Business rates has been a very topical subject over the last few weeks primarily because from April 2017 new property valuations will be used to calculate bills.
Revaluations work by redistributing the total tax yield across ratepayers, based on how much their property values have changed.
These revaluations always create winners and losers and this time is no different, hence the uproar. At the macro level the ‘losers’ this time seem to be retail and London and the South East.
However within every part of the country you will be able to find losers with egregious increases (you’ll also find major winners too, but there is no news like bad news).
In this blog I’ve explored some of the major challenges.
A word of warning, this is a long blog as it pulls together all the various issues. However the benefit of this is you’ll never need to read a single thing about business rates ever again.
Four types of beef
On the whole, the things people take issue with about the business rates revaluation fall into four main camps:
1. Significant increases for some businesses driven by:
- Major increases in property values over the last seven years since the previous revaluation, primarily in London and the South East.
The Prime Minister has talked about the inevitability of changes because “business rates are based on rental value of properties. Rental value of properties do change over time – they can go up or down. It is right that rates change to recognise this – this is the principle of fairness that underpins the business rate system”
- Idiosyncrasies in how property values are conducted for each sector (e.g. retail values take into consideration footfall, pubs take into consideration turnover).
So while one retail shop a few doors away may be seeing their property values fall, a pub on the same street could see it rising.
Likewise there has been complaints about Amazon warehouses being charged less than high street retailers and that this is unfair.
This may be the case now, but over time if the trend for online shopping continues, demand for warehouse space may increase, pushing up rents and as a result business rates for Amazon.
- Previously undervalued properties on the old list being revalued properly for this list
Caused by the simple fact that no rational person would have appealed because they thought their rateable value was too low.
2. Transitional relief is less generous this time around
Transitional relief smooths the increase in bills by setting a cap on how much bills can increase each year. This is paid for by setting a cap on how much bills can decrease each year to create a fiscally neutral effect.
The scheme for the 2010 Rating List was generous, the scheme for the 2017 Rating List less so.
3. The appeals system is being changed
This rejects appeals of property valuations if they are within the bounds of ‘reasonable professional judgement’. The bounds have been placed at around 15% - i.e. a property valuation has to be out by that much for an appeal to be accepted.
Understandably – some take issue with this.
4. The system is broken and should be scrapped
Fundamental reform is the battle cry. A government review made changes.
On the whole manufacturers would rather stick with what we have, the system is ‘the worst form of property taxation, except for all those other forms that have been tried from time to time.’
There are changes that could be made including removing plant and machinery (see below) and revaluing property values for council tax – the other side of the coin for local government financing (we explored this in a report last year).
What does EEF think?
The key issue for manufacturers is how the system operates for a sector that is more exposed to international competition that others.
While rateable values for industry may have decreased, if some investments are made in plant and machinery at any point before the next Rating List this automatically triggers a revaluation and an increase in bills for manufacturers.
This has been our key campaigning ask from the outset: Plant and machinery classes 1, 2 and 4 should be removed from the calculation of business rates bills.
This is because taxing plant and machinery:
- Acts as a disincentive to productivity-boosting capital investment, especially for large-scale manufacturers with a multi-country footing
- Reduces business certainty in estimating returns on investment from capital expenditure
- Disproportionately affects the manufacturing sector, which punches above its weight on investment, productivity and R&D spending but bears 67% of all plant and machinery liability (after excluding regulated utilities)
- Undermines the sustainability of local government finances in a world of 100% business rates retention, by linking property taxation to the mobile tax base of plant and machinery
EEF has presented substantial evidence on the negative impact of the inclusion of plant and machinery in the calculation of site rateable values for UK manufacturers.
It increases the effective cost of capital, generates uncertainty about returns on investment, acts as a disincentive for some large scale investments and may encourage some businesses to prioritise labour over capital, reducing long-term productivity.
The principle that this should be removed has been established widely by, among others:
The pushback we’ve consistently been given is that the change would cost too much. But we’ve never been told convincingly by anyone in government how much it would cost (nor does the VOA have aggregate figures).
Ultimately the government needs to decide if it wishes to make decisions on the long-term nature of the business rates system on the basis of sound principles of property taxation (which would align with an industrial strategy), or if it wishes to continue with the annual approach of placating and tweaking.
We obviously hope, that this time, it will be the former.