Expert opinion - Why none of the political parties appear to have grasped the business rates issue

by John Webber, Head of Business Rates at Colliers

Over the past 18 months I have met with representatives of all three political parties.  I spoke to them about the impact of a business rates system which is too complicated, and which takes too much money off an ever-shrinking tax base.  They all understand that.

So, it is not surprising to see that all three main political parties acknowledge the negative impact of business rates on our struggling high streets. But that is as far as it goes.

Because, looking at the election manifestos of the three main political parties in this year’s election, it has become apparent that none of them appear to understand or have properly grasped what to actually do about the business rates issue.

So what are the main political parties saying about it?

Liberal Democrats

The Liberal Democrats brought out their manifesto first in which they claimed they will:

“Boost small businesses and empower them to create new local jobs, including by abolishing business rates and replacing them with a Commercial Landowner Levy to help our high streets.”

Although the Lib Dems have given no further detail of how this Commercial Landowner Levy will work, it looks likely that they are resurrecting their long-term policy of a commercial land tax on landlords – as explained in detail in their 2018 report : Business_Rates.pdf (d3n8a8pro7vhmx.cloudfront.net)

If this is the case we’d be moving to a system where commercial land is taxed regardless of whether the buildings above it are occupied and the tax would apply to unused and derelict commercial land also.

The report claims the Commercial Landlord Levy would mean lower taxes for businesses in 92 per cent of English local authorities.

Our view

We believe the idea of trying to replace business rates with a full commercial landowner tax is unrealistic. A land value tax would be a complicated system that would struggle to be evidence based.

Moreover, business rates were set up to pay for the amenities and services businesses use in the community.  There is surely no dispute that they should pay something for these services.

To replace the levy with a total land tax on landowners would impact on land values and discourage investment into property generally. Among other things, this would not be good news for pension fund holders.

The additional tax would also result in landlords retrieving their lost income by hiking up the rents they charge to occupiers. We would therefore have a system whereby businesses would end up paying more to the landlord but, unlike the present system, would be unable to appeal against their combined rent and rate bills that the landlord would introduce. So how would they benefit? 

Other parts of their plans also show naivety. The Lib Dems claim that land will be valued on its "best permitted use" and that this would encourage landowners to work their land better.

This implies they are not doing so now and ignores considerations of commercial viability. They seem to think that without a land tax, land will be sitting empty and largely undeveloped, again ignoring the commercial realities of development in today’s marketplace. 

Even more concerning is that they admit the system would not produce enough tax income and the gap would need to be filled – probably by also raising corporation tax.

The period of transition between the two systems would also be tricky and unwieldly.

So, whilst we agree the current business rates system needs reform and drastic reform at that, we still need to remember that business rates raise £30 billion for the economy and local authority financing.

To abolish them totally would be a drastic step. Trying to put all the costs on the landowner would backfire given the impact on investment, rents and through increased corporation tax.

The Conservatives

The Conservative manifesto has very little to say about business rates reform. 

The Tories said they would,

“Deliver a 10-point plan to support SMEs in the next parliament which would include continuing to ease the burden of business rates for high street, leisure and hospitality businesses by increasing the multiplier on distribution warehouses that support online shopping over time.”

The manifesto also reiterated the Conservatives’ business rates support package, worth £4.3bn over the next five years, to support small businesses and the high street.

Our view

This is highly disappointing. The Conservatives have failed to honour their original manifesto commitment to cut the business rates burden and we are now sitting on a multiplier of 54.6  per cent, the highest in the UK’s history.

Nowhere else in Europe do businesses pay half the rental value of premises in property taxes. Such a tax rate is too high, stifling growth new investment in business.

The proposal to shift some of the burden of business rates onto warehouses also misses the point - that the overall burden of business rates is simply too high for everyone.

Distribution warehouses have already seen some of the biggest increases in their rates bills following the 2023 revaluation when the average rateable value increased around 35 per cent. The Conservatives should be cutting the rate for all, not just targeting specific sectors.

At no point in its manifesto do the Conservatives mention tackling the multiplier or the relief system or the broken appeals system. Their proposals do nothing to stimulate further growth.

Labour

Labour’s manifesto rightly emphasizes the issues with business rates which they recognise “disincentivises investment, creates uncertainty and places an undue burden on our high streets.”

Labour is committed to replacing the system, “so we can raise the same revenue but in a fairer way.”

But again, the details are vague. Labour says, “This new system will level the playing field between the high street and online giants, better incentivize investment, tackle empty properties and support entrepreneurship.”

Our view

Pledging to abolish business rates and replace them is the easy bit. But what exactly with?  We need to be able to advise businesses on what kind of taxes they will be paying under a Labour government and Labour’s vagueness is frustrating- they give no detail as to how they will replace the £30 billion of income that business rates raise.

And if Labour plans to raise the same amount of money but shield the high street, they will need to collect it from some other sector- such as logistics / industrials or offices. Someone will need to take the pain.

The mention of levelling the playing field between the high street and online giants, may indicate Labour is thinking again about resurrecting the idea of some sort of Digital Services Tax- which included a £3 billion tax raid on tech companies such as Amazon and Facebook. 

Labour later abandoned these plans after being warned that such a policy could result in a trade war with the US. But are they reconsidering them?

We also wonder if Labour might be tempted to postpone the 2026 revaluation, since in that Revaluation retail RVs will bounce back.

If the Revaluation goes ahead as it is scheduled to do so, the retail sector will see an increase in RV and will take on a bigger business rates tax burden.

Labour may decide to postpone the revaluation to keep retail RVs at their current low state. Otherwise, it will be hard to see how they will keep their promises of protecting the high street.

The reference to “tackling empty properties” could also refer to Labour’s thoughts about a “new shops bonus” it has already trailed; to incentivise occupation.

Under the plans, shop owners are offered a three-month business rates holiday in the first year in new premises. This would come in from month seven to nine to ensure the new business is viable and legitimate before it benefits from taxpayers’ cash.

The business rate discount would be paid for by reallocating funding currently used to provide three months of ‘empty property relief’. Labour says this relief currently goes to the landlord, rather than helping new tenants.

However, we think this thinking rather misses the point. Landlords often have a 12-month gap before finding suitable tenants, so to “clobber” them with empty rates is unfair and will do nothing to speed up re-letting.

Then to offer new businesses 3-month rates holiday 7-9 months in, also suggests the people drawing up these schemes have never set up a business – most new businesses fail due to a lack of cash flow in the early months since that’s when they need the help.

And whilst we believe reform of business rates is essential, total abolition would be naïve. Business rates as a tax has been around for 400 years- it’s only during the last 20 that it has been tinkered with so disastrously.  It is the one “certain” tax.

Given the economic situation in which the UK finds itself, no politician worth their salt would suddenly get rid of this the most certain of taxes, without replacing them with something they know will work. 

So, whilst we would support Labour if it introduced significant reform to the current system, we would not support its total abolition or any form of Land Value tax and we would certainly need to see the detail on other reforms suggested and its attitudes to say the Empty Rates Relief regime before we could give our support

We just hope if Labour goes ahead and creates a new property tax it would retain all the best elements of business rates whilst reforming the existing system, reducing the multiplier and hence the burden of tax, and making things simpler.

 But Labour’s lack of clarity on its policy is unsettling and damaging for businesses. Many businesses, especially prospective retailers from abroad, will not invest unless they understand the market they are entering. If we cannot tell them, they will invest elsewhere in the world. This issue will only become more pronounced as time goes on.

Conclusion

None of the three main parties’ manifestos provide me with reassurance. From the “Alice in Wonderland” policies of the Lib Dems to the dangerous tinkering with the Conservatives and vagueness of Labour, no one party has come forward with concrete proposals for reform.

What we need to do is reform, not to abolish business rates. As we say in our Colliers 10-point business rates manifesto+ we need to:

• Address the multiplier: rebasing it to a sensible level that businesses can afford, such as £0.35, near its historical level. And de-couple business rates from inflation to make the tax more sustainable.
• Reform the reliefs system- removing business rates deserts, which are inequitable. And make sure everyone that benefits from public utilities and local services pays something towards them-but at a fair rate.
• Look at alternative means of funding/ a range of measures
• Extend empty property rates relief to twelve months for all sectors
• Introduce annual revaluations so business rates bills will accurately reflect values,
• Review plant and machinery- exemptions from business rates for All plant that is an integral part of the trade process should be exempt from business rates, as should investment in new technology that makes businesses more green/ sustainable.
• Improve transparency from the VOA
• Reform the appeal system
• Take a proper look at local authority financing.
• Address rogue rating advisors by regulating the ratings industry

The time is now

A new government has a real opportunity to introduce key reforms to the business rates system – a system which, in its current form, is not working. Over the past 30 years, various governments have over-complicated this tax, made it more opaque and increased its level disproportionately, leading to a growing chorus of criticism and contributing to destroying the high street.

We need a well-managed and transparent business rates system that supports growth, not hinders it; and we need it now. That is why we have been campaigning to all parties. We need meaningful reform- not more shallow sound bites.