Reforming Business Rates

In 1572, the Ridolfi Plot to marry Mary Queen of Scots to the Duke of Norfolk and overthrow Elizabeth I was quashed, Spanish Conquistadors finished conquering the last part of the Incan Empire and the first ever book dedicated to dermatology was written. Imagine all that has happened in the almost half a millennium which has followed, all the ways society has changed and the invention and re-inventions of the global economy. Now answer me a simple question, do you believe a tax invented in this year securing contributions from businesses for local services is likely to accurately reflect the value of companies in the year 2023.

No? Well you may well be right, unfortunately that is exactly the situation we’re facing with business rates. While the system has been subject to various changes over the years, at their core business rates remain the same form of property-based taxation which was introduced in Elizabethan times and for various reasons that’s not a good thing.

Firstly, a bit of background information about how rates relate to local councils. Much as with West Sussex County Council’s tax and the Police and Crime Commissioner’s precept, Crawley Borough Council is required to collect all the rates businesses are liable for within Crawley on behalf of the system as a whole. Over recent years the council has been allowed to retain a portion of these rates to spend on local services, replacing some of the grant which was lost, with another portion going to the county council.

While the Government talks of councils being allowed to retain all their business rates this is, in keeping which much of what they say, completely untrue. Crawley collects around £120m in business rates and gets to keep around £4m due to a combination of charges introduced. We can argue about how fair these charges are, but to some extent they are necessary since without them Crawley would have almost nine-to-ten times the money we actually need to currently run the council, but at the cost of other councils in the country we subsidise going bankrupt.

The other main thing to bear in mind is that we don’t set what the business rates are. Before Margaret Thatcher, councils could set both the rate of council tax and the rates for businesses, yet when she introduced the Poll Tax she also removed the ability of councils to set their own rates for businesses, with them not being set entirely by central government.

At the time when the UK’s economy was still feudal, with economic value essentially being a matter of what you could extract from the Earth, a model of business taxation based upon land and property made sense. The more valuable the estate the more it could afford to contribute. However, the world today is entirely different, with the value of a company not only no longer determined by the size of their property, but where businesses increasingly don’t need buildings at all.

This not only means that the tax is no longer being levied upon those who can most afford to pay, but that those who are paying are suffering an extra disadvantage in trying to compete. This is most apparent when it comes to considering retail, where shops are left paying high rents and rates on town centre locations while their competition is delivering items directly to customers’ doors. The whole business rates model is needlessly exacerbating the structural challenges councils are facing in trying to save their high streets, amongst having other perverse outcomes (for instance, councils quite often can’t bring services back in-house where they have been outsourced to various types of non-profit organisations, as those organisations are exempt from business rates liability while councils and other parts of the public sector are not).

Fortunately, there does at last seem to be some movement on this, with the Labour Party pledging that we will ‘scrap business rates and replace them with a system that will incentivise investment and level the playing field between high street businesses and global giants’. Having raised these issues for many years now, it’s a relief to see that there is common sense out there, even if we are going to have to wait for a change of Government to see it in action.