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Business Rates - an Unfair System

  • Blog
  • 16 February 2017

As some of our members face the prospect of big increases in their business rate bills, let me make my view clear: the business rates system is broken, outdated, unfair and in need of radical change. It is absurd that the amount small businesses are required to fork out bears little or no relation to their turnover, profits or ability to pay. Instead, it is arbitrarily based upon notional property values. The reason this has come to a head now is due to a recent (and much-delayed) revaluation, which has created a new set of anomalies.

While we at the FSB have been talking about this for a long time, and have published a set of guidance on our website for members it is only since Christmas that this issue has really taken off in the national media. Only this morning, The Times and the Daily Mail reported on the ludicrous situation whereby an online retail giant like Amazon could have its rates cut for its warehouses around the UK, while some small firms, including on many of our high streets, and particularly in London, will be walloped with steep increases by 2020.

Business Rates - an Unfair System

At a time when across the board the cost of business is going up, this will put a real financial strain on many small businesses. I’m sorry to say that I have heard from a number of our members who seriously believe the tax rise will force them to close. It goes without saying that this would be bad for the economy, for jobs and for the communities these independent businesses serve.

Around the country, the impact is mixed. FSB’s greatest lobbying win in 2016 was to successfully remove £6.7bn from the business rates system, which lifted 600,000 firms out of paying business rates altogether – by increasing thresholds and making the doubling of Small Business Rate Relief permanent.  In the Autumn Statement, we corrected an anomaly where rural businesses could not receive the full 100%.  Now, overall, 420,000 will see their rates stay the same, 920,000 will see a decrease and 510,000 will see an increase.  For those businesses that are set to see an increase, FSB also won a big victory on a new transitional relief scheme. This means that for small businesses, any increase in business rates will be limited to 5% next year with any subsequent increases spread out over 5 years.

Where property values have soared over the last six or seven years, these businesses need special help – we want local councils to exercise their power for discretionary relief, to protect their local small business community - from B&Bs in Eastbourne to small shops in parts of Suffolk and many, many (far too many) other examples.

London is being particularly badly hit by this, because of the big jump in the capital’s property values which means that the vast majority of small firms cannot qualify for small business rate relief. We have pushed hard in meetings with the Chancellor and the Treasury to create a ‘London weighting’ to increase the thresholds there.

The effect of the business rate rise is compounded by other costs going up at the same time. I am very concerned about the relaxation in planning rules, which makes it easier for commercial property to be turned into residential. The effect is a reduced supply of commercial premises – and therefore higher rents. In London, this is something that FSB has been in talks with the Mayor, Sadiq Khan, about. More generally, many small businesses are also feeling the squeeze of the roll out of pension auto-enrolment and the national living wage and national insurance hikes.

All of this, added together, is creating significant financial pressure on many smaller businesses and the prospect of higher costs of doing business is something we need to create as much evidence as possible, so that we can influence the Chancellor before his – more substantive – Autumn Budget.  We will be gathering evidence through our Small Business Index and starting a major new exercise to inform Government policy.  In the mean-time, I would again urge the Chancellor, Philip Hammond, to do all he can to limit the damage from business rates, the scale of which is only becoming apparent, now just 3 weeks away from his first Spring Budget.  Longer term, there are 3 alternatives for business rates – Retain them, Reform, or Replace.  The only option I see is for Replace.  It’s time for the Government to indicate it seeks a sensible, fair system fit for the 21st century.

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