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Business rates multiplier reform is needed to save economy

Tax experts have urged the government to cut the business rates multiplier ahead of wider reform of the system or risk derailing the economic recovery.

30th Sep 2020
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Covid-19 maintain social distance sign on UK shopping street

HM Treasury’s call for evidence on business rates has elicited a strong response from industry bodies including the ICAEW, along with retail, leisure, hospitality and property associations.

The government announced at the 2020 Budget in March that it would conduct a review of the business taxation system in England, and it is first considering the business rates multiplier and reliefs.

After the coronavirus pandemic struck, business rates for retail, hospitality and leisure businesses in England were halted for the current 2020/21 financial year, but there is no plan to further extend the relief.

“Urgent action is needed before the business rates holiday for retail, hospitality and leisure ends in April 2021,” the ICAEW Tax Faculty said in its response. “In the current situation many businesses will fail when faced with inflexible rates bills.”

The ICAEW said 2021 bills will be based on historical values “that do not reflect economic conditions for the rapid shift to online we have seen since the lockdown started”.

Business rates are a tax paid by UK businesses on the property they occupy, and are also paid by other occupants of non-domestic properties, including fire departments and utility companies. The tax is based on an estimate of the rentable value of the premises, as calculated by the Valuations Office Agency.

The government sets the business rates multipliers for each financial year, and generally, the multipliers increase in line with inflation according to the Retail Price Index (RPI) in September of the preceding year.

However, competition from online businesses is reducing the benefits of physical premises, while businesses have long complained the existing system for assessing business rates is complex, costly and not fit for purpose.

In the short-term, the ICAEW said there is a strong case for a significant reduction in the multiplier, as currently at more than 50p for each £1 of rateable value is “simply too high”.

“The multiplier started at 34.8p in 1990 and it’s now time to reverse the trend,” the ICAEW said. “Reducing the liability is a simple and relatively fair way that the government can preserve the core revenue base, while giving time to properly consider further reform of business tax.”

The government is currently considering various stimulus packages to prop up the economy and several troubled sectors in response to the continuing coronavirus crisis.

Fresh restrictions have been imposed on the retail and hospitality sectors in the form of curfews and guidance for workers to stay away from city centres, drawing criticism from those in the sector who have pleaded for further help. The end of the furlough scheme in October will also leave hundreds of thousands of businesses at risk of collapse, lobby groups have said.

Alterations to the multiplier would be a quick fix, experts said, providing immediate relief and support to those high street businesses who are disproportionately struck by the Covid-driven constraints on footfall as they enter the busiest period of the year.

Save the High Street

Retail property body Revo has also called for the business rates multiplier to be fixed at 30%, down from 51%, at the 2023 revaluation, stating the cut would help retailers save over £3bn each year.

It said the current business rates holiday should be continued for the 2021 to 2022 financial year at 50% and retained the following year ahead of the next revaluation. It also wants the freeze to be extended to empty retail properties.

“Successive governments have failed to deliver on promises to reform business rates, and given the crisis engulfing the high street it really is a case of now or never,” Revo chief executive Vivienne King said. “For a decade our sector has been calling for reform of the system which does not reflect today’s economy, cannot adjust quickly enough to market conditions and places a disproportionate burden on physical retail, which sustains millions of UK jobs and is the heart of town and cities.”

King said radical action was needed “to save the High Street for future generations”.

London mayor Sadiq Khan said the government is listening after he also made a plea to extend the business rates holiday for another year.

Khan has joined with local councils in London in a joint submission to request an extension to the 2021/22 financial year.

“The indication from the government is they are in listening mode,” Khan said. “We’ve made our observations quite clear on a cross party basis that these businesses need support. And actually, if the government is serious about giving a helping hand to business, the best way to do it, is to support them during this difficult time.”

Raising concerns that thousands of jobs could be lost, the London mayor’s office said that an extension on the business rates holiday would provide support to businesses who have lost significant custom due to the coronavirus pandemic.

All about the multiplier

The business rates team at real estate services giants Colliers International favours a complete re-basing of the multiplier and a reduction in the time between revaluations – at least a move to three-yearly or ideally annual revaluations – as well as a total reform of the reliefs system.

“It’s all down to the multiplier,” said John Webber, head of business rates at Colliers International. “The current multiplier has reached an unsustainable level of over 50p in the £1, and directly impacts on the decisions made by many retail and leisure operators as to whether they open, close, or downsize their bricks and mortar estate. A tax that is now so high it impacts on these decisions, which in turn affects employment and investment, has to change.”

Re-basing the multiplier to something manageable that businesses can afford, he said, will mean that other reliefs can be simplified.

“Short term decisions to grant reliefs have been made by all political parties over the past 30 years – it’s the reason we are in the mess we are today,” he said. “Therefore, the whole question of reliefs needs to be properly overhauled and re-balanced to meet the needs of modern-day businesses.”

He said the government must come to its conclusions and offer solutions quickly.

“In this period of pandemic, retail and leisure businesses are making their decisions now about whether they stay open or close. Increasing costs, of which business rates play a big part will be a significant factor in the decision making,” he said. “We call for a drastic cut in the multiplier and subsequent business rate bills and we urge that this is done sooner than later. Next year could just be too late – and the government may find the golden goose of business rates really has been well and truly cooked.”

Lack of awareness

The CIOT meanwhile said the case for a fundamental review of business rates was overwhelming “though it will be a challenge for the government to satisfy all interested parties, especially at a time when finances are likely to be tight”.

In its response, it called for greater consistency and transparency around the criteria for business rates reliefs, to ensure the processes for claiming them is more effective.

“We question whether awareness of reliefs is sufficiently high among small businesses,” the CIOT said. “Small businesses tend to simply accept the rateable value assessment. Methods of improving awareness and accessibility of reliefs should be investigated.”

Business rates are not included in the tax gap, it said, and there is very little published data on existing business rates mitigation schemes and tax loss.

“Any evaluation of the extent of the problem by reference to the objectives of the various reliefs and the appropriate methods for addressing abuse will require data on the tax leakage.”

Responses on all other sections to the consultation are invited by 31 October, ahead of its conclusion in Spring 2021.

Replies (5)

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By Kentwillumsen
01st Oct 2020 09:40

VAT, corporation tax and business rates should be replaced by a simple sales tax based on turnover.
This would equalise on-line and physical high-street businesses.
This would also equalise UK based small business and large multinational business using tax heavens and transfer pricing to reduce their UK based income to lower VAT and corporation tax liability.

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Replying to Kentwillumsen:
By [email protected]
01st Oct 2020 11:13

Until taxes are the same globaly, large corporations will continue to find ways to move profit around to tax havens

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By johnjenkins
01st Oct 2020 09:40

Let's replace council tax with a poll tax.

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By [email protected]
01st Oct 2020 11:11

Rent and rates have been slowly killing the high street for decades now
For many businesses (and certianly small businesses) they are a significant and unavoidable overhead that you have to cover before you start to make any profit.

A simpler farer system based on economic value added would be far better
simply basing on turnover alone is too simplistic and doesn't account for offices where there are no sales
In the 90s i worked for a company that had a preemises in New York and their system was based on 3 criteria
Sales and profit
Ratable value
There was a formulea for each and you paid the lower figure subject to a de-minimis valuation.
It meant that while we were establishing the New York business the rates were very low then as we became more successful they went up

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Replying to [email protected]:
Hallerud at Easter
02nd Oct 2020 14:54

Rents are based upon market prices, nothing more, nothing less, landlords and tenants negotiate these at arms length- as a landlord I have no real interest in determining my rents based on my tenants' sales, profits or wages, (Wages and profits never, sales maybe if I was reassured re ability to monitor (audit) reported figures and it was worth the compliance costs)

If that is all that is to be on offer from prospective tenants we will just convert half our offices to residential instead. (Already got planning for one and currently slowly starting to lose office tenants)

For warehouses/workshops just get in the queue, I could currently let twice what we own- maybe we will set a closing date for rental offers such is their demand.

Whilst it might all work for large class A premises it certainly will not work in the secondary/tertiary sector.

With regards to rates small business rates relief already removes the charge from a lot of smaller business entities

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