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Elizabethan business rates a ‘busted flush’, says FSB

Martin McTague, policy and advocacy chairman at the Federation of Small Businesses, on why a radical reform of the business rates system can’t come soon enough

The high street is facing challenging times. Just last week the second Grimsey Review was published, demonstrating just how bleak the outlook is, with a growing number of vacant shop units and costs rising faster than sales growth.

And like bigger retailers and department stores, many of which have reported falling sales and closures in recent months, small firms on the high street are suffering.

Spiralling business rates bills are crippling many small businesses, which are already battling ever-increasing rents.

And, of course, these financial hurdles are set against a backdrop of weak consumer demand, while the rise of online sales and bank branch closures drawing people away from the high street, are all piling the pressure on.

The business rates tax has its roots in the Elizabethan poor laws, which recently celebrated its 400-year anniversary. Despite a lot changing since then, this antiquated rates regime is still stuck in the past.

The fundamental principle underlying the business rates system – that property value is a reasonable proxy for an occupant’s wealth – is no longer fit for purpose.

Businesses in many properties rent, so don’t benefit when their shops and offices rise in value. Yet they’re still expected to pay increasing business rates on top of rising rents. The tax is not linked in any way to fluctuations in trade or income.

In the digital age, this creates perverse outcomes. Because while multimillion-pound e-commerce giants operating out of remote warehouses are seeing their rates fall, thousands of small high-street shops are being hit with massive hikes following the rate revaluation – an indication of how ludicrous this regressive system is.

One of the issues with the system is that these revaluations are so infrequent – until now, five-year intervals have been the norm.

Last year’s revaluation had a twist, though. Expected to take place in 2015 (based on 2013 property values), it was delayed by two years – with bills calculated using 2015 values. Property prices in many pockets of the country surged in the interim, meaning those hit with hikes were hit a lot harder than anticipated.

In April, bills increased again for many as year-one caps on increases were lost and an inflation-linked rise was applied.

Martin McTague FSB
Martin McTague, policy and advocacy chairman, FSB
Multimillion-pound e-commerce giants are seeing their rates fall while small high-street shops are being hit with massive hikes

Business rates is a tax that might have made sense once. Today, though, it’s a busted flush.

FSB has fought hard for business rates reform. We’ve successfully ensured many more of our members are exempt from the tax, reducing the rates liability for the small business community by £6.7 billion for this revaluation period.

Small Business Rates Relief is now thoroughly embedded in the system, taking the smallest businesses out of the tax altogether, and providing tapered relief for those who are just above the threshold. The relief now needs to be expanded, with targeted help for those areas most impacted by rates rises, not least London where few small firms qualify. The threshold should be adjusted in inner and outer London to enable more small businesses to receive relief.

Other wins include a £435 million support package unveiled by the Chancellor as part of the 2017 Spring Budget. It consists of a £300m fund that councils can draw on to help small firms hit by big rates increases, a discount on bills for pubs and a cap on hikes for firms that are having to pay rates for the first time.

This year the Government has committed to more frequent revaluations – every three years rather than every five, which should help to make the system fairer, provided it doesn’t come with additional admin for small firms.

We’ve also secured a reduction in the annual inflation-linked increase in bills. It’s now applied according to the consumer prices index, rather than the considerably higher retail prices index.

Over the long term, a fundamental review of business rates has been promised and that can’t come soon enough.

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