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Understanding Business Rates: A Comprehensive Overview and Reform Perspectives

Business rates are an essential tax levied on non-residential properties, raising significant revenue, reported at £26.1 billion in 2012-13 alone. While crucial for local financing, they often face scrutiny for their impact on small businesses and property development due to outdated valuation methods and exemptions. Recent policy changes, including temporary relief measures for retail properties, reflect ongoing debates about fairness and effectiveness. This analysis explores the current system's challenges and potential reforms to create a more equitable and responsive taxation framework.

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Understanding Business Rates: A Comprehensive Overview and Reform Perspectives

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  1. Business rates Helen Miller

  2. A substantial but (usually) little discussed tax • Business rates are levied on non-residential properties, with some exemptions • Raise substantial revenue • 2012–13: £26.1 billion; 4.5% of total revenue • council tax: £26.3 billion; corporation tax: £40.4 billion

  3. Receipts from recurrent taxes on non-domestic immovable property as a share of national income, 2011 Source: Figure 11.3. , The IFS Green Budget 2014.

  4. A substantial but (usually) little discussed tax • Business rates are levied on non-residential properties, with some exemptions • Raise substantial revenue • 2012–13: £26.1 billion; 4.5% of total revenue • council tax: £26.3 billion; corporation tax: £40.4 billion • Revenues are high by international standards • Are not responsive to economic conditions • business rates revenue increased as share of all revenues since 2007

  5. Response to recent concerns David Cameron, January 2014: • business rates are “businesses’ – and particularly small businesses’ – number one complaint” • “I think we do need to look at longer-term reform” Ed Miliband, September 2013 • “[we propose] cutting small business rates when we come to office in 2015 and freezing them the next year”

  6. How business rates works Only 20% of properties have a rateable value above £25,000

  7. How business rates works Standard multiplier: 47.1% Rateable value of £30,000 implies £14,130 tax bill

  8. How business rates works Between revaluations: multipliers uprated in line with RPI At revaluation: multipliers adjusted so that average bill increases in line with RPI

  9. Problems with the business rates system • Discourages development and use of business property • taxing value of land (excluding buildings) would not do this • Rateable values move out of line with current rental values • could improve this by having more frequent revaluations • and/or by uprating rateable values to keep them as close as possible to current values - e.g. uprate in line with a local rental price index • Some types of property treated differently, with no clear justification

  10. Recent policy changes Two departures from normal process of adjusting bills: • Multipliers to be increased by 2% in 2014, rather than the 3.2% implied by the September 2013 RPI • giveaway mainly to property owners in the long run • Revaluation of rateable values due in 2015 delayed until 2017 • aim: prevent sharp changes in bills • likely effect: sharper changes in 2017 • largest losers: offices in London; offices in the West Midlands; offices & retail premises in the North • largest winners: offices in the East Midlands; retail premises in the East Midlands and London

  11. ‘Temporary’ doubling of small business rate relief

  12. ‘Temporary’ doubling of small business rate relief

  13. Temporary relief for retail properties • Discount of £1,000 for retail properties with a rateable value ≤£50,000 for 2014–15 & 2015–16 • 300,000 properties estimated to be eligible • Disadvantages to treating retail premises differently • Possible rationales: • bricks-and-mortar retailers face more competition from online rivals • (smaller) retailers bring benefits to wider society • If there are compelling arguments for the relief, why only temporary?

  14. Moves to localisation • Aim: incentivise local authorities to promote development, for example through the planning system • From April 2013, English LAs retain a share of receipts from new properties until 2020 • desire to equalise resources across LAs dampens incentives • Merit in the intention, but complicated design, with room for improving incentives • e.g. allow LAs to keep a fraction the revenue for a given number of years (five or ten, say) rather than until a given calendar date

  15. Conclusion • Business rates is a substantial tax, with room for reform • Options going forward: • return to a stable system • levy a simple percentage of up-to-date values • move to a land value tax • Coalition government’s package of business rate changes didn’t move in these directions

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