Why business rates reform will green our tax system and revive our high streets

The past 18 months have been challenging for many businesses, to say the least, and many investment plans have been put on ice. And although the return to consumer spending over the past few months has injected some much-needed momentum into our economy, we need business appetite to thaw before we can hope to put our recovery on a more even keel.

Yet one of the perpetual problems facing businesses, large or small – undermining any call to invest more – is a business rates system stuck in the past. It may seem a bit niche but time and time again, when I talk to businesses about their investment plans to make their buildings more energy-efficient or upgrade their manufacturing plant or rebuild a high street shop, they talk about how the current business rates system works against their investment plans and our wider aims to revive our high streets and decarbonise our infrastructure.

It’s been at the root of our high street struggles even before the pandemic hit, and the system in its current form is unfair, uncompetitive and unproductive. And its impact stretches well beyond our shops to any business with a physical footprint, from factories and airports to pubs and offices.

The government knows what a burden the existing system can be to everyday bricks and mortar businesses – it’s why one of the first things it did to support hard-hit firms during the crisis was to offer relief on business rates.

Major reform has been long promised. Successive governments have tinkered at the edges. Our current government is looking at the issue again now but they need to have the bravery to really grasp the mettle of fundamental reform.

If they get reforms on this right, the prize is worth it; we can unlock investment in our high streets, our regions and in the fight against climate change. Fail to act and it becomes that bit harder to secure a sustainable economic recovery, let alone deliver on our net zero and levelling-up ambitions.

Business rates are a barrier to the investment we need most

Don’t get me wrong; business rates are – and should remain – a vital and substantial part of the UK’s tax system. They raise 4% of government revenue, helping to fund our vital public services, including the NHS. But UK property taxes are four times higher than in Germany and 50% higher than the G7 average. And the current rates system works against firms who want to invest; the very opposite of what we need.

Take all our efforts to build momentum on the net zero agenda, both at home and internationally. Around 20% of the UK’s carbon footprint comes from buildings – and to stand any chance of reaching our targets, those buildings desperately need an upgrade. Yet firms investing in solar panels or energy storage systems are rewarded by a rise in business rates before the return on investment is realised. We need a tax system that supports our move to a low carbon economy, not one that works against it.

Likewise, levelling-up is a cornerstone of this government’s stated policy goals, yet business rates that lag local economic realities punish businesses in areas that are struggling and hold back those in areas on the up. In Redcar, for example, local firms were still paying around 20% higher than their rateable value on their premises after its steelworks closure hit the local economy. Meanwhile, in Hackney, the lag between the rise in property prices and revaluation meant firms had to cope with a shock rise in rates of almost 50%, in one go.

So what’s to be done?

The priority right now should be to safeguard our economic recovery. This means freezing rates until the next revaluation in 2023 and allowing firms to instantly benefit from any falls in property valuations from then.

Bringing the business rates multiplier to a lower and more sustainable rate would unlock more investment. And if rates are to better reflect what is happening on the ground in local economies then we must also move to a system of annual revaluations by 2026. The shift to three-yearly reviews was a step in the right direction but only half the job is done.

Finally, the system must be transformed to help tackle the climate emergency by incentivising firms to green their existing shops, offices and factories. When firms make investments that result in an improved EPC rating, give them a business rates grace period of 12 months, alongside an additional holiday from rates increases for another year. Exempt certain existing plant and machinery and new technologies that directly link to the green agenda, including solar panels and heat pumps.

These steps will form the basis of a CBI campaign this autumn – so if your firm has a business rates story to share, please let me know. Because we want to help transform our outdated business rates system into a tax that is finally fit for the future.

Now is the moment for the Chancellor to be bold this autumn and green our tax system. Let’s start with serious reforms to business rates by unlocking investment which can double-down on our economic recovery, at the same time as cutting emissions and benefiting towns and cities right across the UK.

For more information about our business rates campaign or to get involved, please contact Adriana Curca, [email protected].