Business Rates Need More Localism
By: Dhruv Patel Obe
Tags: Politics, Tax Reform, Property, United Kingdom, Small Business

Last year I was elected to the City of London Council as an Independent. Prior to my campaign, I visited many small retailers and was repeatedly told about the devastating effect the current business rate system was having on them. I am very familiar with the problem as my family operate a small, independent chain of pharmacies, so I was not surprised by their reaction all. I therefore made business rates reform one of the key platforms of my campaign.

Business rates are set every five years using the rateable value of the property as it was two years previously. This means that from 2010 onwards, the value of the property used to calculate the tax was based on high pre-crisis 2008 figures. As the economy tightened the increasing discrepancies between the value used to calculate business rates and real market rents, became a very serious issue. This imbalance would have been addressed in the next English revaluation which was due in 2015 but the government announced a postponement until 2017. This decision was greatly flawed and means the rateable value of business properties remains too high in many areas.

In addition to this artificially high valuation basis for business rates, another problem specific to Central London is the difficulty in the application of the Small Business Rate Relief Scheme. Small independent retailers throughout England can seek financial help via the scheme but it is only given to occupiers of property with a rateable value below a maximum of £12,000, a figure which is set nationally. This means that almost no small retailers in Central London can take advantage of the relief.

Both of these problems have contributed to the degeneration of our high streets. Where there was once a thriving variety of retail outlets, offering individuality and varied merchandise, we now have streets of unaffordable, desolate, empty buildings interspersed with a few betting shops and pawnbrokers, or the uniform bleakness of chain stores and multiples. As if that wasn’t enough the few local traders that do remain also have to compete against internet retailers who do not have to pay for a presence on the high street. We need a solution.

One idea would be to scrap business rates for retailers and increase VAT (retail sales tax) to make up for the lost revenue but this would require a great deal of political will. Indeed the British Retail Consortium have already made proposals along these lines, although the British Chambers of Commerce have commented that as business rates affect all sectors, any new method should be fair to all businesses.

A simpler solution therefore, would be to allow local authorities to take control of their own local business rate revenue.

Historically local authorities collected business rates which were then paid into a national central pool. Some of this money was in turn redistributed back to the local authorities as part of the formula grant. However, there was no relationship between how much, or how little, a local authority collected, and the amount that was returned. This meant that local councils had no incentive to drive growth locally, by using their levers such as planning, parking and public transportation policy, as any resulting increase in business rates had to be paid into the central pool.

Recently the government have made some changes to this policy and for the current year (2013–14) onwards, local authorities are now allowed to retain some of the growth they achieve in business rates receipts. This is good news but these plans don’t go far enough. Local authorities should also be given responsibility for setting the business rate multiplier, timing of revaluations and, most importantly, they should be free to determine the availability and premise on which reliefs are made available.

Supporting these suggestions is Mayor Boris Johnson’s backing of the 2013 London Finance Commission report that contains a proposal for a ‘comprehensive package of devolution measures to give Londoners a more direct say over a greater proportion of taxes raised in their city’. Furthermore, there is the recent report from the Business, Innovation and Skills Committee which says that ‘the property tax is no longer fit for purpose’ and ‘is in need of “fundamental reforms”’.

These reports have attracted a lot of support and added an authoritative voice to the plea for financial and fiscal devolution. Sir Richard Leese, leader of Manchester City Council has said that we must ‘free our cities from central control so they can create more jobs and economic growth’ whilst Mayor Jules Pipe, Chair of London Councils, said ‘these proposals offer new hope for jobs, improved local services and economic growth’.

I believe it is vital that the tasks of setting rates and reliefs, and deciding how to spend them are devolved to local and regional levels of government. This would give people a democratic say in which types of businesses they want to encourage and how the receipts are spent, allowing them to witness the resultant effect in their own, and neighbouring, areas.