The CBI's John Allan argues business rates reform can't come soon enough

In a speech at a CBI conference dedicated to addressing the challenge of business rates, CBI President John Allan could not have been clearer about member experiences of the current system.

“The business rates system has – over time – become uneconomical, unsustainable, and frankly, unintelligible," he said. "In short, it’s a system in need of reform.”

He argued the case for serious reform on two fronts. Firstly, the long gaps between revaluations means rates don’t reflect property values – punishing areas of the country that are already struggling, but also eventually undermining those that are on the way up.

“It’s the way that business rates currently work against the economic cycle that makes the tax uniquely damaging,” he explained. “Just compare this approach with other types of tax. Fuel duty, or corporation tax, for example. They increase when business is booming in proportion to the amount of fuel you buy, or profit you make. It’s a much fairer system. One that doesn’t reinforce economic disparities – like the current business rates system does.”

Secondly, he argued the system makes businesses less likely to invest in growth:

“If you’re a climate-conscious business owner and you want to improve your office, or your energy supply with solar panels – or new energy-efficient lightbulbs. Whether it’s a large capital investment, or several smaller upgrades to existing property, any real efforts to invest will see your business rates rise.”

With business rates playing a role in Debenhams collapse – and the high number of firms that try to appeal their business rates each year – Allan highlighted just how little confidence there is in the system.

And referring to government’s “warm words and small solutions”, he said tweaks over the years have only served to reinforce the idea that business rates are a high street issue rather than a problem for our whole economy.

Instead he urged both the Conservatives and Labour party to make good on their manifesto promises to undertake a comprehensive and independent review.

Transcript

Good morning everyone – and a warm welcome to today’s conference. It’s fantastic to see so many here today. And twice as fantastic – to be talking about something other than Brexit for once.

Although I did notice this morning, that it was on this exact day, in 1970 the Beatles released their song – ‘a long and winding road’. Which, almost half a century later – seems to fit our current political situation rather well.

But the truth is that – as much as Brexit is stealing the headlines the uncertainty we’ve seen over the past few months has actually made it even more important that we start talking about some of the other big issues of our times.

I’m sure you already know this. You probably wouldn’t be at a business rates conference on a [grey] Wednesday morning if you didn’t.

But I do think now is the time to ask some serious questions, about the UK’s place in the world, about how other countries see us and about the sort of business environment we want – if we are to keep attracting the kind of brilliant companies we have here today.

And we do need to act.

Since the EU referendum, 80% of CBI members have said that Brexit has had a negative effect on their investment in the UK.

There’s no easy answer to that.

But politicians do have a few levers with which to show they support British business. And which could help to preserve the UK’s position as a global magnet for trade and talent.

One of which is reforming our business rates system.

It’s a tax on property – from offices, to pubs, to factories.

I didn’t know this, until I started looking into it. But they go way back. To the days of Elizabeth the 1^st. As a way for local parishes to provide relief to the poor.

Things have moved on a bit since then.

So this morning I’d like to make a simple case. Not that businesses shouldn’t pay their fair share towards public services. Far from it – they should.

But rather – that the business rates system has – over time – become uneconomical, unsustainable, and frankly, unintelligible.

In short – it’s a system in need of reform.

I’m not going to delve into what the best solution is. I’ll leave that open. Rather, I’d like to focus on two basic reasons for change.

• First – that the system disincentivises important forms of investment.
• And second – that it reinforces economic disparities between different parts of the UK.

Discouraging investment

So let me start with the first point. Which is that the business rates system – in its current form disincentivises investment.

The economist Milton Friedman once said that:

‘One of the great mistakes is to judge policies and programs by their intentions – rather than their results’.

But the problem here isn’t the intention behind a business property tax. In fact, it’s a good way to prevent tax fraud – given the difficulties of concealing an office, or a factory.

Rather, it’s the way that the current system discourages investment. From the installation of solar panels to robots on a car production line to new energy-efficient lightbulbs.

And whether it’s a large capital investment, or several smaller upgrades to existing property any real efforts to invest will see your business rates rise. Often, unpredictably.

Discouraging companies that might otherwise make innovative, long-term investments that could go a long way towards tackling the UK’s stagnant productivity.

Let me give you an example. Of just one CBI member – an energy storage company in the North West[1].

10 years ago, the firm launched a new project in Cheshire. The plan was to store natural gas in underground salt caverns. Forming part of a stable energy supply for UK homes stimulating jobs and growth for the local economy, not to mention being a key step towards carbon neutrality.

Four years ago, however, the company dropped the last phase of the project. Hamstrung, in large part, by unpredictable, rapid rises in business rates at a considerably higher level than when the firm originally decided to invest.

It’s a pattern we’ve seen time and time again.

In which changes to business rates simply haven’t given firms enough time to put their investments to productive use or have been the deciding factor in cutting investment in the first place.

And at a macro level, this nuance simply adds another barrier to growth at a time when the UK has seen four successive quarters of falling business investment: our longest streak of contraction since the financial crisis.

It certainly doesn’t give businesses a strong reason to invest in the UK. Let alone in areas where capital is most sorely needed.

Regional unfairness

And that brings me on to my second reason we need reform which is that the business rates system further entrenches regional inequalities.

And at the heart of the problem is uncertainty around when the next rates revaluation will occur. The last revaluation period was extended from five years to seven. We can now expect revaluations every three years.

But in practice, any longer than one year means business rates lag far behind economic cycles. And – over the years – significant rises in property costs.

The result is a system that rewards those places already on their way up – in the short-term but eventually pulls the rug from under them.

And one that punishes those areas that are already struggling meaning boarded up shops become an all too common sight.

Take Hackney, for example. Almost a decade ago, the borough was known as the centre of the London riots. A world away from the Hackney we know today:

A vibrant vessel of investment, buzzing with interest – a magnet for new businesses. Home to London’s ‘Silicon Roundabout’. Which last year attracted almost 20,000 new start-ups.[2]

But the lag between the area’s boom in property prices and its latest business rates revaluation has seen firms suddenly having to cope with an almost 50% increase in their bill.

A temporary benefit before businesses take a hefty hit to their costs. A hit that some won’t be able to survive.

We can compare this to somewhere like Redcar. A town – once considered a powerhouse of coal, steel, and shipbuilding which, following the closure of its steelworks four years ago saw a decline in the local economy – and a drop in property prices.

All while firms in the area continued to pay business rates at up to 20% above their rateable value.

It’s clearly counterintuitive. But it’s also the inevitable result of a system unable to account for rapid change – whether growth or decline that we’ve witnessed in places like Hackney or Redcar.

It can mean local authorities being underfunded, in areas where businesses are on the rise. Or companies going under, creating a vicious cycle of decline and dependence.

And it’s the way that business rates currently work against the economic cycle that makes the tax uniquely damaging.

Just compare this approach with other types of tax. Fuel duty, or corporation tax, for example. They increase when business is booming in proportion to the amount of fuel you buy, or profit you make.

It’s a much fairer system. One that doesn’t reinforce economic disparities – like the current business rates system does.

Conclusion

But to understand the impact of these problems, we need only look at the headlines of the past few weeks.

Debenhams, once a stronghold of the British high street, has fallen into administration. Exactly ‘why’ is a complicated question. But I’ve yet to read an explanation that doesn’t cite business rates as at least part of the cause.

And the same has been true of countless firms over the years. Woolworths, Maplin, House of Fraser.

And every year, thousands of firms try to appeal their business rates bill at a higher rate than almost any other comparable country. It suggests a lack of confidence in the system.

So while we have seen warm words and small solutions from government over the years these tweaks have only served to reinforce the idea that business rates are a high street issue rather than a problem for our whole economy.

And the more sticking plasters we add, the greater the signal that the system is broken and in need of a fundamental re-think.

And let’s face it. The scope for business rates applied to plant and machinery hasn’t been reviewed since the 1990s. The era of fax machines, floppy disks, and phones the size of bricks.

So here’s our solution. A comprehensive and independent review of the business rates system. It’s in the manifesto for both Labour and the Conservatives. Now why not follow through on that promise.

At the CBI – we have some practical ideas for long-term reform. We’ll be talking about what exactly they might look like later today. But in the meantime – we can’t be complacent – while business rates continue to be an issue.

And actually, there are a few things the government can do in the short-term while we conduct a long-term review.

Such as pressing pause on business rates – for those firms currently investing in new properties or making improvements to existing ones, for example.

Or removing downward transitional arrangements so businesses in less affluent areas can benefit from lower rates immediately.

Or improving transparency around the valuation process.

I’m delighted to say we have some brilliant panels and speakers later today to hear more.

So to conclude – please do enjoy the rest of the day. And above all – don’t hold back later when we go head-to-head in our brainstorms for reform.

Thank you.

[1] Storengy, project Stublach

[2] Companies House & Centre for Entrepreneurs, Jan 2019