Over-rated: making the case for business rates reform

The CBI’s new report, written in partnership with Avison Young, presents evidence on the impact of the historic increase in the business rates tax rate (the Uniform Business Rate, or UBR) on business costs and investment. The report points to an unsustainable burden for business that is disconnected from their performance, and addresses the extent to which revaluations and reliefs have achieved their objectives in ensuring a fair and sustainable bill.

Based on the report’s findings, a set of recommendations have been developed on the immediate steps government can take to reduce a high tax burden and help incentivise business investment, while promoting sustainable public finances.

Download the full report

Key findings

• The UBR (or tax rate) has increased 44% over a thirty-year period. Having started at 34.8p in the pound in the 1990s when the UBR was first introduced, the UBR has now reached nearly 50p in the pound
• If the switch in the indexation method for ensuring the UBR rises in line with inflation occurred in 2011 alongside other policies, the UBR would now be at 44p. This delay in switching from the Retail Price Index (RPI) to the Consumer Price Index (CPI) is estimated to have cost businesses £13bn over the nine-year period
• Downward transition is estimated to have cost affected businesses £1.8bn. While the 2017 transitional relief scheme helped smooth significant increases in business rates bills following the 2017 revaluation, this has come at a cost to those businesses whose bills should have fallen
• A further increase in the UBR would come at a cost to business investment, at a time when this is already weak. Business rates already makes up a significant proportion of fixed costs for businesses, at around 6%, and any further increases will push this up further limiting the ability for businesses to invest
• Rebasing the UBR has the potential to boost business investment and fuel economic growth. A UBR of 44p for example, would reduce the overall business rates liability in the order of £5bn per annum (before reliefs): an average reduction of 14% per property. The short-term gain from a reduction in fixed costs will lead to longer term benefits by incentivising investment, which has wider economic benefits by increasing the productive capacity of the economy.

Recommendations

Based on the findings, the CBI and Avison Young have set out a package of measures, at a total cost of £18bn over 5 years, that we believe the government needs to adopt as a first step towards a fair and sustainable system.

• For the remainder of the 2017 revaluation period (up to 2022/23), the government should freeze the Uniform Business Rate at its current 49.9p and therefore not continue to index it in line with CPI. This is estimated to cost around £0.8bn 
• At the start of the 2023 revaluation, the government should stop total gross receipts from business rates going beyond £30bn. This would equate to revising the Uniform Business Rate from 49.9p to 44p, to realign it with growth in rental values 
• The government should delay the valuation date until 1st October 2021 and shorten valuation periods to ensure bills reflect the economic situation
• Reliefs should continue to be targeted to support businesses most vulnerable, but reform would ensure they also continue to serve their intended purpose. That can be achieved in part by removing transitional arrangements for properties whose rateable values decrease but maintaining that support for those whose rates will increase.It is estimated that would cost the government between £1.5bn and £2bn. 

We believe this is the minimum action that should be taken to offset the delay in switching from RPI to CPI, whilst maintaining sustainable public finances, and should form a crucial part of the government’s wider economic plan to renew and rebuild. While this clearly comes at a high cost in terms of lost revenues, the economic evidence indicates that the investment and growth this would drive will go some way to offsetting this, therefore promoting sustainability of the public finances.

As next steps, the CBI is engaging with government on the findings and recommendations of this report to support the government’s fundamental review of business rates. Their recent call for evidence has been hugely welcome by the CBI and its members, after much campaigning for a fundamental rethink of the system.