Summary
This report considers the administration of business rates in England and Wales. Business rates are handled differently in Scotland and Northern Ireland.
Business rates are a form of property tax charged on most non-domestic properties. They are calculated on the basis of a property’s ‘rateable value’, which is currently its open market rental value on 1 April 2015, as estimated by the Valuation Office Agency.
Since business rates were introduced in their current form in 1990, the revenue they have generated has outpaced inflation. They are also growing as a proportion of the total tax paid by businesses. In 2018–19, £31 billion of government income was raised through non-domestic property rates, one of the seven highest grossing taxes in the UK.
The Government needs to explain whether it is deliberate policy to allow the revenue generated by business rates to increase above the rate of inflation and to become an increasingly significant proportion of the total taxes borne by businesses. If these are deliberate policy decisions, the Government needs to explain the rationale behind their policy and what it is intended to achieve.
The incidence of business rates does not fall upon all businesses equally:
- methods of valuation applied to ostensibly similar businesses can lead to widely varying rates bills
- business rates place a far greater cost on businesses that need a physical presence to trade–such as high street shops–than those that can rely more upon an online presence.
Businesses can face a dilemma when spending money to improve their property because it can lead to a higher rates bill. This means that business rates can work against government policy to improve productivity, improve digital connectivity and encourage the use of more energy- efficient technology.
Because business rates are a property tax, rather than a tax based on profits, they take no account of whether a business is doing well or suffering from poor trading conditions.
Tweaking the current system of business rates through an increasingly complex web of reliefs does little to address the negative aspects of this tax and simply demonstrates how broken the system is. Given the changing nature of the economy, and with high streets on the decline, the Government needs to be curious, proactive and creative in exploring alternative options to such an important source of revenue.
Businesses deserve a system that is reactive to changes in the modern economy and fit for purpose. We considered alternative options to replace or reform the current system of business rates that were intended to address the negative impacts of business rates. However, further work was needed to fully model the proposals and provide the necessary evidence to support any recommendation. The Government should take a deeper and more holistic look at possible alternatives that would keep the benefits that business rates offer, being a secure and reliable source of revenue, whilst addressing the weaknesses. It should prepare a consultation in time for the next Spring Statement to identify potential alternatives to business rates with a view to subsequently carrying out a detailed evaluation of viable options.
Any reform of the system should have particular regard both to the need to maintain the total income for local authorities, and to keep the link between individual authorities and the current and potential new businesses in their areas.
While the Government considers deeper structural reform, there are improvements which should be made to the current system.
Business rates reliefs are intended to reduce the financial burden placed on businesses. But they are to some extent arbitrary, administered inconsistently and add complexity to a system that is already onerous. The proliferation of reliefs seen as necessary to make business rates work show the strain that the business rates system is under. Outdated or unneeded reliefs should be removed. Other reliefs should be improved; for example, transitional relief should be redesigned to ensure that, before the end of a rating list, businesses can complete the transition, upward or downward, to their correct rateable value.
The Valuation Office Agency needs to resolve a large caseload of open appeals relating to the 2010 listing. It also needs to provide a better service for businesses trying to use its Check Challenge Appeal process for current valuations. Check Challenge Appeal is a reasonable attempt by the Valuation Office Agency to address weaknesses in the previous appeal process. Its functionality has improved since it was first introduced. But further improvement and better guidance on using the system is needed.
The current statutory response times built in to the CCA process are excessive. The Government should reduce the statutory time limits for both Checks and Challenges to a more reasonable timeframe, preferably a maximum of six months each.
Processes for reaching agreed property valuations for business rates purposes need to be made more transparent so that businesses can progress their appeals faster and be assured that they are being treated fairly. The Valuation Office Agency must be more open with business about the evidence on which they base their valuations.
The Valuation Office Agency must ensure that it uses valuation methodologies that fairly reflect changing business practices.
While business rates in England and Wales continue in their current form, the Government needs to ensure that the Valuation Office Agency is properly resourced, particularly if its plan to carry out revaluations every three years, instead of five, is to be a success.
Published: 31 October 2019