Understanding the government's position on business rates reform

At the CBI Business Rates Conference on 8 May, CBI President John Allan challenged the government to go further than warm words, welcome tweaks and sticking plasters to provide a serious rethink on the business rates system. So what is the government’s perspective on reform?

Speaking at the event Financial Secretary to the Treasury, Mel Stride MP, highlighted the three principles behind reform of any tax system:

• Competitiveness: “For example, we’ve set out a road map now for corporation tax,” he said, “with it reducing from 28% in 2010 to 19% and then to 17%; we’ve frozen fuel duty for nine years in a row. We’ve been as generous as we can be on tax reliefs particularly those that encourage investment, and at the behest of the CBI we’ve brought in the Structures and Building Allowance.”
• Fairness: “By that I mean fairly progressive,” added the minister, making it clear that the burden of tax should fall largely on those who are most able to pay it, while relieving those who are less able to do so.
• “The third prism that we look at tax through is that it should be paid,” said the minister. The Treasury brought in more than a hundred anti-avoidance measures since 2010, protecting and raising around £200bn in total and establishing one the lowest tax gaps in the world at 5.7%.

When it comes to business rates, the minister said: “Property is quite difficult to hide, making it a very reliable and robust tax to collect compared to other parts of the economy. This tax in total raises about £25bn per year – a very large contributor to public services.”

He went on to say that changes to the tax regime and to business rates are not going to hold back the tide away from the high street to online shopping, although he added: “That’s not the same as saying the government doesn’t have the duty, the ability and the will to make changes and be helpful.”

So what is the government doing?

The government is taking two broad approaches to the issue – relief (worth £13bn over the five years since 2016) and releasing funds to local authorities to help them reinvent the high street (in the last budget £675m was set aside for this purpose).

But as part of the ongoing conversation in Whitehall, there is a Treasury Select Committee (TSC) inquiry looking into the effectiveness and impact of business rates. Representing the committee at the CBI’s Conference was Catherine McKinnell MP who outlined its objectives:

“As a witness to the committee told us yesterday, ‘something that was set up and is fundamentally unchanged since 1988 just does not work for the modern economy’, so we’re keen to get to the bottom of how true that is and the extent to which we need reform.”

The three areas the committee are looking at are:

• The effectiveness of changes to business rates since 2017.
• Whether or not they meet their four pillars of good tax policy – fairness, encouraging growth, certainty and coherence.
• Fundamental issues around the economic justification of property-based business tax.

Having heard a broad spectrum of concerns about the current system, McKinnell said the one that stands out the most is whether the rise of online retailers means that the levy is increasingly outdated in the modern economy.

“While there’s certainly long-term structural changes taking place, many of these firms say the tipping point has been the unnecessarily large burden that business rates placed upon them,” she said.

Also in the committees crosshairs is the subject of rates vs rents. McKinnell was quick to question that there was ample evidence that cuts to business rates would mainly benefit landlords and businesses with long-term agreements. “If this is the case,” she said, “then that makes making cuts to business rates a blunt instrument.”

The committee is also concerned about the effect of policy on local authorities. “Business rates are not now just a tax system but are also expected to counter the impact of austerity and plug the gaps in local budgets.”

The subject of business rates is a complex one, and reform will not come without much discussion on each aspect of the system. But via the select committee the conversation is ongoing, with future evidence sessions scheduled.

“We want to hear from you,” said McKinnell, “we want to hear the issues, we want to hear the merits, the drawbacks, of all the proposed solutions both in the short, medium and the long term.”

The CBI is supporting the committees call for evidence with a member roundtable on 23 May – and we will continue to apply pressure as part of our campaign activity on fair business rates that work for all.