UK committee: Beginning of the end for ‘broken’ rates

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In 2018/19, £31 billion of government income was raised through non-domestic property rates, one of the seven highest-grossing taxes in the U.K. Photo credit: iStock / Getty Images Plus / 8213erika

A report on business rates in the U.K. carried out by the Treasury Committee, described the system as “broken” and called for the government to be “creative” in looking at other options.

The investigation by the select committee was described as “the beginning of the end” for the current ratings system, which has driven rising costs across the hospitality sector.

The report said the tax—based on the estimated rental value of the property— placed greater costs on physical businesses than online traders and had grown as a proportion of the total tax paid by businesses since 1990, when the current regime was implemented. Growth in revenue generated also had outpaced inflation.

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The committee said that, in 2018/19, £31 billion of government income was raised through non-domestic property rates, one of the seven highest-grossing taxes in the U.K. It said the government needed to explain whether it was “deliberate policy to allow the revenue generated by business rates to increase above the rate of inflation and to become an increasingly significant proportion of the total taxes borne by businesses. If these are deliberate policy decisions, the government needs to explain the rationale behind [its] policy and what it is intended to achieve.”

Commenting on possible explanations, John Webber, head of rating, Colliers International, told our IHIF newsletter: “The only rationale behind it is that it’s an easy way to grab more money and if you do that every year for 29 years, you end up in a bad place. It was borne out of short-term political expediency; a tax grab that you wouldn’t lose votes over. It also suited a lot of governments to give relief and be seen to help small businesses, but the same amount still had to be raised; it was just left to the larger groups.”

MPs: Get ‘Curious, Proactive, Creative’

The members of Parliament’s (MPs) report said “tweaking” the system through an increasingly complex web of reliefs merely demonstrated “how broken the system is.” Given the changing nature of the economy, the committee said, the government needs to be “curious, proactive and creative in exploring alternative options”.

It was recommended the government prepare a consultation in time for the Chancellor’s next “Spring Statement” to identify potential alternatives to business rates.

MP Alison McGovern, the Treasury Committee’s lead member for this inquiry, said, “Odd reliefs here and there are nothing more than sticking plasters to a system in urgent need of reform. The committee was presented with numerous alternatives to the current system, but none of them had been sufficiently modeled to examine who would be the winners and losers of any change.”

A Treasury spokesman said, “We concluded a fundamental review of business rates in 2016 and have since introduced reforms and reliefs saving businesses more than £13 billion over the next five years. We will respond to the select committee’s report in due course.”

Said Webber: “It isn’t necessarily the end of the ratings system, but it might be the beginning of the end. A report by one of the most powerful committees in Parliament must be heard— and it covered around 90 percent of people who pay rates.

“If you have a business and someone is asking for your vote, I wouldn’t just be worried about Brexit, I’d be worried about what they’re going to do about this document and about relieving the burden, which is being lumped on medium-size businesses and above.”

Hospitality at a Disadvantage

The ratings system has been blamed by many for placing an untenable burden, failing to take into account the performance of businesses and hindering investment in property due to the risk of pushing up its value and incurring further tax. UKHospitality CEO Kate Nicholls described the current system as being “nowhere near flexible enough and it has directly contributed to the decline of high streets.”

She added, “Hospitality businesses are at a particular disadvantage and have been arguably hammered worse than any other sector. The current system penalizes businesses [that] invest in their properties and actually acts as a deterrent to investment. We need a complete rethink of the system and an overhaul to bring it in line with the 21st century.

“We are pleased that policy-makers are listening to the concerns of businesses and acknowledging that there must now be action. There must be, as the committee recommends, a consultation at the soonest opportunity to identify alternatives to the current system. The incoming government must act on this as a priority.”

Added Webber: “The elephant in the room for many years has been the ever-increasing multiplier or UBR [the figure which is multiplied by the rental value of the property to reach the annual tax bill], which [has] grown from a level of 30 percent in 1990 to a figure today in excess of 50 percent. The committee has stated quite clearly in its report that the government needs to explain how they have reached this figure, and if it is a clear government policy they need to set out the rationale for it. The reality, unfortunately, is that there is no rationale and for the last 29 years, governments of all persuasions have overseen an increasing burden of business rates that has resulted in the unsustainable levels we see today.

“If the net-tax take today was the same as in 1990, the multiplier could easily be reduced to a 30 percent figure. The reality is that if the multiplier was reduced by this amount, most of the questions and issues surrounding business rates would largely evaporate.”

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