The Government’s promise of a “radical” review of business rates is one of the most welcome of this week’s Budget announcements.

The Government’s promise of a “radical” review of business rates is one of the most welcome of this week’s Budget announcements.

There is widespread agreement that the tax, designed to help businesses thrive by funding the essential local services upon which they depend, is now constraining business growth and discouraging investment in our towns and cities. The impact of this outdated tax is apparent on any number of struggling high streets across the UK.

Business rates are rightly of huge concern to retailers, but the question of how rates could function more fairly and with greater economic efficiency is not one that can be ignored by the real estate industry. How much businesses pay in rates has a direct impact on the attractiveness of commercial real estate as an investment, and so affects the amount of development that takes place in the UK. Choking off this investment has consequences for economic growth, job creation and much-needed investment in the built environment.

We are broadly pleased with the widespread nature of the review, particularly in relation to the Government’s intention to review best practice from abroad and to conduct a robust analysis of the trends in use of non-domestic property and property values. Most notably, the internet has drastically changed the way we work, live and shop, which has had a major impact on the way we use commercial property since the legislation was introduced in 1988. 

Wider definition needed

It is understandable that Government wants to make the review “fiscally neutral” in order to maintain stability in funding to public services. However, it is not clear how the Government will be able to design a tax that is responsive to economic conditions if the total tax take must remain the same year on year. Therefore, we would urge all parties to consider a wider definition of what is “fiscally neutral”, considering how rates may change from year to year but still raise a similar amount across the business cycle, or through the greater economic activity that business rates reform will encourage.

A fairer system would see businesses contributing more when they can afford to and less when they could really do with some support – just like every other tax. By introducing a fixed multiplier, rather that inflation-driven increases year on year, businesses will pay rates which better reflect how the economy is doing. In addition, more frequent revaluations would see businesses paying rates based on fair and up-to-date rental values – not based on rents in 2008 as they are currently.

Finally, we would like to see an end to empty business rates; a fundamentally unfair tax which imposes real hardship on landlords and retailers whose investments have already failed. Empty rates were originally introduced to encourage owners of empty homes to get them occupied (back in the days when rates applied to residential as well as commercial property) – a totally different issue. The policy rationale for commercial empty property rates is very weak and ultimately acts as a disincentive to development.

We believe that creating a business rates system that is fit for the 21st century is one of the central challenges facing the next Parliament. Politicians of all parties have talked warmly of reform ahead of the general election. It is vital that retailers and landlords alike ensure they stay true to their word after it.

  • Melanie Leech is chief executive of the British Property Federation