Rate Expectations: how can business rates better serve the sector?
Our webinar this week explored some of the key themes coming out of the Government’s consultation on business rates:
- how can we achieve more frequent revaluations;
- how can the system can better encourage investment in plant and buildings (particularly in the context of the net zero carbon agenda); and
- whether any of the alternative taxes merit further consideration.
Encouragingly, there seemed to be a lot of alignment on what the key challenges were and how we could address them – although whether they will be palatable to Government is another question.
How can we achieve more frequent revaluations?
The lack of frequency of valuations is at the heart of the challenges caused by business rates. This has been most pronounced in the retail sector – even before Covid-19, rents had fallen by almost 50% in some parts of the country, and yet rates bills have continued to go up in this time. This is putting further pressure on a sector which is going through significant changes – making it harder to invest in adapting and evolving their businesses to suit modern consumer preferences.
In addition to the lack of frequency of revaluations – the downwards transition relief mechanism is particularly egregious for those businesses whose premises have fallen in value – as it prevents the rateable values from reflecting this for several years after a revaluation. This runs completely counter to the whole purpose of a revaluation. If the 2023 revaluation is going to truly bring rates bills more into line with our post pandemic reality, downwards transition has to go.
Transparency of data was unanimously a key part of the solution for achieving more frequent revaluations – both from businesses to the Valuation Office Agency (VOA), but also from the VOA to ratepayers. While some commentators are calling for a publicly accessible database, there is some acknowledgement that this may not be appropriate for commercially sensitive data. In addition, there will need to be much greater investment in IT within the VOA – the systems and processes need to become more digital and automated - and while the VOA will continue to need traditional surveyors, they will need a new mix of capabilities, including IT professionals and data analysts.
How can the system better encourage investment in plant and buildings?
The decarbonisation of the built environment is one for the biggest challenges of our time – so it has been concerning to hear anecdotes of investors that have not put solar panels on their roofs because the business rates uplift would far outweigh any energy efficiency benefits. It is encouraging that the CBI and the Centre for Cities have both given this area some considerations in their upcoming reports – with consideration of what policy changes could address some of the barriers within the current system, or even incentivise property owners to improve the energy efficiency or their buildings.
We will be supporting a wider review of the plant and machinery regulations and welcome consideration of new incentives. From the perspective of investors and developers, the charges on empty units are particularly unhelpful for encouraging regeneration and new development – and simply reducing the tax rate (from just over 50%) would help make more investment viable.
Alternatives
The two pages of the consultation dedicated to an online sales tax and a capital values tax have probably garnered the most media attention of the entire consultation. It is an area that has divided opinion – which in part reflects that fact that it will not be easy to modernise the tax system to make it fit for a global and digtal economy. However, it also very difficult to come to a view on a proposition with very little detail – ordinarily you would expect both of these propositions to have a thorough consultation in their own right.
The online sales tax has been borne by the frustrations of physical retailers who have been paying business rates bills based on rateable values which are well in excess or market values for far too long. At the very least, the business rates system must reform to make sure that businesses pay tax based on current valuations – and for retail in particular, the VOA will need to give some consideration to how the growing number of turnover leases should be valued in the future.
What are the most urgent priorities?
By allowing rates to track market rents more closely and by reducing the tax rate, a number of the challenges with the existing system would fall away. However, these solutions are easier said than done, and will require significant investment from government – and substantial changes to way the VOA operates.
While we hope that government will announce these reforms in the Autumn, businesses can’t wait for them to be implemented. The government could make some impactful changes in the short term, notably:
- Abolish downwards transitional phasing;
- Provide certainty to business that when the business rates holiday falls away next April, there will continue to be some support with business rates for those businesses that are still impacted by the pandemic;
- Freeze the tax rate – even if it’s not possible to reduce it from the dizzying heights of 50% straight away, at the very least, stop increasing it.
