commercial property lambert smith hampton

Viewpoint - 19/11/2012

We must ease the bumps in business rates for a smoother recovery

Business rates are the third biggest outgoing for local firms after rent and staff costs. As a very direct and visible tax demand, unsurprisingly, such bills aren’t that popular with business.

Find out more

Business rates are tied to inflation, but every five years, the way bills are calculated are revised in a revaluation undertaken by professionals in the Valuation Office Agency.

On Tuesday, Parliament will debate a new Growth and Infrastructure Bill, and its provisions include postponing the next business rates revaluation in England to 2017.

This decision will avoid local firms and local shops facing unexpected hikes in their business-rates bills over the next five years. As business rates will remain linked to inflation, there will be no real-terms increase in rates over this period.

The last revaluation was based on April 2008 valuations and rents set at the height of Labour’s unsustainable property boom. Since then, the economy and property market have faced exceptional changes. A revaluation at this point would be likely to result in sharp changes to business-rate bills in many parts of the country and in many sectors.

Rents have fallen since that property boom. Some people assume falling business rents somehow equal falling business rates: everyone’s a winner. That might happen in a perfect world, but not in the complex citadel of local government finance.

Business-rates bills are calculated by taking the rateable value of a property (roughly equivalent to their notional yearly rent), and applying a “multiplier”. While aggregate rateable values have fallen, this would automatically be offset at the revaluation by a higher rating multiplier. Firms would just be required to pay a higher proportion of their rateable value. The Valuation Office Agency’s best estimate of rateable value movements suggests there had been a 13pc drop in values in England since the last valuation.

Because revaluations are revenue neutral overall the tax take would have had to rise by 20pc to 56.9p in the pound following the 2015 revaluation. In essence, it works like a tax see-saw. Whether the value goes down on one side or up on the other, the taxman will demand the same overall tax take. Suspending the revaluation will not earn the Government a penny, but it does help us steady that see-saw.

Of course, with any revaluation, there will be some winners. There will be losers, too.

If a small number of high-value sectors and areas saw very sharp declines then the average fall could be very large indeed – meaning that many more businesses whose rents have fallen but by less than the national average would have seen tax increases from 2015. By definition, we have not undertaken a formal revaluation, so any figures will be rough estimates.

The Valuation Office Agency’s best estimate of rental value movements across England, which ahead of carrying out the detailed work necessary for a revaluation is based on professional judgments informed by limited rental market evidence up to January 2012, illustrate that many businesses with reducing rateable values could expect to see increases in their actual rates bills.

Extrapolating from these early estimates suggests that 800,000 premises would see a real-terms rise in their rates bill, where only 300,000 premises would see their bill fall.

Smaller and medium firms are likely to be harder hit. Some in the retail sector have criticised the postponement of the revaluation: yet our estimates suggest that retail is one of the sectors which will face big hikes in bills because of the revaluation, alongside the likes of petrol stations, hotels and pubs.

Transitional relief may be able to compensate initially some of the losers by clawing back most of the gains from the smaller number of winners (so-called downward phasing).

However, we do not think that such immense volatility at this point in time would be in the wider public interest, particularly when we want to ensure the economy is growing.

The Government is committed to maintaining up-to-date rates bills through regular five-yearly revaluations in England, which will resume after 2017, once the economy has had a chance to recover fully from the financial and fiscal crisis this Government inherited from the Labour years.

The engines of economic growth aren’t found in the corridors of Whitehall but in the foundries of great local British companies. The best thing Government can do to help such businesses is to provide them with a stable economic environment. This is why we want to protect local firms from soaring tax bills.

Get in touch


Get the latest insight, event invites and commercial properties by email