Business rates have been a contentious issue for many years, with the system increasingly seen by UK businesses as unfair and, in the digital age, described as archaic and creaking at the seams. Complaints have been driven by increasing complexity, problems with the processes around appeals and valuations, and the impact of delayed revaluation in 2017 that saw double-digit increases in rates for some bigger employers in areas such as London. Nearly three-quarters of small companies in the capital say business rates are the most important issue they face. Public attention directed at business rate reform has focused on the retail sector and the spectre of empty high streets. In response to an overwhelming demand for a reform of the system, the Treasury Committee recently launched an inquiry into business rates to scrutinise how government policy has affected business and how business rates policy has changed.
According to ICAEW, which assesses the effectiveness of the tax system through its Ten Tenets, which include being fair and reasonable, certain, simple, and easy to collect and calculate, the current business rates system is failing. Technical strategy manager John Boulton says: “In order to make a business decision, you would hope that a business would have a fair idea what the cash flows are going to be in relation to tax, particularly if those cash flows are going to be material. With corporation tax, you pay a proportion of your profits. With VAT you pay a proportion of your sales. With business rates it is quite disparate. You might know what the rent is, but that may not necessarily mean the business rates will be a percentage. “You would expect to be able to calculate business rates, but that isn’t always the case. It is bad enough that you have this material tax on a particular type of business activity, but if the features of the system make it more difficult to navigate and more arbitrary, then it is even worse.” Other issues include the fact that many see business rates as too high, and as a tax that is complex and time consuming to appeal, and also that rates are charged on empty properties. Stacy Eden, partner and head of property and construction at national audit, tax and advisory firm Crowe, says: “Business rates rises are linked with inflation, and now stand at around 50% of rents, compared to approximately 20 years ago where the tax rate was close to a third of rents. It is the highest rate of recurrent property tax in the OECD.”
Business rates represent a substantial cost for high street occupiers and are considered partly responsible for a proportion of business closures. As an indicator of their cost, there are now large numbers of charity shops replacing other retailers as a result of the discount that they can receive on business rates. Concerns over this are an area of focus for the Treasury Committee inquiry. In fact, at its launch the (now former) chair of the committee Nicky Morgan highlighted the closure of 10,000 shops per year. However, there are other factors at play on the high street, as Alexander Jan, chief economist at professional services firm Arup, explains. He says: “The whole question of convergence with online retailing is often rightly highlighted, coupled with changing behaviours by consumers who are making fewer shopping trips. But then there are other factors at play, such as some parts of the retail sector suffering from questionable financial practices, which can’t be ignored.”
Digital Services Tax
The gap between what digital businesses and bricks and mortar firms pay in business rates has also come under scrutiny. The previous Chancellor announced plans to tackle this by introducing a digital services tax of 2% of turnover on tech giants. “This will raise well under 2% of business rate revenues,” says Jan. “Even if the tax goes ahead, it will be a long time before we see any meaningful convergence in revenues raised from the two sources. The most significant reform the committee could recommend and the government could adopt is devolution of business rates to local government which would give authorities control over their own financial destinies, providing greater accountability and growth incentives.” Eden believes that the gap will only start to close if taxes on businesses are reviewed as a whole, along with residential property taxation, for example if council tax upper bands could be introduced.
He says: “The system needs to be flexible enough to cope with the changing economy and not add pressure on the high streets, which seem to be hit harder than the logistical centres of technology companies.” Historically, the Treasury has been wary of reform that might lead to greater uncertainty around the £30bn of revenues that account for some 5% of UK tax take. Previous attempts at reform, which go back decades, have tended to run into the sand. But the case for reform is compelling, and not just for some of the reasons highlighted by the committee. Jan says: “The whole question of restoring and strengthening the incentive between local authorities’ tax bases and development and growth needs to be tackled. Arrangements since the 1980s have largely weakened this link, which makes it much harder for councils to persuade their residents that development is a good thing. That surely needs to change.”
Among the things ICAEW has looked at to mitigate the impact on business are having more frequent revaluations, effectively enabling the tax to track the rent, and if the rent goes down, allowing the business to get relief immediately. Investment in a more efficient digital system would also make a significant difference. Boulton says: “We are in the digital era, where the government is gathering all manner of real-time transactional data and has started making tax digital, so they should be able to do better. The system in the Netherlands, for example, is much more straightforward. They have annual revaluations for all 8 million properties, and they have an easier portal for taxpayers to be able to adjust their valuation if it is wrong.”
With that transparency, and the ability to self-input to a portal, businesses could see what their rateable value is and make any adjustments online, in what would be a much simpler system. “Unfortunately, the UK government’s use of technology is just not there yet,” adds Boulton. Other options could include more frequent revaluations, ideally every two or three years, and removing the cap on business rates and moving to a fixed rate system that would make it more responsive to the wider economy and the ability of firms to pay. Others advocate the setting of more realistic thresholds and the value differential between inner and outer London properly reflected. Samuel Leach, founder of Samuel & Co. Trading, advocates a major review of the entire non-domestic property taxation system, which could include looking at alternatives such as turnover taxes, land value taxes and valuation measures that take into account the shift away from property-based business operating models to online ones.
“What we may eventually end up with is a semi-permanent transition combining elements of land value, property and turnover-related tax,” he says. “This could include profits not easily captured in bricks and mortar, which would aim to capture value from firms that shift sales and profits between jurisdictions. We should find a consensual approach to land and property tax that encompasses business profitability, local public services, devolution and economic development.” Ultimately any reforms to the current system should aim to give businesses greater certainty, enabling them to plan and budget, and ensure their activities will not be constrained by uncertainty around rates or the more onerous prospect of getting a rates demand that is much higher than expected – and then facing the challenges of appealing it.
“This is a material tax, and for some businesses it is the biggest tax they have to pay,” says Boulton. “We want to see a more joined up, more responsive system and a more accessible online platform. Giving more certainty to businesses around what tax they are going to pay and the ability to challenge it when it is wrong and quickly remedy any discrepancies, would make the whole thing fairer and simpler.”