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Business rates need radical reform

    Yesterday, MPs on the Business Innovation and Skills Committee called for a complete overhaul of the business rates system. They are absolutely right. The current system of business rates is unfair, inefficient and in need of radical reform.

    Business rates are taxes which are levied on the estimated market rental value of non-residential properties which means everything from shops to warehouses face the tax. The tax is a proportion of the market rent of properties in England and Wales as estimated by the Valuation Office Agency. These rateable values are reassessed every five years with the last revaluation taking place in April 2010 using figures from two years prior to that.

    The system as it stands imposes a particularly severe burden on businesses. Unlike corporation tax, the total amount of tax which is charged does not vary with the economic cycle. This means that business rates do not function as automatic stabilisers and are thus an even greater burden in difficult market conditions. Moreover, business rates do not vary with profitability so even a hard pressed small or medium sized business with razor thin margins has to cough up. It is not hard to imagine a situation where business rates make the difference between profit and loss. Given the myriad of other challenges faced by businesses, it cannot be right for the rates system to place so much extra pressure on them. 

    Furthermore, the fact that the current rateable values are based on market rents that were last assessed in 2008 means that some businesses face an increasingly preposterous situation where their tax doesn’t even bear much resemblance to the value of their property. Crucially, the internet has made the business rates system look like a product of antiquity. The massive growth in online shopping means that the system has a distortionary impact by preferring online business to high street business. Moreover, by taxing property values, there is always a concern that the rates system deters capital investment which improves productivity and increases the value of a building.

    There are numerous short term reliefs such as the small business rate relief, the rural rate relief and empty buildings relief. The 2% cap on rate increases enacted in the 2013 Autumn Statement is also a welcome temporary relief. However, whilst short term reliefs, caps and discounts can help ease the burden on business, there is a real need to carry out more radical, permanent reform of the business rates system to resolve these underlying issues.

    Some steps that the Government should consider taking include ending temporary reliefs and introducing a simplified, banded system with revaluations on a more regular basis as the British Retail Consortium suggests. The Government should also consider breaking the link entirely between rateable value and the tax rate as well as possibly introducing localisation which could allow local authorities to compete to attract businesses by driving down the tax burden.  

    Adam joined the Centre for Policy Studies as Head of Economic Research in January 2014. 

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