer collecting information on their property, probably with the help of a property specialist”.

The government could also bring forward a planned switch from linking business rates with the Retail Price Index (RPI) measure of inflation to the Consumer Price Index (CPI) measure, currently set to happen in April 2020. Chris Richards, senior business environment policy adviser at the manufacturers’ association EEF, says there is no good reason why this change should not be made earlier. Both EEF and the Institute of Directors (IoD) suggest capping rate increases for some businesses. “Why can’t the system say that if you occupy less than 5,000 square feet – for example – your rates can’t rise by more than 15%?” asks Stephen Herring, head of taxation at the IoD.

Other sectors have more specific requests. Many manufacturers suggest that plant and machinery should no longer be included within the rateable value of premises.

The original rationale was that a manufacturer might move into premises already equipped with big ticket machinery, a far less common scenario today. Now, says Richards, including plant and machinery in business rates valuations represents “a tax on investment”.

But it seems there is little chance of these ideas being implemented any time soon. “At the moment, the focus is on getting reliefs in place for businesses that will be affected this year,” says a spokesperson for DCLG. “There are no plans to revisit further reform of the system.”

That makes more comprehensive reform of business taxation in general even less likely in the foreseeable future. Not that everyone thinks this is necessary. “We did a survey just before the Budget and a narrow majority thought business rates weren’t fit for purpose,” says Bill Dodwell, partner and leader of the tax policy group at Deloitte. “But a pretty large number thought the system was fine.”

But Christian Spence, a Chamber Fellow at the British Chambers of Commerce (BCC), believes the system is “fundamentally flawed” while valuations remain infrequent and tied to the RPI. “It’s not responsive to economic cycles, at the macro-economic level, or at a local level,” he says.

But he sees little prospect of a more wholesale reform of business taxation, including, for example, any reverse in the trend set by George Osborne during his tenure in the Treasury to keep reducing the headline rate of corporation tax. That seems a particularly distant prospect today, in the context of Brexit, with the UK government keen to attract or retain inward investment.

The question will be complicated further still by the roll out of devolution plans in England, which will give devolved areas more control over how funds raised through business rates are spent.

“Once devolution goes through we’re going to be dealing with lots of different local government organisations, rather than just the Treasury,” says Spence. “Set that in the context of the Brexit agenda and the chances of large-scale reform seem increasingly unlikely.” If so, at least accountants will have plenty of work to do in the meantime, helping clients to understand the system, or to consider steps they could take to reduce bills.

Yet the current system cannot last forever, says Herring, particularly if it puts an increasing number of businesses into severe financial difficulty. “My guess is that the chancellor will have to do more about this in the Autumn Statement, or before,” he says. “I don’t think this story is going away.”

The Royal Oak pub, Bath

When Chris Powell became landlord of this award-winning pub in 2010, its business rates bill was £9,800. Since the last valuation the pub’s floorplan has not changed, its rent has stayed the same and there have been relatively few changes in the local area. So Powell was horrified to be presented with a new bill for £25,500

He says the valuations office has told him his only course of action is to appeal against the decision, a process he now needs to try to learn about while also trying to run the business; and which can only begin once he starts paying the bill at the new rate.

“I don’t know how they’ve arrived at this valuation,” he says. “There are four pubs within a 10-minute walk and their rates have only gone up by between £1,000 and £2,000.”

He will get support from transitional arrangements put in place by the chancellor – “But I assume that’s only a stop-gap – so what happens once that money’s gone?”

In the longer term if he is unable to reduce the bill significantly, the business may have to fold. “I think everyone should pay tax – that’s how public services are funded and I don’t mind having an increase,” he says. “But there’s been no explanation of why it’s going up by so much.”

CPJ Field

Funeral directors CPJ Field was founded by Robert Field in 17th century London, and by 1901 the Field family had created a business that could be entrusted with the task of managing Queen Victoria’s funeral. Still owned by the family today, the firm now runs 37 funeral homes across south-east England, with administrative headquarters based in Burgess Hill, West Sussex. The business turns over about £10m per year and employs around 175 people.

Deputy chairman Charlie Field says the business will be paying an extra £40,000 in business rates over the next five years. The results of the revaluation are varied: 67% of the property portfolio has seen an increase in rateable value, 10% a reduction and 23% no change. The biggest increase (70%) is for a property in Bromley; followed by 60% in Peckham. The biggest decreases were of 21% in Crawley and 15% in East Grinstead.

Field would like to see reform that takes into account “the changing nature of consumer trends” – that is, the fact that “even the funeral industry is affected by the trend to do business online”.

He would also like to see a greater share of the funding that business rates provide being used to support business.

“At present business rates seem an expensive price for street lighting and clean pavements,” he says.