Budget 2021: Where next for business rates?

A year ago HM Treasury published the terms of reference for its latest ‘fundamental review’ of business rates. I say ‘latest’ because the Treasury has conducted a seemingly unending series of reviews and partial reforms over the last five years. The outcome of those reviews was a mixture of sensible long-term reforms and short-term sticking-plasters – but they all left the fundamental elements of the system unchanged.

The evidence is that this latest review won’t be much different, and that the Treasury will be forced into a further fusillade of short-term and unnecessarily expensive fixes in the forthcoming Budget (3 March). Furthermore, some of the more promising aspects of reform already promised by ex-Chancellor Philip Hammond have already been unwound or left in limbo.

To be fair to the Treasury, business rates is arguably, at the strategic level, a well-designed tax. Calls for its outright abolition, therefore, risk the possibility that it could be replaced by something worse. Such calls are also rather unconvincing considering that business rates raise £25bn (in England) - and in the light of the pandemic the Chancellor needs all the cash he can get.

It is, admittedly, true to say that UK property taxes are higher as a percentage of GDP than in most other advanced economies. But business rates is not the main culprit for this – in fact, residential SDLT is to blame. It’s also not true to claim that, over the last 20 years, business rates have been taking an increased share of national income or represent an increasing share of tax revenues.

And yet business rates are desperately in need of reform. In our new research report on the future of business rates we show that rates liabilities can take many years to catch up with property market trends. This is very damaging if those trends are dramatic.

Take for example the ‘bricks and mortar’ retail sector, which CBRE research shows has been hard hit by the double whammy of e-commerce and Brexit-induced inflation eroding consumer incomes - and now the pandemic. Unless the Chancellor acts, our report forecasts that it will be 2026 at the earliest before these dramatic changes are fully reflected in reduced retailer rates bills.

It follows from this that the booming logistics sector will not experience the increases we forecast in logistics rates bills until that date either – again, at the earliest. Whatever view one takes of the arguments concerning a ‘level playing field’ for high street retailers versus e-commerce, this desperately sluggish system isn’t helping.

To add insult to injury, CBRE finds that business rates property valuations have been growing faster than the underlying market, suggesting that the whole valuation regime has come adrift from the market evidence that everyone else (including CBRE’s own valuers) is using. This further adds to the unresponsiveness of the system to the very market trends which are supposed to inform the tax.

Frequent revaluations, more recent valuation dates, a more sensitive transitional relief system, a wider tax base, and a simpler exemptions regime would all help to recover business rates from an increasingly dangerous lack of legitimacy.