8. February 2017

Don’t bet the shop on swift business rates reform

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Business rates, as the pages of the Financial Times have repeatedly born witness in recent weeks, are not universally popular.  There are lots of companies who argue (with some justification) that a tax focused on property values in an era where an online revolution is sweeping through commerce is imperfect at best.

But while National Non Domestic Rates (NNDR) as they are formally known may be a tax out of time the blunt truth is that, seen through Treasury eyes, they are easy to collect with low levels of avoidance and evasion, raise a large amount of money (nearly £30bn a year), and incentivise businesses to invest in more disadvantaged parts of the country. So while some tweaks in this year’s two budgets are possible – in particular to address some of the most severe increases faced by SMEs following the latest revaluation – wholesale reform is just not a priority for a Government grappling with the Hydra that is Brexit.

So where does this leave those like the retail sector whose business model relies disproportionately on square footage and prime locations, and who are also facing the pain from digital challengers? First, effecting fundamental reform of NNDR is going to be a medium term campaign. The default position of the current Government is inertia, in large part because the Chancellor will want any changes to be fiscally neutral which means raising substantial additional funds elsewhere, so enraging a whole new swathe of businesses.

Added to this is the complication that by 2020 the Government has committed to having transferred to local government all the money raised by the NNDR system (though not the ability to push up the rates paid).  So will councils be more amenable to arguments for reform? Certainly no-one I’ve spoken to in local government was under any illusions that a property tax in a digital age can be viable in the long term. But the overriding goal for the first couple of years post 2020 will be to make this huge act of devolution work. The result will therefore be a system characterised by caution, akin to a teenager taking out their parents’ car for the first time.

The silver lining to delay is that it allows those pushing for a new local business taxation system to make sure that they have constructed a compelling, robustly evidenced case. The NNDR system is fiendishly complicated and the Chancellor is very much a details man so any proposal put forward will be ruthlessly probed for weaknesses. The principal question will be “if not you who pays, who?” This will place petitioners in an invidious position because no one in business likes pointing the finger at others for higher taxes. So they will need to show not just why other sectors should be bearing a greater share of the tax burden but that they have thought about what the knock on impact of such a shift would be, and can convincingly argue that it is genuinely bearable by those ‘losers’.

Extra time will also allow for the development of creative solutions. As well as balancing the books, if you can put forward plans that would help the Government to address one or more of its key goals, such as stimulating the country’s obstinately lagging productivity, your chances of success will be enhanced. The good news is that the nature of NNDR lends itself to this approach. There are plenty in local and central government who are aware that it is counterproductive to be incentivising local areas to be pushing for new businesses with large square footage like distribution centres. Rather we should be seeking to encourage dynamic companies that can generate much more meaningful economic activity (including jobs) from more compact premises, and leave land to be used for much needed housing, which is helpfully another key government priority.

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