Labour and Business Rates Reform - The Elephant in the Room

The heat continues to rise across the political arena as the UK goes to the polls today for the general election.

Let’s assume that the polls are very much correct and Labour do prevail with a comfortable majority. Over the next few months we will start to see the real detail behind their polices.

One quite radical announcement advocates significant reform/abolition of business rates, a tax Labour believe is outdated and places an unfair burden on businesses, with a specific focus on smaller businesses and retailers. They consider the current business rates system creates inequities between high street businesses and on-line retailers. They have mooted replacing businesses rates with a fairer system, possibly based on land tax or the capital values of commercial property. However, despite the desire for significant reform, Labour still requires the tax (whether business rates or another form of property tax) to remain revenue neutral. So, in essence continue to collect £30 billion plus in revenues for the Exchequer.

This is the nub of the problem. Any reform will create new imbalances and what may be fairer for one business will be unfair for another. Already small independent businesses pay nothing if their valuation is below rateable value (RV) £12,000 with a phased liability up to RV £15,000. This takes approximately 700,000 businesses out of paying business rates. Businesses under RV £50,000 pay no large supplement which places an additional £2 billion+ burden on larger sized businesses.

Therefore, the question is to what extent would a Labour government be prepared to keep the tax revenue neutral but fulfil their pledge to further help SMEs, accepting these further subsidies would again have to be borne by medium to large sized business?

The same principle is replicated with retail. Undoubtedly the desire to reduce the business rates burden for the sector is a noble one, with suggestions of a lower retail uniform business rate (UBR) versus the rest. Again, to fund this, and in doing so ensure the tax remains revenue neutral and also keep your pledge to SME’s, any additional tax burden must be met by medium to large sized businesses across all other sectors. How high would this supplementary charge have to go?

At the crux of the issue is the extent business rates since the inception of the UBR has been allowed to grow (being RPI indexed linked) and in doing so significantly outstrip rental growth (which should temper the level of the UBR). The application of the traditionally higher RPI rather than CPI index has been dramatic. Although this has now changed, we estimate that if the switch had been made in 2010 the UBR would now be around 44p rather than 49.9p, with no need to apply significant additional supplements for larger businesses, now standing at 4.7p.

Avison Young believe, because it is a more evidentially based system, that business rates based on rents, remains the fairest method of valuation. Rather than tamper with the basis of valuation, any new government needs to concentrate on working to phase down the UBR to more sensible levels, say around 40p to 45p. They also need to decouple the tax from inflation so that rental performance at each 3 year revaluation solely dictates the extent to which the tax base grows. The synergy of the tax with the real time performance of the rental market is therefore preserved.

These are tough decisions to make against the backdrop of a limited ability to lift tax revenues, but if the new government wants to take reform of business rates seriously it has to address the elephant in the room, the tax take has simply been allowed to get out of hand.