UK's business rates system 'broken' says Treasury committee

​MPs tell government to urgently review tax it claims is high and unfair on physical stores.
The business rates system is broken and the government must undertake an urgent review to find alternatives, an influential committee of MPs has said.
The Treasury committee said business rates in England and Wales were high, complex and placed an unfair burden on bricks-and-mortar shops and manufacturers compared with businesses that operate online.
The cross-party group of MPs released their unanimous report as the economy teeters on the edge of recession, retailers and factory owners cut jobs and high street stores close.
The MPs highlighted a complicated web of business rate reliefs and a system that punished investment.
The committee also criticised a backlog of 16,000 appeals against business rate decisions and called for the government’s valuation office to be properly staffed.

Business rates have risen faster than inflation since 1990 and grown as a share of taxes paid by companies, generating £31bn of income for the government last year, the MPs’ report found.
The UK has the one of the highest property taxes as a share of output in the developed world, the report said.
The committee called on the government to explain whether this was a deliberate policy and to consider the impact on economic growth. It said the chancellor should launch a review and report on alternatives in the spring.

Alison McGovern, the MP who led the inquiry, said: “The current business rates system is broken. The tax represents an increasing burden on businesses, particularly those with a physical high street presence struggling to remain competitive. The government must ensure that business rates align with its aim to boost productivity and do not disincentive growth. The government must examine such alternatives in time for spring statement 2020.”

Retailers and other industries have protested for many years about the burden imposed by business rates. In August more than 50 large retailers, including Marks & Spencer and Harrods, wrote to the chancellor calling on him to cut business rates to support declining high streets. The MPs heard that Tesco’s business rates bill had almost doubled to £700m in the past 10 years and that the UK accounts for two-thirds of carmaker Vauxhall’s property taxes in Europe but just 8% of its floor space.

The National Trust said it received almost 1,000 different bills from local authorities. Tesco said a tax of 2% on online sales of physical goods would raise £1.5bn a year – enough to cut business rates by 20% for all retailers. Business rates charge companies based on the estimated rental value of the property they occupy. Local authorities, which raise the tax, keep half the amount but the government wants that to increase to 75% next year. That would leave councils relying more heavily on business rates despite the impact on the local economy.

Helen Dickinson, chief executive of the British Retail Consortium, said: “Business rates are a significant driver of store closures and job losses, and retailers have been getting a raw deal for too long. We urge political parties to support local shops, local shop workers and local communities by including these recommendations in their manifestos.”

​A Treasury spokesman said: “We concluded a fundamental review of business rates in 2016 and have since introduced reforms and reliefs saving businesses more than £13bn over the next five years. We will respond to the select committee’s report in due course.”

Business Rates are a good tax: The case for 
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Sam Bowman, Chief Executive of the Adam Smith Institute, put forward an economic case for business rate rises in The Telegraph in February 2016 saying that:
"....under the government’s plans London is the only region that would see a rise in rates overall – everywhere else would see a fall. Even though most of the benefits would pass to landowners, the changes would encourage greater property investment in the country outside of London. If the revaluation doesn’t go ahead, then next time the adjustments might be even bigger, making changes even more difficult....Unless we’re content to freeze rates across the country forever, benefiting London and hurting the rest of the UK, we should hope the government has the will to ignore the special interests and push ahead with this revaluation – or replace rates altogether with something politically easier to manage sensibly."

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CBI SETS OUT BUSINESS RATES DEMANDS

Creating a simple, fair and competitive system must be the chief aim of the government's business rate review, the CBI has urged.

The organisation said future changes must be geared towards boosting growth, investment and jobs.

Among the CBI's recommendations are measures to remove the smallest properties from business rates, implement more frequent revaluations and use the Consumer Price Index as opposed to the Retail Price Index.

Katja Hall, CBI deputy director-general, said: "The current business rates system harms businesses by relying on a decades-old model that no longer reflects economic conditions. That's made life tough for retailers in particular.

"These reforms are long overdue so it's good that the government is following through on its commitment to look closely at how it can help alleviate the most onerous aspects of business rates.

"We want a simpler, fairer and more competitive system by having more frequent valuations, removing the smallest properties from paying rates, and using the Consumer Price Index so rates don't outpace inflation."

But Hall said the government must avoid devolving rate-setting powers as this will create an uneven playing field, distort growth across the UK and add extra costs for companies.

The CBI said the government must:

• Conduct more frequent property valuations to "make business rates fairer and more responsive to economic conditions"
• Use the Consumer Price Index, as opposed to the Retail Price Index, will "ensure the burden of business rates does not outpace the official measure of inflation"
• Remove the properties with a rateable value of less than £12,000 from paying rates
• Implement "a clear road map" for longer-term reforms such as online billing and administration