Cllr Emily Barley is the Leader of the Conservative Group on Rotherham Council.
As I write, Rishi Sunak and Jeremy Hunt are struggling with what must be one of the most miserable in-trays ever to face an incoming Conservative prime minister and chancellor.
They need to find a way to deliver the spending cuts and tax rises the markets demand, continue to service entitlements such as pensions and benefits as the public expect, and somehow avoid completely choking off the growth that is central to this country’s long-term prosperity – all whilst trying to honour the 2019 pledge to ‘level up’ the North of England.
Unfortunately, there are no silver bullets. But there are a few obvious choices, and one of them is overhauling our onerous and unfair system of business rates.
These are the taxes paid by businesses not on their actual activity, but on the rentable value of their premises. The level is calculated by taking the value at a fixed valuation date and applying what’s called a uniform business rate (UBR) multiplier.
As with taxes generally, this has gradually crept up to unsustainable levels. When Margaret Thatcher first introduced business rates, the UBR stood at 34p in the pound. For 2022/23, it’s an eye-watering 51.2p; for small businesses (defined as those with premises with a rentable value under £15,000) there is a trivially lower rate of 49.9p.
And it’s going to get worse. In April 2023, both rates are set to rise in line with inflation (which hit 10.1 per cent in September). The overall business rates bill for companies across England is projected to jump by £2.7 billion to £30 billion from April, with retailers alone facing an £800m hit. This will be on top of the planned hike in Corporation Tax, which is due to rise six points to 25 per cent.
On its own that would be bad enough. But put it together with falling revenues, soaring energy bills, and labour shortages, and you’ve got a lethal combination for many businesses.
If you want to see the results, however, you don’t need to wait for any official statistics. Just take a walk down your local high street and look for empty shops (or charity shops, which tend to proliferate in areas where actual businesses have been priced out). Or start adding up the once-familiar retailers – Clinton Cards, Jessops, Mothercare, and Poundworld, for example – that shut up shop, all pre-Covid, due in part to the cost and complexity of the system.
The pandemic appears to have only accelerated an existing downward trend for retailers struggling with high tax bills. In 2022, the Centre for Retail Research estimates that 22 major retail businesses are failing, affecting over 1,600 stores and over 30,000 employees.
Naturally this hasn’t completely escaped the notice of politicians. But as so often, successive governments have chosen not a comprehensive reform but instead to create layer upon layer of complex and often ineffective reliefs.
The worst of these is called ‘Transitional Relief’. Given the Government’s commitment to levelling up, it’s extraordinary that ministers haven’t already reformed it. Because the way it actually works is to increase the north/south divide by subsidising southern businesses at the expense of northern ones. Here’s how that happened.
Rateable values are reviewed every few years. The last revaluation was carried out in 2017; the next will be in 2023.
Following the 2017 revaluation, ‘Transitional Relief’ was brought in. It was intended to lessen the blow of significantly higher tax bills when the rateable value of the business property went up by a large amount. Transitional Relief phases these changes in over time.
So far, so good. But of course, the Treasury wouldn’t be caught dead just subsidising businesses. So TR is paid for by ‘downwards transitional relief’, which limits how much business rates can fall in areas where property values have dropped and so keeps rates artificially high.
The upshot of this is that businesses in deprived areas where property values have fallen are essentially subsiding those businesses in affluent areas of South East England where property prices have risen.
As a result, the whole system is driving businesses away from deprived areas by keeping rates high there, despite falling rental values. It is estimated that this scheme could cost retailers over £1 billion between 2023-2026, with the burden falling hardest on those businesses outside of London.
The effect can be seen in the shop vacancy rates, with the highest rates seen in the North East, the Midlands, and Wales. The North has some of the highest vacancy rates in the country, with one in five shops closed in the North East.
If that wasn’t bad enough, this has an obvious knock-on effect on local government finances. Councils get to keep half of all business rates levied in their territory. The current arrangement is therefore not just undermining the economies of left-behind areas, but the budgets for their local services too.
A few simple changes could make a big difference. First, slash the rate to match Corporation Tax, so that retailers with physical stores aren’t heavily penalised. Next, abolish ‘downwards TR’. Finally, shift from five-yearly to annual valuations, thus eliminating the big fluctuations in rental values that led to TR being introduced in the first place.
Today the Chancellor will present his economic plan to Parliament. If levelling up is to mean anything, let us see whether he will honour the 2019 Conservatives’ manifesto commitment to “cut the burden of tax on business by reducing business rates… via a fundamental review of the system” – and put business rates reform on the agenda.