Impact of business rates on business Contents

Conclusions and recommendations

Overview of business rates as tax

1.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. (Paragraph 28)

2.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. (Paragraph 29)

3.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. (Paragraph 42)

4.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. (Paragraph 43)

5.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. (Paragraph 44)

Complexity of the current system

6.The number of reliefs that are needed for business rates to work indicate a broken system. Each additional relief adds a further layer of bureaucracy to an already complex system. HM Treasury should review all business rate reliefs to ensure that they remain necessary. We discuss later the extent to which business rates align with government policy to encourage investment. We note that the system of reliefs have a part to play in this. (Paragraph 51)

7.All 361 billing authorities have the autonomy to run their business rates system as they see fit. There is no obligation for billing authorities to help businesses understand the reliefs that they may be eligible for. There is no requirement for billing authorities to be consistent in whether reliefs are applied automatically or not. (Paragraph 59)

8.The Ministry for Housing, Communities and Local Government (MHCLG) should work with all billing authorities to create a single comprehensive guide on how business rate reliefs are operated by the individual billing authorities. This would result in consistency in approach by all billing authorities. It would also provide clarity for business on what discretionary reliefs they may be eligible for, and what steps must be taken to claim them. (Paragraph 60)

9.We recognise that transitional relief exists to minimise the movements in any particular year that result from changes in valuation, and that many businesses will have benefited from such relief. However, the decrease in open market rental valuations in the 2017 rating list needs to be reflected more quickly in rates bills for those businesses who are paying significantly higher rates than the open market rental value of their properties would normally determine. The current transitional relief system has kept rate bills artificially high over a prolonged period for many businesses. (Paragraph 69)

10.We recommend that transitional relief is redesigned to ensure that before the end of a rating list, businesses can complete the transition, upward or downward, to their correct rateable value. By the end of the rating list’s life, all business rates liabilities should represent the period’s rating list value, adjusted for inflation. This will mean that for the next rating list, there would not be any need for transitional relief related to the previous rating list’s values. (Paragraph 70)

11.The current approach to business rates acts as an immediate significant disincentive to investment. Such an approach contradicts wider government policies such as reducing the UK’s carbon emissions through investment in greener technologies or improving productivity. (Paragraph 82)

12.HM Treasury needs to revise the business rates system and implement change to support and encourage investment by businesses. When considering the reforms necessary to achieve these changes, HM Treasury may wish to consider lessons learnt by devolved nations when they have made similar adjustments to their business rates system. (Paragraph 83)

13.The Government needs to ensure that business rates align with its aim to boost productivity and do not undermine its intentions to encourage businesses to invest in energy efficient technologies and better data connectivity. (Paragraph 92)

14.The classes of plant and machinery that are included in the business rates calculation were last re-defined in 1993, when the UK economy operated very differently. Many modern businesses have moved away from being dependent on plant and machinery. It is therefore unfair on the manufacturing sector for their business rates valuation to include their essential operating equipment, where other businesses are not equally affected. (Paragraph 93)

15.The Government should look at where case law currently stands on what assets are included in rateable values and should consider whether legislation is required to ensure the categories are fit for the modern economy. If it is the Government’s stated aim to incentivise the transition to a green economy, it should be proactive in ensuring that businesses that invest in green assets such as solar panels or energy efficient machinery are not subjected to higher business rates as a result. (Paragraph 94)

16.HM Treasury must keep the definition of what is included in a rateable value up-to-date and ensure that that definition supports wider government targets to support business growth. (Paragraph 95)

17.The VOA’s previous appeals system needed to be replaced. It made it too easy for businesses to make speculative appeals and created an unsustainable workload for the VOA. (Paragraph 99)

18.It is unacceptable that there are still appeals outstanding from the 2010 listing, years after the appeals were first raised. The VOA must resolve these appeals as a matter of urgency. Such long delays bring the work of the VOA into disrepute and undermine trust in the UK tax system. No business should be waiting for over two years into the next rating list for their checks or challenges from the previous rating list to be resolved. (Paragraph 111)

19.The current statutory response times are too generous. No business should have to wait up to two and half years for their appeal to conclude. We recommend that the Government introduces new secondary legislation under Section 143 of the Local Government Finance Act 1988 to reduce the statutory limit for both Checks and Challenges to a more reasonable timeframe, preferably a maximum of six months each. (Paragraph 112)

20.The VOA considers the level of information it is providing to ratepayers is sufficiently transparent. However, the evidence we received from business ratepayers, across a variety of sectors, shows that many businesses do not agree. The VOA has a duty to maintain trust and confidence in its appeals process. Where there is a legislative block on providing a ratepayer with all relevant evidence used to establish a property valuation, the VOA must ensure the ratepayer understands the reasons why such evidence is being withheld. The VOA should also monitor and report to us annually how often it denies transparency requests. (Paragraph 122)

21.It is unacceptable to bring in a system that creates so many difficulties for ratepayers. The Check Challenge Appeal process should have been designed so that at its initial implementation in April 2017 it had more functionality than the system it was replacing. In particular, it should have been possible for businesses with multiple properties to authorise an agent to work on their behalf, as firms were able to do previously. (Paragraph 135)

22.Bringing a new system online with less functionality than its predecessor has eroded public confidence. Whilst the VOA has improved the functionality of the system for multi-site and larger businesses since Check Challenge Appeal was introduced, these issues were known about before implementation. They should have been addressed before the system went live. (Paragraph 136)

23.The overwhelming evidence is that the VOA’s systems do not work for ratepayers with multiple properties. There continues to be a disconnect between how the VOA and the users of the Check Challenge Appeal view its ease of use and complexity. The VOA must make sure that ratepayers with multiple properties are able to use its systems easily and that its systems are not creating unnecessary additional bureaucracy. (Paragraph 137)

24.HM Treasury should work closely with the VOA and HMRC to develop a timetable to migrate business rates onto the ‘Making Tax Digital’ platform. The migration needs to learn from the lessons of bringing Check Challenge Appeal online ensuring that there is no loss of functionality with the transition. (Paragraph143)

25.Moving to the ‘Making Tax Digital’ platform would give the VOA the opportunity to revisit the issue of user authentication and to improve the verification process, for example through alignment of business rates with VAT returns. There may also be scope for further authentication in future as other business taxes are brought into the system. (Paragraph 144)

26.Valuations do not always appear to use the most appropriate methodology or reflect changing business models. Businesses must be able to adapt to compete in the modern economy and good tax policy should be fair and coherent. The VOA must ensure that it is open-minded and prepared to revisit the traditional way that it values businesses to ensure that they take account of real-life modern business experience. We recommend that internal guidelines are reviewed to ensure staff take a flexible and responsive approach to valuation. (Paragraph 154)

27.It appears that the system permits significant discrepancies to exist in the valuations of seemingly similar businesses. We recommend that in its review of internal guidelines the VOA looks at how those discrepancies arise and whether there is scope to improve valuation methodologies so they lead to more consistent outcomes. (Paragraph 158)

28.Business rates need to be fair to all ratepayers, and where unfairness is perceived, action needs to be taken to address the concern. At present, there is a significant level of distrust of the VOA’s valuation techniques in some business sectors. When a ratepayer questions a valuation, VOA staff should explain clearly how their valuation complies with their own guidance, particularly when they have used the contractor’s valuation method. The VOA must also take appropriate action to put things right quickly when presented with evidence that their valuation is incorrect. (Paragraph 162)

Alternatives to the current system

29.A land-based tax is theoretically appealing as it charges landowners rather than tenants—although it cannot be known on whom the final incidence of the tax would fall—and incentivises the best possible use of land. However, the practicalities of implementation are very difficult. It is likely that there would be more appeals. There would be an enhanced level of technical judgement required, particularly in built up areas where there are very few sales to generate a reliable value and it is very difficult to separate the value of land from the value of the buildings that are situated on that land. Land value tax would incentivise high-density usage, and there could be instances where this would not be the desired outcome, such as green spaces. (Paragraph 169)

30.In response to this Report Treasury should research examples from other countries with Land Value Taxes such as Australia and Denmark. (Paragraph 170)

31.Businesses deserve a system that reacts to changes in the modern economy. A number of alternatives to the current business rates system were presented and an equal number of reasons presented as to why England and Wales are not yet ready to move to them. One of the key reasons is that there is insufficient modelling of the viable alternatives, and therefore insufficient data to make a recommendation for change currently. This is true of the online sales levy. (Paragraph 181)

32.At this time, there does not appear to be sufficient appetite from businesses or consumers to introduce an additional sales or profits-based tax. Based on current information, there is a risk that the introduction of such a tax could adversely affect some sectors of the population and some sectors within business. (Paragraph 190)

33.On its own, a single consolidated tax would not appear to present sufficient solutions to the issues being experienced by the current business rates system. Nonetheless a single consolidated tax would be simple, it is something that some small businesses want, and, if it was designed to be revenue neutral, could be a viable option in the future. (Paragraph 193)

34.A hybrid system is a potentially viable option in the future that would enable the Government to have a tax system that is more reactive to changes in the modern economy. However, to be assessed further it needs a comprehensive plan outlining how a hybrid tax could be constituted, and a blueprint for taking this idea further.(Paragraph 198)

35.It is clear change is needed to the current business rates system. None of the alternative systems presented to this inquiry have demonstrated that they are a clearly superior alternative. However, it should not be up to external stakeholders to develop and evaluate detailed proposals. 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 Government revenue. We recommend that the Government prepares a consultation in time for the next Spring Statement to identify potential alternatives to the current system of business rates and form the basis for a subsequent detailed evaluation of viable options. (Paragraph 199)

36.The primary considerations given the extended period of time this has been an issue, should be the ease and speed with which any potential reforms can be introduced and the fairness of the system. (Paragraph 200)


37.Reducing the gap between revaluations from five years to three years will increase the demands on the VOA. The VOA needs to ensure that it is properly staffed to deliver its specialist role. This includes sufficient resource to deliver the next valuation listing on time, to be able to respond to Checks and Challenges on the current system, and to be able to conclude appeals from the legacy systems and enhance functionality on the Check Challenge Appeal process simultaneously. The VOA must perform a detailed analysis of its staffing and skills requirement in time for the next Spending Review and share it with this Committee. (Paragraph 211)

Published: 31 October 2019