The government's consultation on business rates reform has closed today with experts calling for more radical thinking to overhaul the real estate industry's most divisive tax.
In September, in an update on the consultation the chancellor of the exchequer Rachel Reeves laid out the government's priorities for reform of the tax levied on commercial properties.
The "Transforming Business Rates" discussion paper was published at the Autumn 2024 Budget to start a consultation on improvements to the system.
The government has described this as a multi-year process and it will consider reforms to the system over the course of this Parliament, which could be until 2029, alongside the revaluation of properties in 2026 and 2029.
The chancellor made clear government would explore fixing sudden jumps in business rates, known as “cliff edges”, that can discourage small business investment and growth. Currently when a business opens a second property, it loses access to all Small Business Rates Relief, which is a 100% relief on up to £12,000 and tapered thereafter, and Reeves said this is also holding businesses back from expanding.
The priority areas being considered are: a "slab" to "slice" reform, which would move from the current structure where a single multiplier is paid on the full rateable value to one where successive bands are taxed at increasing rates.
The Treasury is considering enhancing SBRR to support business growth and investment and enhancing Improvement Relief, once more data is available to establish how it is being used. Improvement Relief is used where a property's rateable value is increased, either by an increase in size or by adding features such as air conditioning.
It is also exploring concerns over the "Receipts and expenditure" methodology and the benefits of shortening the Antecedent Valuation Date in the future.
The government intends to use the merger of the Valuation Office Agency with HMRC to pursue administrative changes that help ratepayers.
In its response to the consultation, which ends today, Colliers says it is a "real stretch to claim that the government is 'meeting its manifesto commitment to rebalance the business rates system'."
Colliers says the 2024 Labour manifesto said it would “replace the business rates system” and “level the playing field between the high street and online giants” but argues thousands of retail, leisure and hospitality businesses properties – which are not the online giants' distribution warehouses of online giants – are being asked to pay the new, higher multiplier for big premises.
It adds: "Moreover, a 5p reduction from the standard rate for RHL does almost nothing to offset the loss of the legacy Covid 40% relief enjoyed by RHL businesses. The commitments of the Manifesto have clearly not been met."
Alex Altmann, partner at London-based business advisers and chartered accountants Lubbock Fine, argues that business rates should be replaced with a local supplement tax on profits. He says the system is "overly complex, leads to endless disputes and [is] a significant barrier to inward investment into the UK".
Altmann, who heads the firm’s German desk, also says that most proposals for reforms of business rates are minor tweaks that would leave in place an overly complex system which really needs a complete overhaul.
Altmann said: “Swapping business rates for a local tax on profits would create a fair and predictable tax system. It would also create a tax system that would support business as they go through their early unprofitable launch or growth stage. It would also automatically be a tax that would become less of a burden when a business or a sector is struggling.”
Colliers sent out a survey to its clients asking them to respond to the questions in the consultation. It says 67% of clients said the current level of business rates is a disincentive to invest in and grow their business. It adds that there is a strong view rates should be based on property size rather than business performance, and that increases disproportionately affect some sectors while leaving many businesses unsupported. The majority favour a multiplier below 20p, with most respondents supporting a rate no higher than 35p to encourage investment.
Colliers notes that the government says it is committed to a progressive business rates system, where higher value properties pay more, but says it is not clear what the government means by a “progressive business rates system".
It adds: "If the government is saying that it wants to increase the tax on larger properties disproportionately and so make it progressively harder to occupy larger commercial premises, then it will never encourage investment or growth. It is important that government understands that higher multipliers for occupying larger premises limit business investment."
It adds: "Several multipliers are a much bigger block on investment than whether we have a slab or slice system.
"The cliff edges at £12,000 and £51,000 are about to be added to with the £500,000 threshold. Added to that the differential in RHL multipliers below £500,000 means the cliff has just got a little higher."
In terms of what a move to a "slice-based system" would mean Colliers says while the system sounds attractive in principle "if the end game is collecting the same amount of revenue, it really is rearranging the deck chairs on the Titanic".
Colliers adds: "A slice system makes the transition smoother and could stop so many appeals around the £12,000 (£15,000) £51,000 and £500,000 levels. However, it would not be necessary if there was only one sensible multiplier.
"If the government proceeds with a slice-based tax and multiple multipliers, it is extremely likely that the government will also change the multipliers, and that larger properties will be asked to pay yet more, so the government can retain the same revenue intake. This will be a disincentive to business growth and expansion.
"The danger of a slice-based tax and multiple multipliers is that it will take so long to unwind. Already, we believe it would take over five years to move back towards the sensible level of uniform business rate that we had when the system came in back in 1990."
In the report the government says it is committed to tackling avoidance, while also ensuring that Empty Property Relief supports business investment. Colliers believes EPR needs extending: "The current three- and six-month relief periods are outdated. Business rates become payable long before a property can realistically be refurbished, marketed and relet, often when owners have no rental income at all. This creates a punitive incentive for defensive behaviour, including short-term avoidance schemes, premature demolition and leaving buildings in disrepair. Extending EPR to 12 months would remove the incentive to take avoidance measures."
In terms of reforms to property valuation for business rates, Colliers argues that the level of the tax is the problem not the methodology of the valuation. It points to the Netherlands and its ability to assess business rates annually as a better system. "If it is possible there, it should be possible here."
It adds: "Simplifying the multiplier structure and making it more stable would help investors better forecast their costs and reduce risk.
"Reforms that increase transparency, predictability, and fairness, would better enable sustained, high-value investment in the commercial property market."
John Webber, head of business rates at Colliers, said: "Ultimately, if you keep trying to raise more money through business rates you will only create a disincentive for businesses to expand or improve."