Business rates: how an existing system can address the increasingly challenging burden
This article first appeared on Property Week online on September 5 2019
Opinion piece by Duncan Lillie, Shelley Sandzer.
Two months ago, the Conservative Leadership election was in full swing, shining a light on issues that have seemingly been neglected for years. Business rates was one such policy area fought over during the campaign, acknowledged by the current governing party as requiring reform, with promises made in the 2017 manifesto to review the system.But while Boris Johnson only anecdotally sought to overhaul “crippling business rates”, it was his rival for the position who put forward a plan to “take 90% of businesses out of business rates”, at an estimated cost of £900m to The Treasury.
Despite some initial pro-business rhetoric, not many will have forgotten the newly appointed Prime Minister’s “f*** business” remark last year, and since July 24there has been a complete dilution of business rates messaging within government. It is also worth noting that Boris’ position is fragile, with a recent by-election and defection leaving the government without a working majority, calling into question whether he has the power, or hunger, to make much-needed changes to the rates system, with the threat of a general election looming. There is however some comfort in the decision to prorogue Parliament at this time, which can provide the opportunity to grab headlines with forward-thinking tax policy.
The call for change from within the business world is increasing in volume, with the Federation of Small Businesses and British Retail Consortium both pointing to onerous business rates as a key challenge for the industry.Current rateable values are based on the rental tone from April 2015, widely acknowledged to represent the top of the market, and in many locations across the UK these rents are not being replicated on subsequent lettings, rent reviews, and lease renewals. Rate bills represent a significant challenge to business, frequently cited by operators as the single most important cost for inhibiting cashflow and profitability. There may be relief systems in place for small businesses, and those that have witnessed the steepest rise in rates since 2017, but the issue remains that business rates simply do not reflect current economic conditions.
It may be argued that the economy, as things stand, is in such a state of turmoil that any re-evaluation of rateable values would only serve to overcompensate operators. What this fails to take into account is the structural changes in the licensed premises sector, as the impact of off-sales becoming more prevalent means venues now favour smaller units or moving out of high value rental areas entirely.
The sharp rise in appeals against rates bills provides a stark indication of how retailers feel about their valuation. The appeals process is itself also wildly troublesome, as operators can only challenge an assessment once the statutory period has passed on a material change of circumstance, normally limited to: new development in the area, new road closures or changes to access routes, change of use, or competition. In and of itself, a change in economic conditions will not be considered material in this valuation check.
The solution therefore is to move towards profit-based valuations, used to good effect for pubs and other licensed premises, where rateable value is calculated by expected annual trade should the business operate in a reasonably efficient manner, taking into account the type of premises, its location, and its offer. The rateable value applied following this calculation is also influenced by the Valuation Office Agency’s pub guide, and agreed with the British Beer & Pub Association (BBPA). In principle this approach could be adopted more widely, with the British Retail Consortium fulfilling the additional advisory role. Size and location are a strong signal of a site’s suitability for different types of operators, so it should be possible to predict a likely tenant and assess the volume of trade the site should deliver.
This level of change would require significant structural change within the rating system, to mirror the significant structural change taking place within the market. With other issues having completely dominated the political agenda, it remains to be seen whether such a modal shift can be delivered, or whether easier to produce, short-term tweaks can keep retailers happy. Although, adopting a positive stance, in order to appease the electorate this may well become an electoral pledge.