The UK’s business rates system is “uneconomical” and “unsustainable”, according to the head of the Confederation of British Industry, John Allan. Mr Allan, who is also the chairman of Tesco, said that reforms to the property tax “cannot come soon enough”, as the current system unfairly affects some regions over others, as well as deterring businesses from investing in property.

What are business rates?

Business rates need to be paid by any company or individual that occupies a building for non-domestic purposes. The amount of tax which is due relies on a number of factors, which make up the ‘rateable value’ of the property. 

Rateable value is worked out by the Valuation Office Agency (VOA), and takes into account the annual market rent value, which is an average of other rents in the local area, and things like the size of the property and what it is used for. Factories and shops tend to have a higher rateable value than storage spaces, for example.

Business rates bills currently apply to around 1.8m commercial properties in the UK, and are sent out in February or March of each year. For the most part these rates remain stable, but there is a revaluation every 5 years which can cause the bills to go up or down.

During revaluation, the VOA takes into account changes in the property market and adjusts the rateable value of business properties in the area to match it. All properties are given a new rateable value and multipliers are revised, so a change in the rateable value of the property doesn’t necessarily mean a change in the tax due.

The last recent evaluation in England and Wales was in April 2017, based on rateable values from 2015, so these rates are expected to remain stable for another couple of years.

What is small business rates relief?

The Government is currently attempting to make business rates fairer, and encourage businesses of all sizes to invest in property. Small retail businesses were given a helping hand from 6 April 2019, where business rates were reduced by a third for any retail properties with a rateable value of less than £51,000

Small business rate relief applies to properties which have a rateable value of less than £15,000 and is usually for businesses who only use one property. Full business rate relief is available on properties with a rateable value of less than £12,000, whilst for properties between £12,001 and £15,000, relief works on a gradual sliding scale from 100% to 0%.

During the last revaluation, the Government permanently doubled small business rate relief, and almost three quarters of businesses saw no change or even a fall in their business rates. However, the CBI say that these changes are not enough, and are calling for a full review of the current business rate system.

What’s wrong with the system?

Sir Charlie Mayfield, president of the British Retail Consortium, says that the problem with business rates is that they don’t take into account the financial climate, arguing that “business rates bills have continued to rise when property values have fallen,” and stating that “reforming the rates system would be a welcome boost for retailers and help drive investment in training and technology.”

Long gaps between revaluations 

Because the business rates revaluations happen every 5 years, the system is not very responsive to the current economic climate, and slowly but surely goes out of date between each revaluation. As an example, the 2007 revaluation happened before the 2008 recession, and came into force in 2010 when businesses were still struggling to pick themselves back up. 

Unfair calculations

Meanwhile, the system is unfairly skewed towards rewarding larger, out-of-town businesses, thanks to the way in which the tax is based on growth in commercial floor-space, whilst smaller city centre companies suffer. This means that social growth and investment behaviours are actually discouraged under the system, which is bad for business, and bad for the economy.

For retail companies, the current system is damaging to smaller, physical stores. For larger companies who also have a strong online presence, as well as large stores and warehouses out of town, their income is unlikely to be severely impacted by business rates and they will likely pay less for their large suburban store than a smaller company will pay for a very small space in the heart of towns or cities. A recent report has found that the level of vacant shop units is currently at the highest number in more than 4 years.

Dave Lewis, CEO of Tesco, suggests that small high street shops should get a 20% reduction on their business rates, as they face “crippling bills on their properties while battling online competition.”

“Billions of pounds have shifted online, but the rates system was never devised to account for this,” Lewis says “Because the bill is linked to property – not profit – shops struggling to keep the doors open have to pay up, while larger online business pay just a fraction.

“Our business rates system has barely evolved since 1988, yet the way people shop has changed profoundly. Online retail has grown dramatically, while sales in shops have fallen.

“It is impossible not to notice the increasing stresses in the retail sector, with a long list of household names going out of business in recent years.”

Lack of transparency

Many businesses have complained that the Government is not transparent enough in how rateable value is determined, meaning that it can be hard for companies to appeal a decision that they feel is wrong. 

The Government has also made plans to introduce an upfront fee for lodging an appeal to business rates decisions, as well as penalty charges for businesses who mistakenly appeal when they have simply misunderstood the rules.

What is next?

In February 2019, the Treasury committee launched an inquiry into business rates to see what measures need to be taken in order to improve the system. The inquiry takes into account how the business rates policy has changed over the years, and is suggesting alternatives, including a digital services tax which the Government has promised will be in force by April 2020.

Governments of both political parties have discussed root and branch reforms over the years, but no serious changes have been implemented. It is hard to argue against the claim that business on the high street have been particularly hard hit in comparison to their out of town and online competitors. 

Until this taxation takes into account how the internet has fundamentally changed how products and services are delivered, then they will continue to suffer and their desertion of the high streets will continue unabated.

If your business needs help or advice on this matter then please contact the team at TFMC. We offer a full range of taxation consultancy services and are here to help. You can reach us on 0800 470 4820 or email to find out how we can help.

Martin Beckenham
Martin Beckenham

Martin Beckenham runs The Financial Management Centre in Ashford & Maidstone and serves as the head bookkeeper in Ashford and Maidstone. Martin is a Certified Bookkeeper with the Institute of Certified Bookkeepers. He has over 35 years of experience in the Finance and Administration sector, firstly in the Oil Industry and more recently as Head of Statutory Government body.