8Business Rates and the so-called ‘staircase tax’
122.The Autumn Budget announced a number of changes to the administration of Business Rates in order to support “businesses and improve the fairness of the system”. The measures include:
- bringing forward to 1 April 2018 the planned switch in indexation from the Retail Price Index (RPI) to the main measure of inflation, currently Consumer Price Index (CPI),
- legislating retrospectively to address the so-called ‘staircase tax’. Affected businesses will be able to ask the Valuation Office Agency (VOA) to recalculate valuations so that bills are based on previous practice backdated to April 2010—including those who lost Small Business Rate Relief as a result of the Court judgement, and
- increasing the frequency with which the VOA revalues non-domestic properties by moving to revaluations every three years following the next revaluation, currently due in 2022.
Change in revaluations
123.At present Business Rate revaluations occur every five years. The longer the gap between revaluations, the greater the opportunity for the value of a property to diverge from its last valuation.
124.In 2017, a revaluation of commercial properties for the purposes of Business Rates took effect. The revaluation should have taken place in 2015, but was delayed by two years by the Growth and Infrastructure Act 2013.116 Therefore no revaluation had taken place for seven years. When the revaluation did take place, the values used were those from 2015. Although fiscally neutral, the seven-year time lapse meant that properties in London had gone up significantly in price, and therefore would be paying significantly more in rates, while all other areas of the country that should have received a reduction in Business Rates sooner, had been paying higher rates than they otherwise should have been paying for an additional two years.117
125.The current five-year revaluation period remains unchanged and will run from 2017 to 2022. Therefore, the first shorter three-year revaluation period will begin in 2022 and run until 2025.
126.The Institute of Directors made the case in its Spring Budget 2017 submission for using technology to help remove the cliff edges in Business Rates experienced by businesses:
There are coherent arguments for a fuller review of the business rates system more generally, with modern technology and ‘big data’ advances in theory making it possible to have a more responsive, ‘real-time’ ratings system, as opposed to the five- or indeed seven-year cycle of plateaus and damaging cliff edges.118
127.At the time of the 2017 revaluation CVS, a business rates specialist, reported that across its nine distribution centres in England and Wales, Amazon would “benefit from a £148,000 reduction in property tax liabilities” with similar situations among other large out-of-town distribution centres for businesses such as ASOS, Boohoo, AO.com, JD Sports and Sports Direct. At the same time, CVS calculated that the average small shop would experience an extra £3,663 in rates over the next 5 years.119
128.Moving to three-year revaluations is an improvement to the Business Rates system. More regular revaluations will provide more accurate property valuations, and the changes to Business Rates that businesses experience will, on average, be smaller, and easier to adapt to. However, the benefits of this policy change will not be felt until 2025, when properties are revalued for the first time according to the new timetable. The Committee recommends the Government urgently investigates how to shorten the timescale between revaluations through, for example, revaluing properties annually between formal revaluations using published property price indexes.
129.Business Rates damage the competitiveness of shops on the high street relative to large out-of-town distributors and online retailers. The Government should address the property taxation imbalance between businesses on the high street compared to those based on major out-of, or edge-of town, retail parks, and online businesses.
Abolition of staircase tax
130.The so-called ‘staircase tax’ came into existence as a result of a Supreme Court ruling120 on how to define physically separate properties as separate or not. The Court ruling prevented valuation officers from assigning a single rateable value to properties that are not physically contiguous but (for instance) are covered by a single lease to a single occupant. The matter had previously been a matter of discretion for local valuation officers.121
131.The consequences of this ruling were that property units that had been previously considered to be a single unit were now separate units. One example that was provided to the Committee was the case of a company where due to the staircase between its two floors being a communal staircase shared with other tenants of the building, the units were deemed to be separate. Had the staircase not been communal, the units would have been classed as the same property.
132.The entitlement to Small Business Rate Relief rests on whether a company only operates from one property with a rateable value of less than £15,000. If a business uses more than one property it may still be able to qualify for the relief, but only if none of the additional properties have a rateable value above £2,899 and the total rateable value of all the properties is less than £20,000.122 The ‘staircase tax’ removed many businesses eligibility for Small Business Rate Relief despite not having changed in size.
133.The Supreme Court ruling meant that many businesses previously eligible for Small Business Rates Relief were no longer eligible, on the grounds that they happened to share a staircase with other tenants. Such a situation was clearly not what was intended by the policy. The Committee raised the issue in oral evidence with the Chancellor in October 2017. The Committee welcomes the Chancellor’s subsequent commitment to legislate to retrospectively remove the so-called ‘staircase tax’.
Change in indexing increases in Business Rates from RPI to CPI
134.At present, the Business Rates Multiplier increases each year in line with the Retail Price Index measure of inflation. The Business Rates Multiplier is applied to the rateable value of a property to calculate the Business Rates liability for a business using the property.
135.The Retail Price Index had its status as a National Statistic de-designated in March 2013.123 Paul Johnson has been publicly highly critical of the measure writing:
the RPI is plain wrong […] It has the rather unfortunate feature that if prices rise one month and then return to their original level the following month, the RPI will still show an increase in prices over the period […] it really is no good.124
136.The Government has already removed the link between RPI and the uprating of pensions, benefits and tax allowances, but continues to use RPI as an index for calculating the interest rate on student loans, the uprating of rail fares, Treasury Gilts, Air Passenger Duty, Vehicle Excise Duty and tobacco and alcohol duties.
137.The Committee welcomes the switch from RPI to CPI for the indexation of the Business Rates multiplier.
138.The RPI is no longer a National Statistic and its deficiencies are numerous. The Government has acknowledged that using the statistically-flawed RPI to uprate the Business Rates multiplier is unfair on businesses. Having acknowledged this, the Government should now discontinue the use of RPI for any indexation purpose where legally possible.
116 Business rates: the 2017 revaluation, Briefing Paper 07722, House of Commons Library, 23 November 2017
117 Department for Communities and Local Government, Business Rates Revaluation 2017: Consultation on the transitional arrangements for the 2017 business rates revaluation, September 2016, p. 6
118 Institute of Directors, Recommendations to HM Treasury for Budget 2017, January 2017
119 Commercial Valuers and Surveyors Limited, Small shops Vs E-tailers- which has won the Business Rates battle?, 20 January 2017
120 Woolway v Mazars (2015 UK SC53), 29 July 2015
121 Business rates: the 2017 revaluation, Briefing Paper 07722, House of Commons Library, 23 November 2017
122 HM Government, ‘Business Rates Relief’, accessed 17 January 2018
123 UK Statistics Authority, Assessment of compliance with the Code of Practice for Official Statistics: Assessment Report 246, March 2013
124 Institute for Fiscal Studies, Good luck to our latest measure of inflation, it’s the best of a bad bunch, 21 March 2017
19 January 2018