DON'T BELIEVE WHAT YOU READ: BUSINESS RATES IS A FAIR SYSTEM FOR TAXING COMMERCIAL PROPERTY

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DON’T BELIEVE WHAT YOU READ; BUSINESS RATES IS A FAIR SYSTEM FOR TAXING COMMERCIAL PROPERTY

I am reading a lot in the Press about business rates.  One effect of growing old is that one remembers why things happened in the days when most of today’s practitioners were at school or still to be born.  The current version of business rates – Uniform Business Rates or Non-domestic Rates as it is actually called – dates from 1 April 1990.  Its introduction was hailed by business at the time as preventing far left local authorities from being able to impose inordinately high imposts on local businesses.

The idea was very simple.  Value every non-domestic property in the country, add up the values, decide how much business as a whole should contribute to local government and divide one figure by the other to arrive at a rate per £ of value (or a multiplier as bureaucrats described it).

So rates are all about fairness between different businesses.  Of course the world has moved on since 1990 and in the internet age it is questionable whether a property tax is still a sensible way to raise local funds from business.  Nevertheless the government, after consultation, has decided that it is.  So today business rates are the way to divide business’ contribution to local expenditure fairly between users of business properties.

The multiplier was 34.8p in 1990/91 and it is 48.4p for small businesses in 2016/17.  £1 in 1990 was worth £2.25 in 2016.  Accordingly if the value of the property owned by a business has not moved, the increase over the period has been well below inflation.  The problem is that the value of almost all properties has moved.  In addition the national stock of commercial property has changed.  Nevertheless business overall has not done badly if the aggregate value of all commercial property in 2017 is 2.25 times or more of the aggregate value of commercial property in 1990 (or 1989 when the 1990 valuations were arrived at).

But of course nobody looks at things globally.  Most people’s perception is at individual property level.  Properties do not increase uniformally across the country.  If a shop in Camden High Street was worth 100 in 1990 it could well be worth 500 today, whereas the equivalent shop in Liverpool or Stockport may only have doubled in value over the period.  So is it fair for the shop in London to pay 2½ times the rates of the shop in Liverpool?  The value of a shop largely reflects its ability to generate income, in which case that seems fair to me.

And what about the shop in Watford High Street that was worth 100 in 1990 and is probably not worth much more now because the shops in Queen’s Road, a relatively quiet street behind the High Street, were demolished and replaced by the Harlequin Centre which has taken away a lot of the trade from the High Street and whose value today is far greater than in 1990.  Doesn’t fairness mean that today the Harlequin Centre ought to contribute more per square foot to Watford BC than the High Street?  That will be reflected in the values of the properties.

The real problem is that we do not have enough revaluations.  They ideally ought to take place every year but the work involved makes that impractical.  Parliament in 1988 (when the legislation was put in place) compromised at every five years.  Sadly when the time came for the 2013 revaluation the government put it off for a couple of years so the current rates are based on 2008 values and those for 2017/18 will be based on 2015 values.

This posting was prompted by some sad stories in The Times the Saturday before last.  For example, the crafts shop in Southwold High Street mainly run by volunteers whose only aim is to break even.  Their rates will go up from £152 p.a. to £7,500 p.a. (by the time the transitional relief runs out).  “How can that be fair” asked the shop manager, “It’s totally perplexing”.  I think it’s fair.  Why should any shop (other than one operated by a charity, which the crafts shop could probably become if it wished) pay less than £3 a week in rates?  Why should the crafts shop keep out of business the person who could run a shop selling something else that could justify £7,500 p.a. in rates?  As rateable values reflect rental values, what has happened to the crafts shop’s rent?  If it has increased since 2008, why shouldn’t the rates increase too?  If it has not, it is hard to see how the rates could have gone up so much unless the landlord is subsidising the crafts shop.  And if he is, why should other businesses in Southwold or elsewhere subsidise it too.

Similarly with the Two Magpies Bakery.  The owner does not understand why she should pay the same rates as Costa Coffee a few doors away whose rates are increasing by less.  Well why shouldn’t she if her shop is worth the same as Costa’s?  If her customers are not prepared to pay more to buy her freshly baked bread, so she cannot afford to pay the real cost of her shop being where it is in Southwold, why should Sainsbury’s and Tesco subsidise her?

Of course I feel sorry for all of these people and for Alex Pose-Gill whose family have run his Coffee Lounge near Buckingham Palace for three generations.  He has had to put an extra 60p on the price of his full English breakfast.  But surely that is what should happen.  The cost of his premises is the aggregate of his rent, rates and utilities.  His prices need to absorb those costs.  But it is not reasonable to blame the government if the rates element of that package goes up but to accept as a fact of life if the rent element increases.

It is certainly reasonable to moan at the government for continuing with rates rather than find a better way for businesses to contribute to local authorities so that internet businesses do not have an unfair advantage over those that trade from buildings.  But it is not reasonable to criticise the fairness of a system that seeks to allocate a tax on buildings between buildings according to their values.  It is hard to conceive a fairer way.

It is also unreasonable to have allowed new businesses to be created in a fool’s paradise where their economic model was based on paying an artificially low price to occupy their premises, so that the substitution of a more realistic price will destroy the business.  However that is not the fault of business rates.  It is due to either the lack of adequate advice to micro-businesses or the failure of such businesses to seek proper advice before starting up.

ROBERT MAAS