This article was originally published at Reaction.
Even the Daily Mail is splashing business rates on its front page. What has this most unglamorous of taxes done to deserve that?
For many businesses, rates are a bigger headache than corporation tax. After all, they only have to pay the latter if they are profitable. There is no such escape from rates. The trouble is the way they are levied. To figure out how much it owes, a business first needs to know the theoretical amount that someone would pay to rent the premises it occupies. This ‘rateable value’ is determined during a periodic exercise by the valuation office agency. The business has to pay roughly half of the rateable value as a tax each year. It doesn’t matter if the business is doing well or seriously struggling, it still has to cough up.
At the best of times, the tax is unfair in the way that it hits some kinds of trade harder than others. A bookshop in the High Street of a pretty country town might not make much money. But it has to pay business rates that reflect the gentrified area in which it is located. Conversely, a small office in an out-of-town development might contain a few highly paid executives for whom the business rates are not a significant cost.
In short, business rates are oppressive for a retailer which has to locate close to its customers. One result is that charity shops, that get an automatic 80% rebate, have colonised high streets where regular stores are priced out. The Government periodically promises a review of business rates but the chance of serious reform founders on the need to raise the same amount of money after any changes. Nonetheless, there are plenty of exemptions and reliefs, such as those for village shops and pubs, which mean everyone else has to pay even more.
The current hullabaloo, reflected in the Daily Mail and other papers, is simply the regular revaluation exercise intended to keep rates fair. Although the total amount to be raised isn’t increasing much, there are, inevitably, winners and losers. The winners, which allegedly include Amazon’s warehouses, are quietly satisfied. The losers, comprising popular brands and small shops, are outraged. Numerically, it also looks like the losers may outnumber the winners, further increasing the volume of their complaints. The Government itself has made matters worse. The revaluation was supposed to happen in 2015 but, since it did not want the resulting controversy to hit just before a general election, it postponed the changes until this year. As a result, many ratepayers are seeing much bigger revaluations than they would have done had the exercise taken place two years ago as scheduled.
In some ways, business rates are the commercial equivalent of council tax. Like with council tax, the revenue raised goes to fund local government. A total of £26 billion a year is collected and, through a complicated formula, it is redistributed to local authorities. Unlike council tax, business rates are not automatically spent in the same area in which they are collected. My local authority of Tunbridge Wells, being quite a wealthy borough, keeps a tiny proportion of the rates it collects. Councils don’t even get much say on what the level of rates should be. Since the 1980s that has be set by central government. Going forward, local authorities will get to keep increases in the money raised from business rates in their patch, but conversely they are on the hook if they do not manage to collect enough.
The Government will be very keen to face down the current resistance. Assuaging those seeing increases in their rates will cost money that it does not have. David Gauke, Financial Secretary to the Treasury and a politician who radiates seriousness, has been dispatched to calm things down. Number 10 will be hopeful that when Article 50 is debated by the House of Lords next week, public attention will be distracted from business rates (that most people know nothing about) and the Daily Mail will come back onside.
However, all this could merely be a dress rehearsal for what would happen if there was ever a council tax revaluation. Council tax is calculated from the value of our homes in 1991, which is now hopelessly out of date. But given the regular angst caused by business rates changes, it is no surprise that ministers have repeatedly refused to countenance a revamp of residential property taxes. That would just be asking for trouble.