THE BLOG

'No-Mates Rates' - Will BIS' Proposals Kickstart Radical Reform of the Business Rates System?

17/03/2014 12:06 GMT | Updated 14/05/2014 10:59 BST

So, former Tesco boss Sir Terry Leahy has described Business Rates as an "ancient tax" that "has not worked for years". And with impeccable timing, the BIS Committee has recommended wholesale changes to the business rates system - but do those proposed changes address Sir Terry's criticism? Or does George Osborne need to act sooner in the Chancellor's April Statement?

Traditionally, business rates are charged to retailers based on the value of their shop or other commercial property. It is a simple system in theory but a complex one in practice.

Currently business rates are typically charged at 40 per cent of a shop's estimated rental value. If a shop has an estimated rental value of £100,000 per year, the occupant of that shop may typically be expected to pay an additional £40,000 in business rates. The system operates on a 5-year cycle so is slow to acknowledge rental decreases, and conversely factors in annual inflation-linked increases by reference to RPI. The effect of this is that rates bills are continuing to increase at a time when rents are falling. In areas where rents have plummeted, this can even result in business rates being higher than market rents. The high cost of rates can be a serious disincentive to potential occupants considering whether to lease their premises. Prospective tenants of commercial properties need to consider not only whether they can afford to pay rent and service charges, but also whether they can meet business rates. Often, this may tip the balance between whether a new business is viable or not.

So far, so straightforward. The problem with business rates is that it applies across the whole of England & Wales equally (Scotland has a separate system). The problem with that is that the commercial property market is not the same in London as it is in Middlesbrough. So, while rents are rising in London, rents have crashed in the north of England. That means a tax which is currently based on 2008 rents is adversely affecting properties in the north of England and the Midlands who are not seeing the benefit of falling rents leading to reduced business rates. A two year delay in revaluating rent has only made this problem worse as it will be another two years before any rent inequality between rent valued and rent actually paid will be addressed.

The BIS Committee has however called for a wholesale review that goes beyond the administration of the current system. It suggests examining whether retail taxes should be based on sales rather than the rateable value of a property; whether retail needs its own system of business taxation; and how frequently revaluations should take place. But these are suggestions only and George Osborne should not consider this 'job done' just yet.

While a radical review is proposed, the BIS committee also suggests, in the interim, a six months business rates amnesty for businesses occupying empty properties. This would go further than the 50% reduction announced in the Autumn Statement and is aimed at encouraging new businesses to the High Street.

The BIS suggestion of a 6 month 'payment holiday' for businesses occupying empty premises means that in the first half year of occupation, new tenants would have no liability at all for business rates, which is preferable to the 'half-price' proposal suggested in the Autumn statement. That said, 6 months of paying no business rates is unlikely to be a guarantee of success for new businesses, if after that 6-month period they are faced with potentially crippling rates bills.

But some change is better than no change. The current regime results in properties lying empty, and owners of these properties having to carry the can by paying business rates which they expected to pass on to tenants.

While offering new tenants 6-month rates amnesties is likely to improve occupancy rates, it will not mean that empty properties are magically filled. A 6 month delay only postpones the bill it doesn't change it.

Radical reform is needed and the BIS committee's review has much to recommend it. Now it's over to the Chancellor to show that the Coalition will support and implement reforms urgently.