1Overview of business rates as a tax
7.Business rates are a significant source of revenue for the UK Government. In 2018–19, the OBR forecast that £31billion of government income would be raised through non-domestic property rates, one of the seven highest grossing taxes in the UK.1
Chart 1: Forecasted tax receipts for 2018–19 (£ billion)
Source: Office for Budget Responsibility2
8.Business rates policy is set by central government, whilst the administration of the system is carried out by local government. Generally, business rates are difficult for a business to avoid. Jesse Norman MP, the Financial Secretary to the Treasury, told us that “the [business rates] system collects 98 per cent of the tax that is due. Very few other taxes do that, anywhere in the world.” He went on to say that he noted that “there are undoubtedly concerns, which it is important to address.”3
9.At present, Local Authorities retain 50 per cent of their business rates income as standard, with some areas piloting increased rates of 75 or 100 per cent.
Box 1: Business rates pilots 2019–20
Source: Local Government Association and Ministry for Housing, Communities and Local Government4
10.The Local Government Association told us that the business rates systems raised a broadly similar amount to government grants to Local Authorities, excluding grants for schools.5
Box 2: How to calculate your business rates liability
Source: Treasury Committee
11.The system works by charging all non-domestic properties in England business rates. An individual building’s business rate liability is calculated by taking the market rental value of the property and multiplying it by the appropriate business rates multiplier (i.e. the Standard Multiplier or the Small Business Multiplier) to create the annual business rates liability. Once a liability has been calculated, any reliefs that the business is entitled to are deducted, leaving the organisation with a final rates bill.6
Rating lists
12.Responsibility for compiling and maintaining statutory rating lists of rateable values for non-domestic properties sits with the Valuation Office Agency (VOA). A rating list shows all non-domestic properties in a billing authority’s area with their rateable value and other relevant information. Under current legislation, valuations are meant to be performed every five years, but at the time of this report, legislation was going through Parliament to increase the frequency of revaluations.7
13.The VOA base their rating list on real data. To give the VOA time to collate the data required, and to discuss proposed values with businesses, there is a two-year time delay between the data used to generate a liability, and the date when the new valuations are implemented. For example, the underlying data for the current list brought into use in April 2017, are the market rental values of non-domestic properties as at 1 April 2015.
14.Instead of introducing a new rating list in 2015, the Government chose to delay until 2017.8 As a result, there is a seven-year gap between the current 2017 rating list and its predecessor in 2010.9 The 2010 rating list was based on rental values at 1 April 2008, which was when market valuations were peaking before the 2008 financial crisis.10 The valuation date for the 2017 rating list is 1 April 2015. The changing economic circumstances in the UK between April 2008 and April 2015 resulted in significant movement in the rental market valuations for some sectors and locations. The delay in creating a new rating list meant that some businesses had to pay a high level of business rates that did not reflect the downturn they had experienced in market conditions.
15.Jerry Schurder, Head of Business Rates at Gerald Eve, explained to the Committee that “one of the fundamental problems that we have with the system, and have had for many years, is the infrequency of revaluation.” He went on to say that one of the fundamental steps required to “make business rates fair again is far more frequent revaluations—far more frequent than even the three-yearly revaluations that the Government intend to introduce.”11
16.The CBI explained that regular revaluations are fundamental to long-term investment decisions. They told us that “for longer term investments requiring an in-depth business case significant variability around the expected business rates bill could result in these investments being deemed commercially unviable.”12
17.Whilst noting that moving to a three-yearly revaluation is better than a five-yearly revaluation, the data that is being used pre-dates the valuation period by two years. This is because valuations are based on the antecedent valuation date13 which is two-years before the valuation date. Therefore, at the end of a three-year valuation period, the valuations would be based on data from five years previously.
18.We asked the VOA why they needed the two-year gap between the antecedent valuation date and bringing the rating list in. They said:
The gap set out in the legislation enables us to collect the evidence in advance. There is a complex process to doing revals [ … ] There are often lags in the property market, depending on when the deal is done. Rent renewal or lease renewal might have a date of, say, 1 April, but the two surveyors involved in agreeing that deal might not agree that rent for nine or 10 months afterwards. The antecedent valuation date gives us the best possible window to gather all the available evidence.14
19.We asked the VOA what could be done to reduce the two-year gap. They responded:
The process for each revaluation is normally around three years. We will be starting by 2024, which sounds like a long time away, but probably isn’t. It is sooner than we would have done previously, and it will require us to work differently.15
20.Gerald Eve told us that the VOA should be targeting bringing down the gap between the antecedent valuation date to the listing from two years to one year, which would then allow for annual revaluations. They explained that:
Much of the need for the current two year AVD16 gap is because of the government’s need to model the potential outcome of the revaluation and consult upon alternative transitional relief schemes. With annual rating revaluations it would be possible to dispense with any need for transitional arrangements.17
21.The call for a move to annual revaluation is echoed by organisations18 like the Association of Accounting Technicians, a professional accountancy body, which cited countries like Hong Kong and Holland which operate annual revaluations. They told us that the “AAT welcomed the recent commitment to revaluations every three years but would still very much like to see this progressed to annual revaluations to provide increased certainty and accuracy.”19
22.London First, an employers’ campaigning organisation in London, said they believe annual revaluations are possible. They said that they “believe that improvements in technology and a move towards self-assessment, as is the case in Northern Ireland, will make annual revaluation possible in the near future.”20
23.In Chapter 4 of this report we consider what moving to more regular valuations would mean for the staffing and resources of the Valuation Office Agency.
Inflation
24.The increase in government revenues generated by business rates has outpaced inflation since business rates were introduced in their current form in 1990. Since its introduction, business rates receipts have increased from £8.8 billion in 1990 to £27.3 billion in 2017–18, an increase of 210 per cent. Had business rates revenue grown in line with inflation using the Treasury’s deflator series, rates should have only increased by approximately 75 per cent. See Chart 2.
25.When we asked Jesse Norman MP, Financial Secretary to the Treasury, why this increase had occurred he said the increase was not much different to inflation:
If you gross up £10 billion over 29 years by 2 per cent per cent to 3 per cent—that is what we are talking about, if we are talking about long-term interest rates or inflation—you can get into the order of £20 billion to £25 billion, so I do not accept that it has changed enormously.21
26.We disagree with this view. The evidence we have seen shows that business rate growth has significantly outpaced inflation since the current system was introduced in 1990.
Chart 2: Total Business Rates Revenue collected versus hypothetical rate of collection taking inflation into account (£ billion)
Source: Treasury Committee
27.A number of factors have contributed to the growth in revenue generated by business rates. For example, one of the drivers behind business rates growth outpacing inflation is the increase in the number of properties that are subject to business rates, which are referred to as ‘hereditaments’. Between 2000–01 and 2018–19, the number of hereditaments increased by 19 per cent.22
Chart 3: Growth in hereditaments since 2000–01
Source: Treasury Committee
28.The growth in business rate revenue has outpaced inflation since the current system was introduced in 1990. Whilst noting that other factors have contributed to the variance, the Government should acknowledge that there has been an above inflation increase in commercial property-based taxation since its introduction in 1990 and that the revenue generated by business rates has grown as a proportion of GDP. We note below the effect that the timing of the release of the 2017 rating list and increases in the multiplier have had on increasing the level of business rates paid by business.
29.In response to this report, the Government should explain whether it is government policy to allow the growth in business rates to outpace inflation. This is a crucial question which also requires further consideration by the Committee. This will include the consideration of the impact of reliefs.
30.The multiplier is the percentage that is applied to a property’s rateable value to establish a business rates liability. There are two multipliers that can be used: the standard multiplier or the small business multiplier. To be eligible for the small business multiplier, a property’s rateable value must be below £18,000, or £25,500 in Greater London.23
31.The standard multiplier in its current form has existed since 1990–91. It was initially introduced at a rate of 34.8p in the pound, or 34.8 per cent of the rateable value of a property. Since then, the standard multiplier has increased to 50.4p.24 Over the same period, VAT has increased from 15 per cent to 20 per cent,25 and corporation tax has decreased from 34 per cent26 to 19 per cent and is set to fall further to 17 per cent from 1 April 2020.27
32.Concerns were raised by organisations like the Altus Group, a provider of independent advisory services, software and data solutions to the global commercial real estate industry, that the resultant business rates liability presents a “disproportionate burden on bricks-and-mortar businesses”.28 These organisations told us that business rates are considered to be a burden mainly because of the size of the multiplier and some called for the multiplier to be reduced to a more manageable level.29
33.The earlier delay in updating the 2010 rating list to reflect changing market conditions mentioned earlier in this chapter and the increase in the size of the multiplier have both contributed to businesses having to bear unfair and additional costs. In the next section we look at how this has led to business rates becoming an increasingly significant component of the total tax paid by businesses.
Business taxation
Chart 4: Rates of main business taxes since 1990–91
Source: Treasury Committee
34.Blake Penfold, a consultancy that specialises in business rates, suggested that the current level of business rates may adversely affect the UK’s ability to be competitive. They told us that:
A comparison with competing economies makes clear the very high level of property taxes in the UK. OECD30 and other figures show that the UK has the highest level of recurrent property taxes (measured as a proportion of GDP) of any OECD country (4.1 per cent in the UK in comparison with the average for OECD countries of 1.9 per cent) and as a proportion of total taxes (12.6 per cent in the UK in comparison with the average for OECD countries of 5.6 per cent). This puts UK businesses at a significant competitive disadvantage in comparison with countries both in Europe and the rest of the world.31
35.The CBI, a not-for-profit membership organisation representing British Industry, told us that the UK has the highest property taxes across the G7 as a proportion of GDP.32
Chart 5: Annual property taxes across the G7
Source: CBI33
36.This compares to the UK having the third lowest corporate tax rate in the OECD at 19 per cent,34 and a VAT rate consistent with other countries in the OECD.35
37.Jerry Schurder, Head of Business Rates of Gerald Eve LLP, an international property consultancy firm, gave an example of how this approach to corporate taxation may adversely affect the attractiveness of the UK for future investment. He said that:
Vauxhall UK did research in relation to all the local property taxes it pays across Europe. The UK occupies 8 per cent of its total floor space in Europe, but accounts for 67 per cent of the property taxes that it pays across Europe. That is the extent to which our system overtaxes all businesses. It is not just retail, although clearly there is an emphasis and focus on it.36
38.Several organisations37 submitted written evidence stating that business rates were out of kilter with other business taxes and called for the multiplier to be reduced or frozen. Jerry Schurder summed this up by saying:
Many businesses say, “I would be delighted to pay corporation tax, but I can’t make any money.” Business rates are one of the factors that get in the way.38
39.When we asked Mike Williams, Director Business and International Tax at HM Treasury, for his view on whether the multiplier was now set too high, and whether this created distortions in the market, he said that the overall level of taxation on business between countries balanced out:
If you go back 30 years, we had relatively high annual business property taxes, and we have continued to have relatively high ones. I don’t think there has been any manipulation of the multiplier to add to that amount, to give extra to local government, for example. If you charge more on property tax, compared with say, France, you charge less on consumption and profits; it is broadly the same cake.39
40.The point at which a tax is levied does have an impact on its perceived fairness. The Institute of Directors told us that they consider business rates to be “ a regressive tax–given that it is not linked to a firm’s profitability or revenue.”40
41.The Clubhouse, a flexible workspace provider, put forward a suggested approach which they estimated would be revenue neutral. They proposed cancelling the forthcoming reduction in the corporation tax rate from 19 per cent to 17 per cent and reducing the business rates multiplier instead. Their analysis indicates that “almost one fifth of the annual Business Rates burden could be alleviated by keeping Corporation Tax at 19 per cent.”41
42.The increase in the tax rate of business rates appears to be inconsistent when compared to the UK’s other corporate tax rates which are falling. The business rates multiplier has continued to increase over time, resulting in the UK having one of the highest property-based taxes in the OECD as a proportion of GDP.
43.We would like the Government to set out its views on the fact that business rates provides one of the highest property tax takes in the OECD. In its response the Government should address the impact that the level of business rates has on the attractiveness of the UK as a destination for investment. It should also address the impact on business directly; in this respect we note, in particular, that profitability or cash flow is not a factor in determining business rates liability.
44.Business rates have become an increasingly significant proportion of the total taxes borne by business. In response to this report HM Treasury must explain whether it is deliberate government policy to rebalance business taxes in this way and, if so, what this policy decision is intended to achieve.
1 Office for Budget Responsibility, ‘Economic and fiscal outlook - March 2019’
2 Office for Budget Responsibility, ‘Economic and fiscal outlook - March 2019’
4 Local Government Association and Ministry of Housing, Communities and Local Government, ‘Business rates retention’, accessed 23 August 2019
6 Gov.uk, ‘Estimate your business rates’, accessed 9 July 2019
7 Parliament website, ‘Non-Domestic Rating (Lists) Bill 2017–19’, accessed 28 October 2019 - The 2019 Autumn Prorogation meant that this Bill would make no further progress.
8 HC Deb, 12 Nov 2012 : Column 1WS
9 HC Deb, 12 Nov 2012 : Column 1WS
10 HC Deb, 12 Nov 2012 : Column 1WS
13 The antecedent valuation date is the date set by Parliament on which all valuations are based. This is normally set exactly two years prior to the date on which the valuation list comes into force.
16 AVD - Antecedent Valuation Date
18 Other organisations calling for annual revaluations include: All-Party Parliamentary Group on Land Value Capture (IBR0034); Energy and Utilities Alliance (IBR0029); London First (IBR0044); and River Island Clothing Company Ltd ( For and on behalf of the Retailers Rates Action Group) (IBR0032).
22 Valuation Office Agency, Non Domestic Rates Stock of Properties - Table SOP3.0, July 2019
23 Gov.uk, ‘Estimate your business rates’, accessed 29 August 2019
24 Southampton City Council website, ‘Business rates multipliers’, accessed 28 October 2019
25 Institute for Fiscal Studies, ‘Fiscal facts: tax and benefits’, accessed 28 October 2019
26 Institute for Fiscal Studies, ‘Fiscal facts: tax and benefits’, accessed 28 October 2019
27 HMRC gov.uk, ‘Rates and allowances: Corporation Tax’, accessed 28 October 2019
29 Organisations calling for a reduction in the multiplier include: Accessible Retail (IBR0038), British Retail Consortium (IBR0057), Institute of Revenues, Rating and Valuation (IBR0109), intu properties plc (IBR0035), Love Wimbledon BID Ltd (IBR0037), The National Trust (IBR0048), and Virgin Media Limited (IBR0113)
30 OECD - Organisation for Economic Co-operation and Development
34 OECD, ‘Tax policy reforms 2018: OECD and selected partner economies’, accessed 24 July 2019
35 OECD, ‘Tax policy reforms 2018: OECD and selected partner economies’, accessed 24 July 2019
37 Organisations include: Blake Penfold (IBR0027); British Retail Consortium (IBR0057), The Clubhouse London Limited (IBR0063); GL Hearn Limited (IBR0062); North East Lincolnshire Council (IBR0052), Royal Institution of Chartered Surveyors (IBR0075); Save UK Pubs (IBR0118), UK Cinema Association (IBR0086); Walgreens Boots Alliance (IBR0120), and Woodhaven Trust (IBR0043).
Published: 31 October 2019