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East Midlands Chamber News

How Centre for Cities proposes to make business rates fairer - with Dutch inspiration

Annual revaluations carried out by local authorities rather than Government would make business rates fairer, according to an economic think-tank.

The Centre for Cities has set out a 10-point plan of recommendations for how the much-maligned system can be overhauled as part of a Government consultation, which precedes a fundamental review, due to be published in the spring, of how the levy is applied.

Business rates are collected on commercial property and linked to the estimated underlying rental value of the premises. But the tax is widely regarded as outdated because it penalises companies that need a presence in town and city centres, where property values are higher, resulting in them paying more in rates than online rivals.

Kathrin Enenkel, a senior analyst at Centre for Cities, said: “Currently, revaluations are infrequent. This means that rates are paid based on property values that can be as much as seven years out of date. And this causes a number of problems.”

Kathrin Enenkel

“The first is that it creates a cliff edge when valuations finally occur as assessments must catch up with how the market has changed over the previous years.”

She said the current phased-in approach to new tax liabilities means businesses that have been underpaying for years benefit from staggered increases, but those overpaying will continue to overpay as transitional relief staggers the fall in rates due.


Read this article in Business Network magazine


This is at odds with the levelling up agenda as northern businesses have been more likely to have seen drops in their rateable value, and therefore continue to overpay, while those firms in the South are effectively being subsidised by these characteristics of the tax.

A third issue highlighted is that recent changes in demand for bricks and mortar retail have meant the lack of revaluation has resulted in shops partially subsidising warehouses.

Dutch inspiration

The Centre for Cities’ annual revaluation recommendation is based on many changes in the Netherlands when it went through a comprehensive reform of its overly complex business rates system in the mid-1990s.

By moving property valuations from every four years – which disincentivised growth – to annually, and taking local market information into account alongside property-specific details, the number of appeals have reduced by 80% and the costs of valuations were cut by 20%.

Speaking at an online briefing of the Reforming Business Rates report, Centre for Cities chief executive Andrew Carter said: “We deliberately looked at the Dutch model because it shows us the system can be reformed to make it more efficient, more timely, less complex and more responsive.”

BCC response to business rates reform

Dr Adam Marshall, director-general of the British Chambers of Commerce (BCC), welcomed the Centre for Cities recommendations during the online discussion.

He said: “The business rates system does remain fundamentally broken. It creates so many disincentives for investment, it’s a burden on many businesses regardless of their ability to pay and makes no allowance for structural changes that have taken place in the UK economy.

“We all know it doesn’t work for local economic needs or at national level.”

He cautioned against reforming business rates without wider consideration for how businesses are taxed elsewhere, otherwise “we could end up solving one problem and creating another”.

Dr Adam Marshall

Dr Marshall said chambers of commerce have long been calling for annual revaluations as it would take many of the issues inherent in the system, while he also welcomed suggestions for a simplified methodology to valuations and regional pooling so local authorities could retain 100% of business rate revenue growth.

Commenting on a recommendation to remove plant and machinery from the valuation process, he added: “I’ve heard from so many businesses over the years that have said they’ve taken the decision not to invest in improvements to their premises because they were worried about increasing their fixed costs over time.

“That’s crazy and should not happen in a country that desperately needs investment and improvement in its productivity.”

But he warned against abolishing business rates relief without illustrating to businesses and landlords how things would improve for them, while he said there must be assurances that removing the cap on total business rates revenue doesn’t just lead to firms becoming a “cash cow” for authorities to fund local services.


Centre for Cities feedback and recommendations

What’s wrong with the business rates system?

The report identifies four fundamental problems with business rates:

  1. Business rates do not reflect local economic realities
  2. Business rates are too complex
  3. Business rates disincentivise investment
  4. Business rates do not incentivise local growth

How should the business rates system be improved?

It set out 10 proposals for reforming of business rates in a way that addresses each of these issues.

Reflecting local economic realities

  1. Introduce annual business rates revaluations
  2. Devolve the valuation process to local government

Simplifying the system

  1. Ensure the valuation process uses the most up to date local economic information transparently
  2. Reform the system of discounts and incentives
  3. Make landlords take on 50% business rates liability
  4. Abolish business rate relief, with some exceptions for community groups
  5. Equalise the empty rates relief between retail and industrial units

Promoting investment

  1. Remove plant and machinery from the valuation process

Incentivise local growth

  1. Allow local authorities that participate in a new pooling system to retain 100% of business rate revenue growth
  2. Remove the cap on total business rates revenue

 

This article appears in the December 2020/January 2021 issue of the Chamber's Business Network magazine. To read the online edition, click here.

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