Are there Alternatives to Business Rates?

21st August, 2019

The notion of taxing the occupation of property historically arose in the late Tudor period, at first as a way of raising money for the poor, but has been with us in various guises since. Local parishes would make lists of property and occupiers to be taxed. Ever since, a tax on property has been a favoured way of raising money by governments and policy makers as it offers certainty of collection and is perceived, rightly or wrongly, as equitable, as it is based on property value and therefore, in theory, ability to pay.

From early Victorian times, rates were based on the annual value of property or in other words its rental value. In 1990, domestic property tax was changed to be based on the capital value of property, becoming known as the Community Charge or Council Tax. 

Non-domestic property continues to be taxed based on the annual value of property via business rates. Every property that is not domestic, agricultural or religious is placed on the national rating list and given a rateable value which is the annual rental value of the property. The list is maintained by the Valuation Office Agency and re-valued periodically so the values are up to date. The last re-valuation was in 2017 and the next is due in 2021 and is based on actual values 2 years before the re-valuation date.

Rates are payable by the property occupier and the amount paid is not the rateable value itself but a proportion of it, currently around 50p of each pound of rateable value, set by central government and collected by local government. Over the years, many reliefs have been introduced for charities, small businesses, rural properties and recently retail properties. Transitional relief applies to property affected by large increases or reductions in rateable value after a re-valuation so ratepayers don’t suffer large sudden increases in rates bills but equally they don’t benefit from the reductions that the new status of the property deserves.

Fiddling with the taxation over the years has produced a more bureaucratic system, many unintended consequences and inequities and moved away from the principle of having a wide tax base in which everyone pays something. A small business occupying a property with rateable value of £15,000 will potentially pay around £7,500 in rates but one in a property with a rateable value of £12,000 pays nothing.

Rateable values should reflect changing trends and markets and as one area prospers, rents and rateable values go up, while another declines, rents and rateable values go down. However, rates are slow to react to changing market conditions, due to the length of time between valuations, coupled with the fact they are based on values 2 years before a revaluation and the rental evidence on which the rates are based is sometimes slow to respond to changing markets. Rateable values are, therefore, often out of kilter with the current market in a particular sector or location. 

Although the government can continue offering ad hoc discounts and reliefs, it is an unsatisfactory and complicated way to operate a tax with many businesses not understanding how their bill is calculated.  

What are the alternatives? 

Abolition of business rates altogether. The tax raises about £23 billion for the treasury and the tax burden would have to be transferred either to corporation tax or spread across a range of other taxes. It may be fairer to tax the ability to pay via profits rather than property occupation but from the government’s point of view this lends more opportunity for evasion. Business rates cannot be avoided and provides tax certainty.

Rateable values are complicated to calculate requiring each square metre of each building to be recorded and valued (pubs and hotels aside). Could there be a better way of calculating rateable values which is less intricate and fairer? Perhaps based on just the land area of the property? But then what about multi-storey buildings and tenants occupying the fifth floor? Or based on the overall size of the buildings occupied rather than applying separate figures to different areas. The fact is, if rateable values are to be based on the rental value of a property, the only way to calculate the value of each property is the way a professional valuation would be carried out.

Another option could be to band rates in the same way as Council Tax which would enable the amount paid to be grouped and equitable to all occupiers with similar value properties. The requirement for such accuracy in calculating rateable values would no longer exist although ratepayers on the margins of bands would be even keener to appeal to try and drop down a band.

Alternatively, the rates payable could be based on a combination of turnover and rateable value but, of course, turnover is not an indication of profitability. Although certain specialist trading properties do have their rateable value based on turnover, where profit margin is fairly consistent across a particular sector, shops in a high street for instance have a vast range of profit margin to turnover.

On balance, if property is to be taxed as part of a holistic taxation system, the current rating lists should be retained. However, the rate in the pound could be more flexible with different rates applied for different types of property and levels of value which is fair to all ratepayers. This may entail small businesses paying something rather than nothing, retail and medium sized businesses paying less and online warehouse businesses more and perhaps more of the tax burden could be shifted to Corporation Tax.

It is doubtful if any policy in this area will be fair to all but the important thing is that businesses are encouraged to grow and develop and marginally viable businesses do not suffocate and perish because of unreasonable and inequitable tax demands. The question of whether there are alternatives to business rates is yes there are but the system of taxing property on its value will probably remain but does need serious modification.