All three main political parties recognise that the business rates system isn’t working. In their manifestos, the Conservatives and Labour have both promised to review the system while the Liberal Democrats have gone a step further, pledging to scrap the tax altogether in favour of a commercial landowner levy.
Ahead of this month’s general election, GL Hearn brought together a panel of experts to explore what the key problems are with business rates, focusing not just on the retail sector but also on manufacturing. The panel also looked at what short-term and long-term reforms should be made to business rates, and how best to convince the next government to implement them..
Panel of experts
Dominic Curran, property policy adviser, BRC (British Retail Consortium)
Gary Hoskins, director of tax – intu
Rachel Kelly, senior policy officer – BPF (British Property Federation)
Richard New, partner - Mills & Reeve
Jaspal Singh, real estate manager - Vauxhall Motors
Richard Williamson, national head of rating - GL Hearn
Bruce Wilson, director, national head of corporate advisory - GL Hearn
Edward Woodall, head of policy & public affairs - Association of Convenience Stores
Guy Montague Jones, deputy editor - Property Week (chair)
What are the biggest problems with business rates?
Dominic Curran: This requirement for a fixed income is at the heart of the problem. It feels like there is a final sum that the Treasury wants to get to every year and the whole system is reverse engineered to get there. There’s no other tax in the UK like that. Anything that you give to one group has to be paid for by another group.
Richard Williamson: The Treasury Select Committee got it in one. The system is broken. It is an increasing burden on business and there is this complicated web of reliefs that very few people understand. They’re sticking plasters. Fundamentally the tax is too high and simply needs to reduce. You can show that with reference to the entire developed world – the tax is higher here than in any other developed country.
Jaspal Singh: From a corporate perspective, it disincentivises manufacturers to invest in the UK because, for example, Vauxhall will be getting taxed on plant and machinery. When we are being benchmarked against our sister manufacturing plants in Europe, it puts the UK at a disadvantage. Vauxhall pays 60% of Opel’s total property tax bill but the UK accounts for only 8% of Opel Group’s footprint.
DC: The Treasury Select Committee also mentioned it is making the UK uncompetitive. In the context of manufacturing, when you have that punitive level of tax, why would you choose to base your business in the UK as opposed to another more benign regime?
Edward Woodall: All we’ve done for the last 10 years is recut the pie. Fundamentally, it’s an outdated system. If it were a social media platform, it would be MySpace. It’s not fast, doesn’t have good content and doesn’t have good process.
How significant a factor have business rates been on the decline of bricks-and—mortar retail?
Rachel Kelly: Business rates are supposed to be a tax that is broadly reflective of your rent but retail rents have come down about 30% over the past decade whereas business rates have gone up by 3% a year on average. So it‘s not doing what it should be doing.
EW: Some parts of the retail market are hit particularly hard because different methodologies are used. Petrol forecasts, for example, are rated on a receipts and expenditure model so they have much higher rates – particularly for store sites which are based on turnover, not floor space as other retailers would be. The same goes for ATMs and cash machines, which are the subject of legal case. That is a big issue because they are important services in communities.
Gary Hoskins: It feels surprising that the government hasn’t realised there’s a link between these high business rates and job losses.
Bruce Wilson: And it’s not just job losses. The high street is the hub and the core of many communities and if you lose jobs and get vacancies all of sudden what was a thriving economic environment goes into decline and it becomes self-perpetuating. Then there’s the question of fairness. The system is not responsive because of the time delay between revaluations and the revaluation date, and the appeals system, which should allow rate payers to get to the right liability, is almost impossible to navigate and all ratepayers are affected. Not all the tenets of fairness are there.
What short term measures should be taken to improve the business rates system?
DC: We’ve suggested four things in a letter to the chancellor and what was striking when we put the letter out was the number of CEOs that came back within the hour to support it. The immediate things we want to see are: a freeze in the multiplier rate next April; funding of downward transitional relief so people who should be paying lower rates pay lower rates bills immediately; three-year relief on any investment you make to improve a property so you are not taxed on investment; and reform of the Valuation Office Agency to help them manage revaluations and appeals properly.
RW: Investment relief is a good one because it has already been brought in in Scotland and has proved popular there. That is something the government could do quite quickly.
JS: We would like to see the immediate de-rating of plant and machinery. For a large manufacturer like ourselves, plant and machinery can account for up to 20% of our business rates bill.
What longer term changes could be made?
RK: I think it is a sensible tax to have but there are three main changes that would make it a fair tax. One is to reduce the burden. The Treasury Committee published an interesting graph showing that had the business rates bill not gone up above inflation over the past 30 years, the total revenue would be more than £10bn lower than it is today. That burden needs to come down. We need more frequent revaluations so the system is agile and responsive enough to ensure that people pay the right amount of tax, and the structure needs to change to ensure we do not have above inflation increases in the future.
Is there a realisation in government that something needs to change?
DC: There is a recognition that something needs to happen but there is nervousness as well. The government wants to be able to maintain the current pot.
Richard New: If you consider the £30bn that business rates generate, the difficulty is that all the parties are promising to spend more on education and the NHS. There is pressure to grow the tax take. So much of the litigation that I am involved in, when you drill down, is pressure from on high saying we want to carry on getting this amount of revenue. That cannot be the right way of going about it..
RK: If there’s one silver lining from what’s happening on the high street, it is that it has finally brought business rates to the attention of politicians and even of the electorate. I’m more positive that there is momentum politically to look at the issues and address them.
RW: The Treasury Select Committee was really helpful in terms of what it said but the timing is unfortunate because the government is fixated with other matters.
As well as making the case to reduce the business rates burden, should industry suggest alternative taxes?
GH: Through the various consultations, both the retail and property industries have shown a willingness to engage and suggest ideas. I am therefore confident we can help find a solution to bridge the funding gap.
RW: It is a difficult area. The differential in tax receipts between council tax and nondomestic rates has widened dramatically. The government does not want to have a council tax revaluation for political reasons but actually the difference has probably widened too far and a council tax revaluation is something that could assist in rebalancing the burden of business rates.
DC: There’ isn’t a silver bullet. We’re not going to find £10bn from one tax. I think what you want is to spread that burden around other taxes. I think that’s where you realistically have to go.