Chris Sanger 7 Mar 2017 11:33am

Spring Budget 2017: business rates reform

There’s little doubt that the chancellor had hoped that the first of his two Budgets in 2017 would be a dull, uneventful affair that would pass with as little attention as possible. But the recent furore around business rates looks to have put paid to his best laid plans and he is now under unrelenting pressure to throw some relief in the direction of those hit hardest by the recent property revaluations

Caption: Hammond should consider whether keeping the exchequer’s coffers full justifies such a big increase in business rates.

There is a sensible argument that we should have revaluations more regularly to avoid large distortions compared to small annual valuations. Such regular changes will make things smoother – increasing rates by almost half, as has now happened in some instances, is bound to cause difficulties for some.

However, there remains the question of the level of business rates. Annual revaluations address for changes in relative property values but at least part of the reason why the problem is so acute is the absolute amount of business rates, not just the sudden relative shift.

Business rates are effectively a duty paid on the rental value of a property, and during the long period between revaluations the government guesses by how much this has increased and increases the tax rate so that it collects what it thinks it would tax if it revalued. At least that’s the theory. This time it hasn’t worked.

The rate of business rates started at 41.4% in 2010 and increased to 49.7% last year, being an “inflationary” increase of just over 20%. However by the government’s own measure, the total rateable value of English property has increased in value by only 9.6% in that period, meaning businesses in aggregate have effectively been overpaying all this time, if you believe that 41.4% of the rental value was the right number at the beginning. Much like the metaphorical frog that doesn’t jump out of the saucepan as the temperature is increased in small steps, the small over-inflationary annual increases have gone by without remark.

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You might think that revaluation would at least stop this for the future, with the rate of business rates going back to 41.4% but no, it’s only going down to 48%. This is to ensure that the exchequer receives the same amount in 2017 as it did in 2016. This might sound sensible to the exchequer, but would seem very odd if applied to other taxes: should we increase VAT rates if spending in the country falls (as it did in the downturn), or increase income tax rates if salaries in aggregate drop?

So, while there is clearly a need to address the problems caused by the revaluation, the chancellor could also consider whether keeping the exchequer’s coffers full justifies such a big increase in business rates. Any handout from the chancellor on Wednesday is likely to come in form transitional relief, primarily for SMEs. The case for helping smaller businesses is obvious and fair but we shouldn’t ignore the fact that bigger businesses, which are likely to have to most expensive properties, have been hit by the rise in business rates and barely benefited from the changes to business rates announced earlier in this parliament.

And the fact that such a large increase has been gradual over the last decade, such that there has not been an outcry, doesn’t mean that it was right to continue raising rates in this manner. The chancellor could use this furore to take a more principled look at this tax and fix the distortions properly, rather than just to soften the screams of those hurting most from the revaluation.

Chris Sanger, head of tax policy, EY