Today brings confirmation that inflation (as measured by the now disused Retail Price Index) for the month of September was 3.9%.
Inflation is currently running well above target
Driven by the depreciation of Sterling following the vote to leave the European Union alongside increasing oil prices. September’s RPI is the figure the government will use to increase the business rates multiplier in April 2018, for the 2018/19 financial year.
Revenue from business rates (currently some £26bn), which is used to fund local government, is best considered as a fixed bucket. To keep the value of the bucket (or yield) current, it is ‘uprated’ annually in line with inflation.
But should it? Below are four reasons why the government shouldn't use today's RPI figure to uprate business rates next year.
1. RPI is discredited
RPI is a discredited measure of inflation, this has been recognised by government who have stated their intention to shift to uprating by the official measure of inflation (the Consumer Price Index) in the future. There appears to be little reason for delaying the shift aside from perhaps an opportunity to milk businesses a little longer, with CPI running consistently below RPI.
2. The current inflation rate is due to one-off effects
A second reason why today’s figure should be ignored is that the current high-level of inflation is widely viewed as a one-off primarily Brexit related effect which should be overlooked. After all, the Bank of England has so far done the same.
But beyond quibbles with the figure itself, there are further reasons why today’s inflation rate should give cause for alarm about the business rates system.
3. The multiplier is now at a record high
The multiplier for 2016/17 was 49.7p. That figure was the highest for the multiplier. As the chart below shows, since its inception the multiplier has increased from 34.8p in 1990/91 to last year’s record high.
If the government goes ahead with the increase based on September’s RPI, the multiplier will be 49.8p the highest it has ever been.
4. Delaying the 2017 revaluation delivered limited results
The chart also shows that in revaluation years, the multiplier does fall. This is because as the economy grows the use of property increases and with each revaluation the yield is redistributed across a larger share of properties.
And when the use of property decreases, the yield is spread across a smaller number of properties than before and (as happened in 1995) the multiplier increases between revaluations.
The 2015 revaluation, which was delayed to 2017 to avoid a 1995 scenario, did not reduce the multiplier by levels seen previously. This revaluation saw the lowest fall in the multiplier between Rating Lists (ignoring 1995) falling by just 1.8p. For the 2000 Rating List the multiplier fell by 7.3p, in 2005 by 3.4p and in 2010 by 7.1p.
This miniscule fall in the multiplier for the 2017 Rating List means that if the RPI rate for September 2017 is used, the multiplier for 2018/19 will be back above the rate it was at prior to the end of the 2010 List. The impact of a two year delay will have been for nothing.
Alongside this, any increases in the multiplier, increases the yield (which never decreases). So an increase next year to the yield would be compounded for future annual increases.
So what should happen?
In the long-term government should accelerate the shift from RPI to CPI.
However we believe that the 2% cap on increases in the multiplier, used in 2014/15 and 2015/16, should be reintroduced for the next financial year.
We've written before about the other changes manufacturers want to see to the system - including the removal of the continued tax on plant and machinery investment which is not replicated in other countries. This places UK industry at a disadvantage internationally.