Is it time to re-evaluate business rates?

Looking at how business rates can be reformed and re-evaluated.

A number of voices in the business community have been calling for an overhaul of business rates for some time due to the perceived unfairness of the system. The need for reform has now been magnified by the economic disruption caused by the coronavirus (COVID-19) pandemic. In response, the clamour for the government to act from business groups, including the Institute of Chartered Accountants in England and Wales (ICAEW) and the Confederation of British Industry (CBI), has become louder. Here, we take a look at business rates and consider some of the options for fairer, better solutions to support businesses.

Critics acknowledge that business rates are and should remain an important source of revenue across the UK, for both central and local authorities. However, the government has recognised the need for reform by launching a fundamental review and a subsequent call for evidence.

Unfairness and uncertainty

Many of the problems businesses face with rates are caused by a lack of information about the calculation of rateable values, which only serves to highlight the perceived unfairness of the system. This in turn is exacerbated by the lack of certainty around how much businesses need to pay.

In addition, although the government is committed to completing revaluations every three years, more timely data would maintain a more accurate valuation. These problems mean that a fundamental rethink of property and business tax is needed in order to find a long-term solution.

According to the ICAEW, better use of technology and more transparency could help to address some of the unfairness within the business rates system.

The cost to business

Business rates aim to provide revenue for local government and are a combination of business tax and property tax. According to data published by the ICAEW, business rates generated £30 billion in tax revenue across the UK during the 2018/19 financial year. However, the business rates holiday introduced to support organisations through the COVID-19 pandemic is estimated to result in foregone revenues of £10 billion.

In addition, a report issued by the CBI showed that the burden of business rates in England – at nearly 50p in the pound – will continue to climb without reform. The analysis revealed that this could cost businesses at least an extra £6 billion over the next five years.

Critics of business rates say the current system means they fail to reflect either property values or business activity accurately.

The call for change

The growing consensus that the current business rates system is out-of-date and unsustainable has only been magnified by the strain businesses have been under during the COVID-19 pandemic, further fuelling the calls for change.

The ICAEW says there must be a clearer link with current market values. It says better use of technology could provide a better link between market rents and business rates. It also says that the roll-out of digital tax systems should make it possible to enable more timely maintenance of valuations.

Furthermore, the ICAEW suggests that the government investigates whether the Valuation Office Agency could share more details about assessments, including how a valuation was calculated.

In addition, the CBI has set out a package of measures for England, which it says would save business £21.8 billion over the next five years.

It says the government should delay the next valuation date until 1st October 2021, shortening the valuation period to 18 months. This would ensure bills reflect the current economic situation and the property market in a post COVID-19 world. Also, the CBI says subsequent revaluations should consider reducing this period to 12 months. 

The CBI proposes that the government should also remove transitional arrangements for properties whose rateable value decreases following a revaluation. The business rates bill of those properties reflects the true rateable value, while upwards transitional relief should be maintained to allow a smooth transition to a new higher business rates bill for those properties.

Supporters of these changes say that without them business rates will continue to rise, sinking many investment plans, hitting bottom lines and inadvertently growing inequality between England's richest and poorest areas.

To prevent this the current government review must be the catalyst for a system that is fairer, encourages investment and supports the levelling up agenda.

Although the CBI has focussed on England in its measures the case for reform to business rates applies across the UK.

How we can help

Business rates affect businesses of all sizes. As your accountants, we can help you plan your tax payments as efficiently as possible. Please contact us for further advice.