Business rates prevent new jobs and development as well as harming business

10 Dec 2015

Policy area: Tax & Finance, Town centre & Retail

A new report has revealed that reducing the burden of business rates could unlock almost 4,000 jobs and £1.75bn development over the next five years – more than the combined development value of the Shard, Walkie Talkie and Cheesegrater. 

The report, launched today by the British Property Federation, (BPF), British Council of Shopping Centres (BCSC) and British Council for Offices (BCO), written by Regeneris Consulting, has revealed that over a period of two to three years, approximately three quarters of any increase in business rates is transferred to landlords as occupiers push for lower rents.

In other words, business rates limit the rents that landlord are able to charge to their occupiers. This reduces the potential level of new real estate investments that they can make and reduces the amount of new commercial property development. However, not all of the cost of rising rates is passed on to landlords, with approximately 25% being borne by occupiers.

The report shows that over the past three years, increases in business rates may have led to the economy missing out on as much as £670m of new development, and in addition may have resulted in as many as 6,000 fewer jobs among occupiers of property. 
The organisations have further calculated that over the next five years projected increases in business rates could lead to approximately £1.75bn of new commercial property development being foregone. Rising rates will also reduce occupiers’ profits by approximately £585m, which could affect as many as 4,000 jobs. 

Ahead of the outcome of the Government’s review of business rates, which is expected to report at Budget 2016, the organisations have called on Government to reduce the burden of business rates and introduce more frequent revaluations. 

Revaluations are currently carried out every five years (although a two-year delay for this cycle was introduced in 2012, resulting in seven years between revaluations) and this is not often enough to pick up changes in wider economic conditions, such as the recent recession. More frequent revaluations would make the tax fairer by ensuring that business rates bills are based on up to date market conditions. 

The need for reform is particularly acute for regional markets such as Manchester, Newcastle and Birmingham, where the report found the relationship between business rates and rents is stronger than in London. The fact that rents outside of London are more likely to be affected by the rising cost of business rates means that more development is likely to be forgone outside the capital –which is at odds with the Government’s desire to encourage growth across the country. 

The converse of this is that the regions may be in a better position than London to encourage new commercial property development under the government’s plans to devolve business rates. A strong relationship between business rates and rents suggests that rents (and therefore new development) will respond positively to reductions in business rates.

Ion Fletcher, director of policy (finance) at the British Property Federation, said: “Business rates are often seen as a cost for occupiers; one that gets in the way of growing their businesses. This research shows that business rates also harm landlords and in particular they discourage new, economically valuable development.

“The government’s desire to maintain a high level of income from business rates, although understandable, means we are missing out on opportunities to provide new jobs, skills and growth in various sectors of the economy, not least construction and retail.”

Ed Cooke, director of policy at the British Council of Shopping Centres, said: “We have heard numerous times from the Chancellor that this Government are ‘the builders’. This research by independent expert economists shows clearly that business rates inhibit beneficial property investment   and development, and therefore are a barrier to much needed growth and productivity. 

“If government really takes seriously the challenge of redeveloping our town and city centres so they are places people are proud to be associated with, then they need to significantly reduce the current tax burden”

Jenny MacDonnell, director of research and policy at the British Council for Offices, said “This report highlights the impact of business rates on rental values in the office market, particularly in London.  The BCO is focused on encouraging investment and development in the office sector and would like to see business rates set up to help support that growth.  

Dr Stephen Rosevear, Director at Regeneris Consulting, added:  “The study has important messages for policy makers, investors and occupiers alike, not least of which is the very real impact rising business rates could have on employment and development. This was a complex, but important project cutting across many of our core business areas. It is an extensive work, built on the best available data and analytical techniques.”