Time to speak out against business rates

Margaret Thatcher nationalised the business rates because she felt local councils could not be trusted to work sensibly with local businesses. At around the same time she introduced the community charge in place of domestic rates, which morphed into the less regressive – but still considerably regressive – council tax.

Liberal Democrats have agonised over the latter and our policy is still to introduce a Local Income Tax, instantly handing the tabloids an easy stick with which to beat us – the Lib Dems want a chancellor in every town hall and plan to increase our taxes. The policy is right but certainly needs more careful marketing – perhaps as ‘income related council tax’.

We have spent less effort so far on business rates. We have tended to support the imminent ability of local authorities to retain business rates locally rather than pay into the centre, mainly on grounds of devolution. But this retention is more fictional than real, given the need to provide equalisation between (say) the City of Westminster, rural districts and northern councils and the general inability to change the actual rate itself (the ‘multiplier’) or the rateable value.

Far more significant, however, than the essentially cosmetic rates retention project is the impending rates revaluation, set to blow up in the faces of many businesses in a significant part of the country.

The effect is uneven: in some areas, the revaluations will be welcome. But in areas where property prices have risen sharply, the effect for some enterprises will be to turn profits into losses and thus force closures or staff cuts. Retailers, pubs and restaurants are all feeling under the cosh in London and the greater south-east (and elsewhere) and yet we are not making the case loudly for reform.

The Guardian reports that three quarters of small businesses in London see business rates as the biggest problem that they face. Vibrant pubs may suddenly become boarded up – I have 27 in my electoral division (lucky you, you may say), many of which have been trading for decades if not longer. Worse still, there are huge differences within areas, with (for instance) the pubs in St Albans facing raises of anything up to 240% while Sainsbury’s gets a cut.

It cannot be right that a fiscal quirk unrelated to either the burden on or the contribution to the economy should make or break a currently profitable local enterprise.

Solutions are not straightforward. The advantage of a property tax is the difficulty in avoiding or evading it. A tax on business income could simply expand the tax avoidance industry by making it look as though properties are located in low rate areas when the reality is the reverse.

But we must do and say something. And do so now before we see yet further avoidable harm to our high streets.

* Chris White is a member of the Liberal Democrat Voice Editorial Team, a Liberal Democrat Councillor from St Albans and Deputy Leader of the LGA Liberal Democrat Group.

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  • Graham Evans 20th Feb '17 - 7:22pm

    I don’t actually agree that replacing council tax with a local income tax is the right policy. All taxes produce hard cases and therefore we need a wide variety of taxes. Consequently even if we were to introduce a local income tax this needs to be supplemented by some sort of local property tax. Similar considerations apply to business rates. We need to retain a property tax on business premises but supplement this with some sort of turnover tax and/or payroll tax so that businesses like Amazon make a fair financial contribution to the local economy. Incidentally the advantage of including a payroll tax element would help overcome the problem of people living in one local authority area but working in another. Similarly a turnover tax would deal with the issue of people travelling into one local authority area for services such as shops and restaurants (which place a burden on local roads, etc) while living in another.

  • Toby Matthews -ALTER 20th Feb '17 - 8:12pm

    Sorry Chris, but I disagree.
    First of all, Local Income Tax wasn’t in the 2015 manifesto, as far as I can see. Instead, the old liberal policy of a land value tax has been (correctly) embraced again, with the manifesto moving toward this with higher council tax bands and replacing business rates with LVT:

    “Liberal Democrats remain committed to introducing Land Value Tax (LVT), which would replace Business Rates in the longer term and could enable the reduction or abolition of other taxes” – 2015 Manifesto

    LVT is absolutely the correct the policy. But let’s look at the facets of Business Rates, some are good and some are bad:

    Now, Business Rates – not being a well-implemented LVT – has its faults. But it’s one of the best taxes we have. Being comprised of land value, most of the incidence is with landlords, not business owners (this is evidenced). Taxation of land rent does not harm business.
    So why the problems with Business Rates? Well, the main problem is that it is revalued irregularly. This has been the first revaluation for many years. This means that leases are agreed and the business promises to pay as the economic rent to the landlord. But then if Business Rates rise, after a period of not being revalued, the economic rent has already been promised to the landlord. Thus, we hit a problem. If Business Rates and leases were agreed with more regularity, this can be overcome. Naturally, a 100% LVT would be ideal – as the business can simply agree to pay for the building/plant. Both landlord and business can rest assured that the land rent will be recovered by society. This would make land cheap and accessible for commerce, without any of these problems.
    The second problem is that Business Rates doesn’t just tax land rent – it taxes capital (buildings, plant etc). This harms businesses and kills economic activity at the margin (both geographical and economic) – hurting poor areas and marginal businesses.
    Thirdly, there are distortions and exemptions. Out-of -town car parks and charity shops are the biggest examples. Both are untaxed, hence their proliferation.

    So, to overcome this, we need a full Land Value Tax – and (in the transition period) – force landlords to renegotiate the terms of the lease.

    The Liberals are the party of Free Land. We must defend a flawed Rates system from the Big Property lobby that seeks to undermine it, whilst fighting for a free market that serves people, commerce and the environment.

  • David Sheppard 20th Feb '17 - 10:35pm

    Business rates should be abolished as they are out of touch with business reality. So many manufacturing firms like mine can’t afford to expand due to sky high business rates. If I were to rent a bigger shed the local council would want an extra £50K per year, every year for ever its crazy. So business does not expand due to a rotten tax.Worse we go on line and expand our business that way instead of more manufacturing jobs we just buy from abroad and sell creating nothing.

  • Conor McGovern 20th Feb '17 - 11:33pm

    Replace the rates system with a proper Land Value Tax. In an age of increasing corporate power, we could be the party that solidly backs small firms. Liberals can be at the forefront of policy on a cooperative, fair, open, democratic economy.

  • Mark Goodrich 21st Feb '17 - 12:38am

    Ahem – I have got to disagree with those who say that the problem with business rates is that it is valued irregularly. The problem with it is that it is completely out of step with modern economies and is the enemy of what people want to see which is a vibrant shopping centre not stuffed with charity shops (they are there because of getting an exemption on business rates). High street bookshops (those few that exist) are not competing with chains any more but with Amazon which pays extremely low rates because it uses warehouses in cheap areas. I don’t have a complaint about that aspect of their business but why do we cripple competition by making high street bookshops pay expensive rates for occupying high value property?

    Although it may not ultimately be that popular, I think the only answer is to dramatically slash business rates and find the money from elsewhere. Some of that would have to be increased taxation on residential property.

  • benjamin weenen 21st Feb '17 - 1:35pm

    Any reductions or increases in Business Rates are merely capitalised into rental incomes and selling prices. Thus the costs that businesses pay for their occupation of their premises doesn’t change one jot when the levels of UBR do. In the long term at least.

    This is just common sense really, but as the objections to Business Rates show, the UK populace really are utterly stupid and selfish. Particularly its business leaders.

    Any reduction in UBR will negatively impact our economy in two ways. Firstly it will further widen the unfair competitive advantage owner occupiers already have over those that rent. Secondly, it will necessitate increases in taxes that penalise success ie those on profits and added value.

    Of course UBR should be reformed from the best tax we have, into the best tax there is i.e a Land Value Tax. However, given the levels of ignorance regarding basic matters of economic justice, I wouldn’t hold my breath.

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