1 November 2022

Business rates are a bad tax in dire need of reform


With the implosion of Truss’s Growth Plan, cuts to corporation tax look highly unlikely any time soon. This is disappointing because we know from the Treasury’s own modelling in 2013 just how beneficial not going ahead with the corporation tax rise could have been: long-term GDP and investment spending could all be boosted, with much of the ‘lost’ revenue recovered from these dynamic effects in the economy. But with tax cuts now off the table and supply side reform on the backburner, what can be done to help businesses, drive productivity and get more people working? One answer could be business rates.

Business rates – a property tax on occupants of non-domestic properties – amounted to £27.9bn in 2019-20, with receipts somewhat lower the next two years for obvious reasons. Although there is now a convoluted funding formula between central government and English local authorities, a growing proportion of this revenue is now retained locally, rather than going to Whitehall. That this is raised and retained locally is a good thing, but the burden of business rates is now especially onerous.

The business rates system needs radical reform and there is a growing urgency to do so. The popularity of internet shopping seems here to stay: 19% of total retail sales in 2019 were online, whereas in 2022 so far it’s over 26%. And advances in e-commerce have disrupted the business model of traditional high streets in areas with higher rents and business rates, in favour of online deliveries handled from distribution centres in cheaper locations. To some extent, this phenomenon can be seen as a shift in consumer preferences to which traditional retailers must adapt. The problem is that business rates discourage commercial use of property in more expensive town centre locations.

But there are a range of options available to help firms. For starters, the multiplier – how much the rateable value is multiplied to calculate the business rate to be paid – could be lowered. The multiplier was increasing year-on-year until the UK government (for English properties) froze it in 2020-21. But calls have been made – such as by the former chief executive of Marks and Spencer – to reduce the multiplier to its 1990 level of 35p. He also proposed more frequent revaluations and a quicker reduction in rates when property values drop.

More radical proposals include the abolition of business rates entirely and instead raising VAT to 23%, as proposed by new business minister Kevin Hollinrake MP in a ten-minute rule bill. This would ‘level the playing field between online and high street businesses’. Part of the appeal of this would be to also do away with the convoluted revelations, challenges, appeals and debt collections that come with the business rates system.

Our own research shows that options ranging from complete abolition to a modest reduction can have a positive impact for businesses and households alike. In England alone, complete abolition could see GDP, investment spending and average weekly earnings all be higher after 10 years. Investment spending alone would increase by almost 3% – a boon to our tired town centres.

The government is seemingly alive to concerns about business rates. As a former chancellor, Rishi Sunak is well aware of how important the issue is for small businesses and taxpayers worried about their local high streets. Revaluations are now to be done every three years instead of every five. This will better reflect market rents of properties when a new or revised rateable value is determined. But the current system is still quietly strangling our struggling firms.

Big reductions in the multiplier – or at the very least, ending for good any automatic updating of the multiplier with inflation – must be a priority of the new administration if they are committed to jacking up corporation tax. The new government is right to pursue a period of economic stability, but unless measures are also taken to boost business activity, it may be a while before we see proper and sustained economic growth again. Reforming business rates could be a good place to start.

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Duncan Simpson is chief economist at the TaxPayers' Alliance.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.