The Valuation Office Agency has been busy enacting changes to business rates this year and small business, in particular, isn’t happy. Christian Annesley surveys the business-rates landscape.
Sometimes in life timing is everything, and the timing of the implementation of a two-year-old Supreme Court ruling as it applies to small businesses paying business rates could hardly be worse – for those small businesses affected and for the government.
As affected companies will know, the five-year business rates revaluation process was delayed by two years in 2015. The new rates that eventually came in for April of this year prompted a backlash by business and eventually, a government rethink due to some rates climbing by up to 45%.
A cap on each annual increase was eventually agreed, but for some companies that only feels like a stay of execution against rising fixed costs that erode profits and threaten viability.
What’s the ‘staircase tax’?
The government’s Valuation Office Agency (VOA) has been busy acting on the implications of a 2015 Supreme Court ruling that impacts the setting of business rates.
The ruling relates to how you define a single business space and means the VOA has begun allocating different bills for individual floors and workspaces that are only linked by public areas.
In practice, this means substantial bill increases for those small firms that occupy separate floors of a single building – with a further hit because some of those businesses with more than one rateable site are no longer eligible for small business rates relief (here’s the official guidance on how this is assessed and applied).
It’s been dubbed a ‘staircase tax’ for obvious reasons: companies are being penalised, in effect, for having to use shared rather than private stairs in a single occupied building.
Just how damaging to the government is the debate that’s been triggered on the ‘staircase tax’ – and what are the prospects from here?
The Federation of Small Business is the most vocal business group on the issue so far, and it has looked to MPs of all colours to back its opposition to the VOA’s roll-out of recalculated rates – and to the backdating of its recalculations to 2015 in England and 2010 in Wales.
Mike Cherry, national chairman of the FSB, said the staircase tax “adds another element of chaos to a business rates system in disarray. Cross party support from Conservative, Labour and Lib Dem MPs to sort it out is hugely welcome. Time after time, government is failing to reform an outdated, regressive business rates system.”
Cherry added: “Backdating a tax businesses didn’t even know they were liable for is the worst kind of anti-business action, making the UK look like a hostile place to invest at a time of unprecedented uncertainty. The VOA is hitting small firms with backdated bills despite the Supreme Court ordering them to exercise ‘common sense’ – it’s an absolute scandal.
“Tens of thousands of businesses will be affected – the Cabinet should recognise the problem, get a grip and sort it out.”
But if the FSB’s rallying-cry sounds persuasive, what pressure is actually being brought to bear? There are some politicians who have gone on the record against the VOA’s actions, but the extent of support so far doesn’t suggest a rethink is coming.
Nicky Morgan, who is chair of the Treasury Select Committee, is one of just a few wary government voices on the issue. She has called for Chancellor Philip Hammond to intervene, at least in relation to the backdating of the reassessed rates.
“I certainly support the FSB on this – it can’t be right for businesses to suddenly be asked to find money for something they didn’t know they might be liable for.”
Jacob Rees-Mogg is another Tory who has pushed Hammond to postpone the implementation of any changes to the next Budget, while on the opposition benches Labour shadow business minister Chi Onwurah has said HMRC should stop “targeting the little guy”. Lib-Dem leader Vince Cable has also called the changes unfair, arguing that their backdated application, in particular, is “the last thing” business needs.
Business rates and fairness
Mainstream retailers, which pay the biggest share of business rates, have always led calls for a complete overhaul of the current system, in the main because high street stores face big bills that online retailers with vast warehouses do not have to pay (for example, it’s estimated Amazon’s business rates bill is one sixtieth of Tesco’s).
A report published in 2014 by accountancy firm EY for the British Retail Consortium outlined four alternatives to business rates:
- measuring energy usage rather than property values
- offering discounts for employing workers
- linking business rates to corporation tax
- changing the existing system by introducing more frequent revaluations
Another idea that was floated last year by former Sainsbury’s boss Justin King was to replace business rates with a sales tax.
But so far there are only tentative signs of the government considering major changes to the long-established business rates model.
In 2016 the then-Chancellor George Osborne announced in the Budget that from 2020 the annual inflation-based increase in business rates would be calculated using the Consumer Prices Index rather than Retail Prices Index. He also proposed more frequent revaluations. But so far no follow-up has ever been published, despite Osborne’s promise.
The problem, perhaps, is that the tax remains one of the Treasury’s biggest and most reliable sources of income – and it is also at the centre of the government’s drive to hand more powers to local authorities. By 2020 some councils will be able to keep 100% of the business rates raised in the local area, against 50% currently.
In the meantime, the VOA has a backlog of more than a quarter of a million appeals against the business rates it has applied – a figure that could well be added to as the staircase tax is rolled out.
Case study: How one business has been hit
Peter Cuddehay owns a printing business and art gallery on Plymouth’s waterfront – but the business is spread across three floors, with the top floor being used for storage. The VOA has assessed the arrangement as constituting two premises, and a backdated bill was recently presented to Cuddehay for £5,000.
Cuddehay says he has paid up for now but is appealing the decision and awaiting a date for his hearing.
“A retrospective action [like this] is outrageous,” he said. “All our plans for investment have gone out of the window. We’ll also have to go back to our landlord and maybe say we don’t need the top-floor storage.”
Have you or your clients been approached by the VOA in respect of your business rates and the division of your premises? Let us know in the comments section if you’d like to share your story.