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With Years Of Uncertainty Ahead, It's Time To Rethink Our Business Tax Regime

16/11/2016 12:10

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London's businesses have received some bad news. From 1st April next year, their business rates will go up by an average of 11%, and in some areas of the capital, rates will more than double.

This is the result of the delayed Business Rates Revaluation, due originally in 2015. Currently, businesses pay rates based on the rental value of their property in April 2008. The new rates will reflect changes in the property market since the last Business Rates Revaluation in 2010.

In many areas of the country, the revaluation will come as a relief; since 2008, rental values have decreased in much of England, and this will mean smaller bills from next April. However, city centres, where property values are high, will be hard hit. London's property market is particularly unique in having remained robust during the last recession.

But it won't be the blue chips and large multinationals based in the capital that will suffer, it will be the SMEs, start-ups and small retailers who will bear the brunt of the rates increase. For them, the higher bills may mean cancelling plans to hire more staff in 2017, or even laying off some of their employees.
In London, businesses defined as 'large' in terms of rateable value (those with rateable values of £100,000 or over) are often not large in terms of other factors such as the number of staff and turnover. Many of London's businesses that would be classed as SMEs by all other definitions will therefore be eligible for minimal transitional relief under the schemes proposed by the Government.

Also, business rates in areas such as King's Cross, Stratford, Shoreditch and Clerkenwell, where significant regeneration has taken place since the last revaluation, will increase by 85% or more. These up-and-coming business areas are home to clusters of start-ups and entrepreneurs for whom rates increases of this level will make business unviable. If these businesses pack up and leave, years of constructive work in revitalising neglected neighbourhoods could be undone.

But why does this matter beyond the M25? The London economy represents 17% of the UK's GDP, and contributes almost a third of the UK's tax intake. When business booms in London, the whole country benefits. Likewise, when business struggles in London, this hurts the wider economy.

Following the vote to leave the European Union, businesses across the UK face a great deal of uncertainty, and this will continue throughout the exit negotiation process. During this time, businesses need Government policies that support economic security and stability. Hitting London's businesses with an unprecedented rise in business rates runs counter to this.

The Government is consulting on relief schemes to transition to the new business rates levels, but this does not offer adequate protection. Instead, the Government should freeze the rates increase in London next April and reassess economic conditions in late 2017 before deciding whether or not to introduce the new rates from April 2018.

A five year period of transitional relief with capped rates increases will offer a suitable medium term solution, however it is time to seek a fairer tax regime for businesses that better reflects business size and performance. A tax regime based on property value unfairly discriminates against businesses that rent their premises as well as those that base themselves in areas undergoing significant regeneration.
One option would be to levy business rates purely as a land tax, restricting liability to the owners of commercial property. This would be a fairer settlement for business tenants, particularly start-ups and small companies renting their workspace. If commercial landlords had to pay a tax on their property regardless of occupancy, this may improve their incentive to invest in and rent out their empty properties. This would help to end vacancies on the high street, however this solution would need to be accompanied by measures from local authorities to prevent commercial landowners from introducing sharp rises in their rent prices.

Another option is to adopt the system used in Germany. German businesses pay a trade tax which is based on a national base rate plus a locally-set multiplier linked to a business' earnings. This system would give local authorities more control over their businesses' tax bills, which will help them to better support favourable economic conditions and attract new businesses to their area. It would also tightly tie business tax to business performance. Businesses that earn more would pay more. And businesses that are struggling would be less impacted by their tax bill.

Either way, the time has clearly come to rethink the way in which we tax our businesses. We don't yet know how Brexit will ultimately turn out for business in Britain. Many plans to invest and expand are being put on hold. So the Government must do everything it can to support business throughout this period, and recognise that a stable UK economy relies on a stable London economy.

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