THE POLITICS OF BUSINESS RATES – PART 1

Professional Services News

Unless you’ve been living on Desert Island for the last few months, the UK’s looming General election cannot have escaped your notice.

The competition looks wide open, the only certainty is uncertainty. Against that background, rarely a day goes by without the parties making a pledge to change a policy in the hope that it might just swing a few votes in their direction.

Businesses have done reasonably well under the coalition, with Corporation Tax coming down and some helpful reliefs here and there.

But one issue the Coalition hasn’t tackled sticks out like a sore thumb – and it’s the vexed issue of Business Rates.

I’m going to examine some detailed proposals for reform in another blog next week, but it might be helpful to take a quick glance at what the three major parties are proposing as the election nears.

Labour

Labour clearly acknowledges that business rates are an issue and that’s a good start. Here’s what Ed Balls, the (Nottingham-educated) Shadow Chancellor, has to say:

“We will cut and then freeze business rates for 1.5 million small business properties with a rateable value of less than £50,000. Labour’s plan means the tax burden on small businesses will be lower than under the Tories. We will look to go even further as we priorities small businesses for future tax cuts.”

All good stuff, and it makes for a headline policy which is easy to understand but a headline may be all this is.

This policy would affect around 1.6m properties which have a total rateable value of roughly £16m. And the average rateable value below £50,000 is actually £9,900. So this equates to a saving for them of a grand total of £89!

To enable this to happen, there would have to be a change in the Local Government Finance Act, while local authorities would also have to make changes to their billing systems. All for an average gain of £89.

Labour also say they’d give more discretion to local councils. This is their commitment:

“Under a Labour government, local authorities would be able to keep any additional revenue from business rates during periods of growth.”

No one would argue against what Labour is suggesting. But it looks like small change, and it doesn’t address some of the fundamental iniquities that skew the whole Business Rates system.

Conservatives & Lib Dems

I’ve taken the two other parties together not because they necessarily sing off the same hymn sheet (!), but because they’ve been in government together. So the big question they face is this: if you’re suggesting Business Rates need to change in future, why haven’t you done it before?

We know the answer to that: the Uniform Business Rate brings in £26.6 billion a year in revenue. During a period when the Government was committed to repairing the UK’s cracked finances by reducing the Budget deficit, there was little likelihood of any change which would bring that sum down.

Hence the decision to push back the revaluation scheduled for 2015 until 2017. It kicked the can down the road.

That’s not to say the Coalition has sat back and watched the Business Rates roll in. There have been a number of tweaks to the system – a new build relief scheme, rates deferment, a retail premises discount, the extension of transitional relief for small properties, 12 instead of 10 monthly payments, and capping.

What are the two parties saying? Similar things, funnily enough.

David Cameron: “We will increase from 50% to two-thirds the proportion of business rates that can be retained by local councils to encourage them to get behind commercial development.”

Danny Alexander: “Places such as Manchester, Newcastle, Cardiff, Leeds and Glasgow should have greater freedom to vary property tax.”

Conclusion

One of the most interesting comments on the debate about the future of Business Rates came from Vince Cable, who wondered out loud how you might reform “this incredibly unpopular tax” but didn’t really offer any answers. May be that tells its own story.

The challenge politicians face is this: on the one hand, in Business Rates they’ve got a levy which they know is unpopular, unfair and borderline indefensible. On the other, they’ve got £26 billion a year coming in at a time when money’s too tight to mention.

What’s the answer? I’ll have a look at some potential solutions next week.