Why are so many commentators currently getting hot and bothered about Business Rates? With bills now landing on doorsteps showing some massive changes and the Budget providing a chance to smooth ruffled feathers, here’s a beginner’s guide to Business Rates and the winners and losers from current changes.
Preparing this blog has revealed to me how hard it is to keep things simple, stick solely to facts or not drop my own jaw occasionally in surprise. Your comments, clarification and consternation are welcomed!
What are Business Rates?
Every five years (normally!) the underlying value of properties is assessed to determine their “rateable value”. That figure broadly represents the yearly rent – the rentable value – for which the property could be let. But the underlying property values that are used are always from two years previously. The rateable value is then combined with the “multiplier” – a figure set by the government each year – to determine the final bill. In England the general multiplier in 2016 was 49.7p in the pound. Crucially, the multiplier is set to ensure that the total amount collected in Business Rates remains the same, making it “revenue neutral” for government –but not for businesses!
Are they a significant cost?
Yes! Around 1.8m commercial properties are eligible to pay Business Rates in the UK and for 2016 the total Business Rates payable was estimated as £27.8bn by the Office of Budge Responsibility. Business Rates are reportedly the third biggest outgoing for many small businesses after rent and staff costs.
Simple enough so far?
What is different this time?
The revaluation coming into effect on April 1st 2017 is two years late and is based on rentable values from 2015. Shifts in property values since the 2008 baseline have seen rents rising strongly in many parts of London and the South East but falling steeply in some less prosperous regions. This means there will be some dramatic changes to Business Rates bills.
Is the ‘High Street’ a special case?
Representatives of retailers say ‘yes’ even though they have been one of the loudest voices calling for the revaluation to happen! Much of the reasoning is that sudden changes will hit already vulnerable businesses and could compound existing disparities by region and sector.
According to figures Colliers International quoted recently in the Guardian, around 324 retail centres across Britain will see a decrease in Business Rates; 21 will pay the same amount; and 76, mostly in London and the South East, are likely to see increases.
So, if you’re based in locations such as East London that have become fashionable since 2008, prepare for local shock-waves as the Business Rates bills gets opened. In contrast, if you are away from the South East in somewhere with a struggling High Street, there could be a silver lining to the cloud of town centre decline. In Suffolk, Lowestoft may get reductions of 41% and in Yorkshire, Redcar may see 38% cuts.
According to figures quoted in the Daily Mail, Britain’s out-of-town supermarkets are in line for a £200million business rate cut as they benefit from a 1.7 per cent reduction.
Does this compound any North-South divide?
Some have argued that this phased change amounts to struggling businesses in the North continuing to subsidise businesses that are thriving in the South, even though they have already waited for an extra two years for the revaluation. Others conclude that nationals will see increases in the South balanced out by decreases elsewhere whereas Home Counties’ independent businesses will be under enormous new pressure.
It’s perhaps more appropriate to think in terms of a North, East and West-South divide!
Are there differences in Wales?
Yes! Business Rates were fully devolved to Wales in 2015. Revenue from business rates now remains in Wales, although there is no local retention by councils. It is redistributed amongst Welsh local authorities by the National Assembly. The Assembly sets the multiplier and in 2016 this was 48.6p . The Welsh Government has announced that Business Rates will be reviewed in the summer of 2017, with the intention to reform the tax for the 2018-19 financial year.
A chance lost to level playing fields?
One of the big criticisms of the Business Rate system previously has been the way it apparently favours on-line retail over businesses investing in a physical presence on the ‘High Street’. That is because rates also vary according to the sector in which the business is operating, e.g. factories and shop floors have a higher rateable value than stock rooms.
The revaluation seems to have at best ducked this bullet, however. Take for example the comparison between bookshops and Amazon: The bill for Waterstones will increase from April by £2m, equivalent to a fifth of last year’s £9.8m profit. In contrast according to calculations by experts CVS, Amazon’s warehouse bill will fall slightly.
Other online retailers such as Asos’s warehouse in Barnsley will see no change in rates, and Boohoo, the online fashion retailer, will benefit from a 13 per cent fall in rates on its Burnley facility.
Are there other unhealthy side effects?
This is the bit that made my jaw drop!
Hands-up, who knew hospitals pay Business Rates?! Well not only do they receive bills but NHS hospitals and GP surgeries in England and Wales reportedly face a £635 million hike in their Business Rates over the next five years, equivalent to an average rise of a third by 2021. As a result more than 150 health authorities are joining forces and threatening to mount a major test case against a local authority unless they are granted an exemption or rebate.
Will the changes be eased in?
Yes, partly. The government is providing a transitional arrangement to help companies adapt and in the first year this will apply to over 600,000 properties, according to the Government. So businesses facing higher rates will see their bills go up in steps over the next five years and businesses that are set to benefit from lower property valuations see bills gradually fall. Critics say this is a blunt tool because of the extreme nature of changes this time.
What other help do businesses get?
All businesses with properties that have a rateable value over £12,000 have to pay Business Rates. There are, however, systems already in place to help businesses, particularly small ones. From April 2017 these are:
- Properties with a rateable value of £12-15,000 will get some tapered relief.
- Business where the local population is below 3,000 can get between 50-100% off their rates.
- Charities and sports clubs get up to 80% rate relief. Empty, newly occupied properties and businesses in ‘enterprise zones’ can also apply for relief.
What was new in the 2017 budget?
The Chancellor announced three new concessions aimed at reducing the impacts of Business Rate revaluation on small businesses and pubs:
- Any business coming out of Small Business Rate Relief will benefit from an additional cap that will restrict any bill increase next year by more than £50 a month. Subsequent increases will be capped at either the transitional relief cap or £50 a month, whichever is higher.
- £1,000 discount on business rates bills in 2017 will apply for all pubs with a Rateable Value of less than £100,000 (although there is a question mark over whether this applies if more than 1 pub is in the same ownership.
- Local Councils will be given access to £300 million fund to deliver discretionary relief targeted at individual hard cases in their local areas.
Overall it is calculated that this extra relief will cost the government £435m, although arguably it is other businesses who are footing this bill too. Forecasts for Business Rate income show a projected rise from £28.bn this year to £29.6bn for 207-18 and £33.7bn by 2021-22.
There was no mention in the Chancellor’s speech about a much-heralded ‘major review’ of business rates. Watch this space for further updates.
Will there be an impact on local council budgets?
This is where other changes are adding further complications!
At the moment, English authorities keep hold of 50% of locally-collected Business Rates. The other half goes into a central government pool and is redistributed back to the local authorities according to need. In Scotland, Wales and Northern Ireland, the same happens at a devolved level.
Regions which see their rateable values plummet should continue to get top-ups from central government in the form of revenue support grants and a system of tariffs imposed on rich authorities to benefit the poorer ones.
But big changes are ahead. The government is working towards allowing local authorities in England to keep 100% of Business Rates. This leaves the local councils with complicated budget planning dependent on central government formulas that allow for regional and local disparities in terms of existing economies, revaluation and likely future growth. The case for local retention of Business Rates is that it increases the incentives and rewards for local economic growth.
How will revaluation impact on BIDs?
A Business Improvement District (or BID) is a defined area in which a levy is charged on all business rate payers in addition to the business rates bill. This levy is used to develop projects which will benefit businesses in the local area.
Usually BIDs charge a levy rate of between 1% and 2% of rateable value, i.e. before the multiplier is applied. This annual levy is normally fixed for a period of five years and will currently be based on the 2010 calculations.
As such our understanding is that levy payments made to BIDs will not be immediately affected by the 2017 revaluation unless they are facing a new ballot of members where a revised rate can be fixed. Indirectly though it is easy to forecast tension where a business with a reduced Business Rate Bill (typically on a Northern High Street), will not immediately see a parallel reduction in its BID levy. Conversely a London-based business with facing increased Business Rates, will be temporarily protected from increases in any BID levy due.
Who will ultimately pay?
This is the bit where I get confused beyond a suspicion that the customer will ultimately pay towards rising Business Rates but will not necessarily feel the benefit of reductions.
Some economists think it will ultimately be landlords that take the hit from rising Business Rates through what they call the “incidence” of a tax. The theory is that if Business Rates rise or fall by a small amount businesses aren’t likely to face different costs, just correspondingly higher or lower rents over time. So it’s the landlords who lose out as a result of Business Rates. According to Regeneris consultancy and the London School of Economic, over a period of two to three years, three quarters of the change in Business Rates is ‘capitalised’ ,or accounted for, in rents. Of course, retailers who own their own properties will be impacted upon though arguably they have been protected from any rent rises.
In what other ways are the revisions unappealing?
Aside from the size of the bills, businesses are complaining that the Government is not transparent enough in its calculations and that appeals can take a long time. Figures published by the Telegraph revealed that a third of businesses appealed against their rates bill between 2010 and 2015. To counter this trend the Government is looking to introduce an upfront free for lodging an appeal, and impose fines for businesses that appeal based on a misunderstanding of the rules.
Otherwise is everyone happy?
And if you think all this change is confusing, brace yourself for continued debate around wider reforms. Organisations such as the British Retail Consortium and Institute of Directors consider the current changes as no more than meddling at the margins. Both call for much fundamental reform of the system in a way that rewards investment including in bricks and mortar alongside the growth of self-employment and online business.
Even the big supermarkets are backing such calls. Mike Coupe, chief executive at J Sainsbury, points out that the company’s rates bill is far higher than its corporation tax bill and close to equalling its entire profits. “Business Rates reduce the incentive to invest… areas which need investment will continue to be marginalised,” he has commented, pointing to the example of supermarkets investing in convenience shops in the South East rather than opening more superstores in the North.
Comment, clarification and consternation welcome!
Hopefully this beginner’s guide to Business Rates has provided a good overview of the system at this key time. It’s helped me in writing it! My plan is to keep it up-date-to-date through regular revisions and so your comments, clarification and occasional consternation is welcome!
Recommended read
For further clarity read this newly published House of Commons Briefing Paper on Business Rates from our Recommended Reads.
