The government has been urged to replace the “unfair” and “broken” business rates regime, in a crucial new report from parliament’s Treasury committee.
The findings could herald a long-awaited breakthrough after several years of criticism from bricks-and-mortar retailers, many of which have rallied against the financial burden of paying additional taxes on stores that their online rivals are not subjected to.
Business rates generated £31bn income for the government’s coffers last year.
The group questioned why revenue from the system has outpaced inflation since its introduction in 1990, and called on the government to explain whether this was a deliberate policy.
It also called on the government to address the impact that business rates have on the attractiveness of the UK as a destination for investment. The UK has one of the highest property-based taxes in the OECD as a proportion of GDP.
The report also highlights an “increasingly complex web” of business rate reliefs that has exacerbated the system’s flaws.
However, the committee stopped short of suggesting any specific alternatives to the system. While “numerous” potential alternatives were identified – including a land value tax, online sales levy, profits tax, single consolidated tax and hybrid tax – the group said further work was needed to devise proposals for recommendation.
The government was called upon to prepare a consultation in time for the spring statement.
A backlog of 16,000 appeals made against business rate decisions was also criticised, prompting calls for the government’s valuation office agency to be “appropriately staffed”.
“This is unacceptable; the VOA must resolve them urgently,” the report stated. “Such long delays bring the work of the VOA into disrepute and undermine trust in the UK tax system.”
Alison McGovern, the committee’s lead member for the inquiry, said: “It’s abundantly clear that the current business rates system is broken. The tax represents an increasing burden on businesses, particularly those with a physical high street presence struggling to remain competitive.
“The government must ensure that business rates align with its aim to boost productivity and do not dis-incentivise growth.
“Odd reliefs here and there are nothing more than sticking plasters to a system in urgent need of reform.”
The reaction so far
John Webber, head of rating, Colliers International
“The report was reassuring. I’m hopeful something will be done. The concern is that it [might] get lost in the noise of an election and Brexit discussions. However, it is so well-written and extensive that there is no hiding from it.
“Another concern is that the report calls for more time to look at alternatives, and some of the timescales mentioned are pretty quick. But in our view, if the government did something with the multiplier – which has grown from a level of 30% in 1990 to a figure today in excess of 50% – a lot of the other issues would evaporate.”
Jerry Schurder, head of business rates, Gerald Eve
“While there is much to be welcomed in this report, the recommendations fall short of the radical reforms that are essential if the rating system is to be made fit for purpose for a modern economy.
“The report identifies that business rates are the highest comparable property tax in the OECD – which has been increasing considerably faster than inflation – but eschews any call for the tax to be reduced.
“The committee acknowledges that ‘downward phasing’ under transitional arrangements leaves the hardest-hit facing higher bills for longer, yet doesn’t propose any practical steps to resolve this. Similarly, no specific recommendations are given on how to achieve greater transparency and more frequent revaluations, both of which are recognised as issues of significant concern to many respondents.
“This report is a step in the right direction, and the recommendations if enacted would provide ratepayers with some relief, but in truth it is only reductions in business rates bills that will help struggling firms, and bring the UK into line with other developed nations.”
Alex Probyn, UK president of expert services, Altus Group
“The reality is, successive governments have been far too reliant upon commercial property for tax revenues culminating in a business ‘rebellion’ against the tax.
“Rather than kicking the can down the road, what firms need is an immediate respite from ever-increasing property taxes that are not only uncompetitive but the highest across Europe, which will rise yet again in April unless substantive action is taken to freeze the tax rate.”
Helen Dickinson, chief executive, British Retail Consortium
“The Treasury select committee has identified key flaws in our broken business rates system. The BRC has long been calling for many of the key recommendations.
“Indeed, fixing transitional relief, introducing an improvement relief to unlock investment, and better resourcing the Valuation Office Agency, were all the focus of a letter to the chancellor signed by over 50 retailers in August. Any party that wants to support local high streets should commit to implementing the committee’s reforms as a first step.
“While the committee is right to recommend that government reviews alternatives to the broken business rates system, it must not do this in isolation. Any review must look at the whole suite of business taxation with the aim of creating a tax system that is fit for the 21st century.”
Ed Cooke, chief executive, Revo
“We are seeing unprecedented levels of distress in the retail sector and business rates are one of the root causes.
“While rents are adjusting to the new market dynamics, business rates continue to increase with retailers facing a further £137m hike from April 2020, and over 12,000 shops paying more in rates than they do in rent.
“We need inward investment into our urban environments, and this tax is a significant and material barrier to this investment happening in the quantum it needs to.”