Reform to the business rates system cannot come soon enough for British business, John Allan, the CBI President will say today when he addresses business leaders in central London, calling the system ‘uneconomical, unsustainable, and unintelligible’.
In his speech, Mr Allan will decry the broken system, identifying two key reasons for serious reform: long gaps between revaluations means punishing areas of the country that are already struggling, but also eventually undermining those that are on the way up. Secondly, the system makes businesses less likely to invest in growth.
Mr Allan is expected to say:“The business rates system has – over time – become uneconomical, unsustainable, and frankly, unintelligible. In short, it’s a system in need of reform.
“Part of this problem is the uncertainty around when the next rates revaluations occur. The last revaluation period was extended from five years to seven. We can now expect revaluations every three years. But in practice, any longer than one year means business rates lag far behind economic cycles and – over the years – the significant rises in UK property costs.
“The result is a system that rewards those places already on their way up in the short-term, but eventually pulls the rug from under them. And one that punishes those areas that are already struggling, with boarded up shops an all too common sight.
“Take Hackney, for example. Almost a decade ago, the borough was known as the centre of the London riots. A world away from the Hackney we know today: A vibrant vessel of investment, buzzing with interest – a magnet for new businesses. Part of London’s ‘Silicon Roundabout’ which last year attracted almost 20,000 new start-ups.
“But the lag between the area’s boom in property prices and its latest business rates revaluation has seen firms suddenly having to cope with an almost 50% increase in their bill.
“A temporary benefit before businesses take a hefty hit to their costs. A hit that some won’t be able to survive.
“We can compare this to somewhere like Redcar. A town – once considered a powerhouse of coal, steel, and shipbuilding which, following the closure of its steelworks four years ago, saw a huge rise in unemployment to more than 5% – well above the UK average –alongside a significant drop in property prices. Meanwhile firms in the area continued to pay business rates at up to 20% above their rateable value. It’s clearly counterintuitive. But it’s also the inevitable result of a system unable to account for rapid change – whether growth or decline that we’ve witnessed across the UK.
“It can mean local authorities being underfunded, in areas where businesses are on the rise. Or companies going under, creating a vicious cycle of decline and dependence.
“And it’s the way that business rates currently work against the economic cycle that makes the tax uniquely damaging. Just compare this approach with other types of tax. Fuel duty, or corporation tax, for example. They increase when business is booming in proportion to the amount of fuel you buy, or profit you make. It’s a much fairer system. One that doesn’t reinforce economic disparities – like the current business rates system does.”
He also believes the current system is deterring investment. “The business rates system – in its current form – disincentivises investment. At the heart of the problem is the way we assess property.
“If you’re a climate-conscious business owner and you want to improve your office, or your energy supply with solar panels – or new energy-efficient lightbulbs. Whether it’s a large capital investment, or several smaller upgrades to existing property, any real efforts to invest will see your business rates rise.
“It certainly doesn’t give businesses a strong reason to invest in the UK. Let alone in areas where capital is most sorely needed.
“That adds yet another barrier to growth at a time when the UK already faces its lowest level of business investment since the financial crisis far behind our competitors – at only 9% of GDP compared to 13% across the G7 fuelling an ongoing productivity challenge.
“To understand the impact of these problems, we need only look at the headlines of the past few weeks. Debenhams, once a stronghold of the British high street, fell into administration. Exactly ‘why’ is a complicated question. But I’ve yet to read an explanation that doesn’t cite business rates as at least part of the cause. And the same has been true of countless firms over the years.
“And every year, thousands of firms try to appeal their business rates bill. It more than suggests a lack of confidence in the system.
“While we have seen warm words and small solutions from the Government over the years these tweaks have only served to reinforce the idea that business rates are a high street issue rather than a problem for our whole economy.
“And the more sticking plasters we add, the greater the signal that the system is broken and in need of a fundamental re-think.
“So here’s our solution. A comprehensive and independent review of the business rates system. It’s in the manifesto for both Labour and the Conservatives. Now why not follow through on that promise.”