Ask a traditional business owner about their biggest gripes, and business rates are likely to be near the top of the list. The tax on business premises is unpopular with SMEs, and business bodies have long called for a review of the system, even suggesting disproportionately expensive rates cause some enterprises to shut up shop altogether. Others say business rates should be scrapped in an era when more enterprises are moving out of bricks and mortar workplaces, and operating solely online.
Chancellor George Osborne has heard the business community, and recently announced that business rates will be radically overhauled. Not as drastic as axing the tax, but it’s a move in the right direction for smaller companies who want a simpler process, fairer pricing, and greater transparency. So, what will the business rates changes really mean for small enterprises?
What happens now
Under the present system, business rates are calculated on the rateable value of non-domestic properties, such as shops, offices, and factories. The rateable value is the estimated amount for which a place might be let for the year. Business rates bills are payable by the tenants of premises, not the building’s owner. In terms of decisions about who pays what, not only does Westminster currently set business rates, it gets to keep about half of the revenue generated.
It’s no surprise politicians have resisted abolishing business rates altogether – they raise up to £28 billion in England every year after all. But moves have already been made to reform the unpopular tax. From April 2014, a two per cent cap to the annual inflation increase on business rates was introduced as part of a £4 billion package to help business rates payers. Companies with only one property with a rateable value under £12,000 are eligible for business rates relief, with those valued at £6,000 or less getting 100 per cent off their bills. But such concessions didn’t go far enough for many, and SMEs have continued to lobby for more help. For once, the politicians listened – hence, the further changes recently announced.
What the politicians said
The core message from the Government is that the setting of business rates will be devolved to local councils who will also get more of the billions of pounds raised. At the moment, levels are set by central government, and then topped up should an individual council need it – a decision that’s also taken in Westminster.
Now, councils will have the power set their own business rates, cutting them if they think that will attract more businesses to operate in their area. A cap will be placed on any rises to prevent councillors going on a tax-gathering spree, except where authorities have elected mayors. These officials could opt to raise levies in order to get more funds to improve infrastructure and the general business environment.
The local government grant that central powers hold onto at present, and then distribute as they see fit will be abolished. Removing this top-up option will make local councils responsible for setting rates, collecting them, and deciding how they’re used.
What it means for SMEs
It all sounds good, doesn’t it? But the benefits to businesses themselves will probably depend on where they’re based in England. Areas or cities that have a high concentration of SMEs are likely to be in a better position to slash rates in a bid to attract yet more entrepreneurs, and hold on the enterprises they already have. But districts that are less well-off or more residential could be forced to raise rates to compensate for the loss of the top-up grant if they want to keep public services up to the expected level. Critics already worry currently rich councils will get richer under the new system, while already poor councils will get poorer.
What’s definitely true is that with more power comes more responsibility for local councils. However, the rewards for them and the businesses that operate under them could be great – if they get the balance right. The Institute of Directors has predicted having control of rates revenue will enable councillors to regenerate high streets. But, the British Chambers of Commerce (BCC) worries unscrupulous local councillors may hike business rates, leaving company owners even worse off. The BCC wants company bosses to be consulted before any changes to rate levels are introduced to avoid such an outcome. Meanwhile, the Centre for Entrepreneurs is hopeful the rates change will be good for seaside economies, in particular, allowing these often depressed places to invest in business infrastructure and nurture entrepreneurship.
There’s the small fact that these new measures do nothing to address the issue of online retailers typically paying no business rates where their bricks and mortar peers do. This unjust state of affairs appears to have been left to be tackled another day. In the meantime, SME owners with premises across England will have to wait and see how their councils choose to act when calculating the next round of business rates. And whether they’ll be business rates winners or losers will largely depend on their postcode.