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The business rates system is “passed its sell by date” and has led to a “sense of unfairness” and “a level of frustration and deep unease”, the Commons Treasury committee inquiry into the impact of business rates was told yesterday.
While the witnesses lined up to pass on to MPs the frustration of businesses who are feeling increasingly short-changed by the system, there were also some good suggestions for how it can be reformed – particularly from West Midlands CA mayor Andy Street.
He has the unusual advantage of being able to see the business rates quandry from both sides of the fence, as he spent a decade at the helm of the department store John Lewis before embarking on his career in local government.
Mr Street recommended exempting public services from paying business rates in town centres, claiming the fact that a doctors surgery on the high street will pay a lot more in rates (even though it’s more accessible) than a health centre in a more remote setting is one of the “really illogical” ways that business rates are “mitigating against the sort of social change we want to see” in town centres.
Free trade or enterprise zones in town centres could be another way of drawing businesses into towns, according to Mr Street. He pointed to the success in his region of the Black Country Enterprise Zone, where a 100% business rate discount worth up to £275,000 over five years was offered to attract businesses, including Jaguar Land Rover, to move there. He described it as a “point of inconsistency” that “we are very happy to give away business rate reliefs there, but if you drive down the road to [nearby] town centres, we haven’t given structural reliefs to businesses there”.
But of course, the elephant in the room was that as a large and growing proportion of local government’s funding now comes from business rates at a time when services are being cut, the last thing councils want to see is for their funding streams to be narrowed further.
Holding the baton for local government, Richard Watts (Lab) leader of Islington LBC, told the committee that local authorities feel it’s important to contribute to this debate because rates are “fundamental to our future survival”.
He pointed out that a lot of smaller bricks and mortar retailers in the middle of towns also now sell online so a digital tax, which has been touted as a solution to mitigate against percieved unfairness in the system, would hit them hard too.
Mr Street suggested that other elements of business tax could be retained by councils to plug funding shortfalls, such as an increase to national insurance contributions, which he claims could be a “brilliant incentive” for local authorities.
Chief executive of British BIDs, Chris Turner, suggested the answer to easing the burden on businesses lay in increasing council tax.
“Some people are paying less council tax than their golf club fees,” he said. “The challenge is that businesses are paying a 50% tax on properties because they have been revalued again and again. Domestic properties have not been revalued since 1991.”
To illustrate his point, Mr Turner told how a business in a “big, elegant Georgian building” in his town is paying £60,000 in business rates, while next door, in an “almost identical residential building”, the owners are paying just £3,400 - describing this as a “great inequality”.
“And we keep seeing local authorities building into their plans the expectation that businesses will pay more,” he added.
There is also a big perception problem when it comes to business rates. Mr Turner claims that companies often assume that all the rates they pay goes to the council, ”because that’s where the bill comes from” – and the corresponding reduction in local services creates “a level of frustration and deep unease” among the business community.
“We need to rephrase business rates as a business tax and explain it more carefully,” he said. “Business people know the gap in funding has got worse and now rates have gone up by 50%, and they don’t know what will happen next, they are really nervous about what’s happening.”
Mr Turner claims that there are now between 400 and 500 business improvement districts (BIDs) that have been set up across the country, with another 40 in the pipeline. He says that these BIDs are “almost a terrible indictment of the system” because they involve businesses voluntarily putting money into a pot for things like extra police and extra lighting, which councils would otherwise be paying for.
He also made the plausible claim that restaurants, bars and public houses which invest innovatively to make the properties they inhabit more “rock and rolly” are “possibly being penalised” for their investment.
“The owner benefits because the property value goes up, but the tenant is the one who pays extra tax so slowly, [business] people will be less innovative and spend less money on their properties,” he said.
If he is right and the current business rates system does disincentivise businesses from investing creatively into their buildings, then this surely makes councils’ task of place-shaping even harder.
It seems to be obvious to everyone that this system needs more than just a sticking plaster, but a complete overhaul to address the needs of councils and businesses. Hopefully whatever replaces it will aim to revitalise town centres at the same time.
Jessica Hill, senior reporter