What does the government’s response to the TSC’s inquiry into business rates mean for business?

What has happened so far?

Back in February 2019, the Treasury Select Committee (TSC) started an inquiry into the impact of business rates on business, an inquiry supported by the business community. In April, the CBI submitted a response setting out the key challenges of the business rates system in its current form, and recommendations for addressing some of these challenges.

The prorogation of parliament and a cabinet reshuffle delayed the publication of the TSC’s report, but finally in November, Mel Stride MP, used his first few weeks as Chair to publish the long overdue report. Throughout the report, you can see the impact of the CBI’s submission, with the Committee adopting a number of the CBI’s arguments for reform, as well as four of our recommendations.

On 27 February 2020, the government responded to the TSC’s inquiry.

What does the government’s response say?

Overall, the government was welcoming of the TSC’s report, and has considered each of the recommendations put forward by the Committee in turn. As part of their response the government committed to the following:

• Conducting a fundamental review of business rates that will consider alternative options, taking account of international best practice
• Taking the Committee’s recommendations into account when designing the next transitional relief scheme
• MCHLG will work with local government to produce a guide to business rates reliefs in England, which will be published this year
• The review into the costs of the transition to net zero will consider a wide range of issues, including tax, and will report in autumn 2020.

The government’s response also highlighted two areas of review that are already being undertaken regarding the VOA:

• The VOA is currently conducting a customer evaluation of the delivery of the Check Challenge Appeal (CCA) system which will be published autumn 2020
• HMRC published on 27 February a tailored review of the VOA, considering its role, governance and operational efficiency and effectiveness.

What do these commitments mean for business?

While these six commitments by the government are welcomed by the business community, the detail surrounding each of them is fairly light and in some instances, we would have liked to have seen more of the challenges inherent in the current system addressed in its response.

Conducting a fundamental review

The CBI has long been calling for a fundamental review of the business rates system. It is therefore great to see a commitment to this as part of its response to the TSC’s inquiry. Calling it a “fundamental” review should provide business with the confidence that this review will lead to more impactful change than in previous reviews. However, the scope of the review is still unclear, and we will therefore be keeping abreast of this at the Budget on 11 March.

In its budget submission, the CBI set out that the government’s objective for this review must be to reduce the average rates burden on individual businesses over time and to use this review to understand why the business rates system is broken. It must also develop policy options for how it should be improved and subsequently set out a strategy of how these policy options will be implemented over time. We also highlighted that it is vital for this review to not be constrained by the rule of fiscal neutrality, as we have seen at previous reviews, to ensure it results in fundamental action that supports all business.

Design of the next transitional relief scheme

The current design of the transitional relief scheme enables ratepayers in upward transition (i.e. those who have seen an increase in their rateable value following a revaluation) to adjust to a new (higher) business rates bill over time. However, this comes at a cost to those ratepayers in downward transition, who cannot benefit from a reduced business rates bill immediately. The CBI has called for the removal of downward transitional arrangements to ensure business rates bills better reflect these ratepayer’s ability to pay.

The TSC recommended to redesign the system so ratepayers can transition to their new (higher and lower) bill before the end of a ratings list, which the government has said it would consider for the 2021 revaluation. While this would benefit those in downward transition, there would still be a significant lag between market changes and an adjustment to the business rates bill. It would also mean that businesses in upward transition would have to transition to a new (higher) bill more quickly, which creates cash flow implications. This does not therefore fully address the challenges businesses are facing with the current transitional arrangements.

In a world where revaluations occur less frequently than annually, a lag already exists and should therefore be minimised following a revaluation. To address this, in the CBI’s budget submission we called for the government to retain upward transitional arrangements and remove downward transitional arrangements at the 2021 revaluation.

Guide to business rates reliefs in England

Local authorities can make decisions on when to grant discretionary business rates reliefs. However, there is limited guidance both to businesses to help them understand which reliefs they could be eligible for, but also to local authorities on when and how to apply these reliefs. This has resulted in an inconsistency in approach to reliefs across local authorities.

The government’s commitment to produce a guide on business rates reliefs in England will help to provide businesses with clarity on available reliefs and the criteria for eligibility. This guide will not ensure the eligibility criteria are applied consistently across local authorities. Partly occupied relief is an example of inconsistency. In some instances, businesses felt they met the eligibility criteria but were not granted the relief. In the CBI’s budget submission, we have called for this relief to become mandatory, so it is applied consistently across England.

Business rates to feature in net zero review

One of the key challenges of the business rates system is the impact it has on business’ investment decisions because plant and machinery is included within the scope of business rates. Business rates can therefore be the tipping point when making an investment decision in property enhancements. This has particular implications for meeting government policy objectives. For example, investment in energy efficiency will lead to an increase in business rates and in some instances this increase is too high to make the case for investment. Considering business rates as part of the net zero review is therefore one step in helping to address this.

However, the challenge goes much wider than this. The scope of plant and machinery has not been reviewed since 1993 and since then, there have been a lot of changes in the way businesses operate and the technologies they use meaning the current scope of plant and machinery is not reflective of the modern economy.

Next steps

Overall, business will welcome a review into business rates, a system that is clearly broken and in need of urgent reform. However, at this point it is unclear what form the review will take at the Budget on 11 March. We could see the government announce a call for evidence or a consultation, or simply commit to carrying out a review this year. Whichever outcome we see, the CBI will develop a response through its Business Rates Working Group.

If you would like to get involved in this response or in any of the CBI’s business rates work, please get in touch with Megan Bulford.