Internal conflict: Our absurd business rates system must change

12 Nov 2019

Business rates are in the headlines again, this time because NHS trusts are taking 45 local authorities to court to reclaim £1.5bn of business rates they paid between 2012 and 2018. The hospitals claim that they should have been treated as charities and benefited from charitable relief. The local authorities argue that hospitals have a “governmental” purpose, not a charitable one.

Putting aside who might be right in law, isn’t it bonkers that two bits of the public sector are spending what must be hundreds of thousands of taxpayers’ pounds on a legal battle over public sector money? And isn’t it absurd that business rates should be set up in such a way that incentivises this sort of litigation to happen? Who in their right mind would create a tax that pits health against local government?

Of course, none of this will surprise business rates veterans among you. For years now we and many others have been highlighting the many ways in which business rates are harming our economy and communities. How unfair they are, because properties are revalued so infrequently and because businesses must pay regardless of how well the economy is doing. How they ignore the fact that the way in which we use space is changing rapidly. And how difficult it is to challenge unfair and incorrect valuations.

These were all points we repeated to the Treasury Select Committee earlier this year when they ran an inquiry on business rates. The Committee’s report, published recently, was clear; business rates “act as an immediate disincentive to investment”, which government should “revise…and…change to support investment by businesses”. Furthermore, the number of reliefs needed for the system to work “indicate a broken system”. Finally, the report called on the government to “set out its views” on the fact that thanks to business rates the UK has the highest level of property tax in the OECD.

I can tell you what the government’s reply will be something along the lines of “the UK has one of the most competitive tax systems in the OECD and has the lowest level of corporation tax of any major advanced economy. It also has a very friendly and supportive business environment”. All of which is true to a certain extent, but totally ignores the fact that business rates are fundamentally unsustainable.

The government simply cannot expect to collect an ever-increasing amount of money from a commercial property base whose value has historically grown more slowly than inflation and often less than the economy as a whole. Or rather – it can, but at the terrible cost of new investment in our towns and cities.

Something else the government might say in its response is that if it reduces business rates, landlords will just increase rents to compensate and so occupiers will be no better off. The government will just have handed money to landlords.

Three things here. Firstly, occupiers can negotiate with their landlords on rent. They can’t negotiate with the government on rates. It’s hard to imagine that occupiers wouldn’t benefit from a reduction in business rates.

Secondly, our members are increasingly having to let certain types of property at nil rent (often because their real rental value is negative). Reducing rates on these would immediately benefit occupiers.

Thirdly, if rents do rise as a result of falling business rates, this increases the viability of new development. This is critical when our towns and cities need to rapidly adapt to face the challenges of the 21st Century. There is also ample research to suggest that more modern buildings are not only better for the environment than old buildings, they also enhance productivity. Greening our economy and increasing its productivity are two of the key issues facing the government; doesn’t it make sense to give the property industry the means to support these aims?

Of course, there are no easy answers. I don’t envy the Treasury officials and ministers whose job it is to balance the competing demands of raising revenue and maintaining a healthy economy. There will always be trade-offs.

That said, the case for keeping business rates as they are is getting very thin indeed – definitely time for a change of approach.

Ion Fletcher, Director of Policy, BPF