Business rates structural review will be 'fiscally neutral', says UK Treasury

Out-Law News | 17 Mar 2015 | 4:51 pm | 2 min. read

The UK government will consider structural changes to the way in which business rates payable on commercial properties across England are calculated as part of a "radical review" of the current system, it has announced.

The review will consider whether the current system should be modernised in order to better reflect changes in the value of property, and whether the rules should be amended in order to incentivise development by local authorities and occupiers. It will also consider whether the tax should be based on something other than property values, and whether the rules should be amended to take into account the size of the business occupying the property and its ability to pay.

The UK Treasury announced that it would conduct a review of business rates, which are paid on approximately 1.8 million English properties annually, as part of December's Autumn Statement. Property law expert Stuart McCann of Pinsent Masons, the law firm behind Out-Law.com, said that the review would be particularly welcomed by UK retailers, but questioned how "radical" any resulting reform would be given the government's pledge to keep any changes "fiscally neutral".

"Few would argue that a tax that was created nearly 30 years ago is now seriously outmoded and is in need of wide and comprehensive reform," he said.

"The prospects of a new system of taxation may, though, appear to be limited after the government announced that the review would be 'fiscally neutral' - it is difficult to see how this controversial tax will be overhauled when the amount that the Treasury generates seems likely to remain the same. The indications are that the high street may well have to prepare itself for the government to tinker with the current system rather than provide the radical reform that is being demanded," he said.

Introduced in their current form in 1990, business rates are paid by occupiers of non-domestic properties such as shops, offices, warehouses and factories and are currently the third biggest cost for small businesses after rent and staff costs. The tax is based on a rateable value set by the Valuation Office Agency, with revaluations usually taking place every five years. The current system has been criticised as outdated and unfair by business bodies, particularly those representing retailers; and the House of Commons Business, Innovation and Skills (BIS) select committee.

The UK government has introduced a number of policies and incentives to support small businesses and encourage the reoccupation of empty commercial properties over the past few years, and has also carried out a review of the way in which the tax is administered. However, this review is the first to look at the way in which the tax itself is calculated. Although the government has said that it would prefer to keep business rates as a property tax, firms have been asked for their views on whether the government should consider a move towards "alternative tax bases" as part of the terms of reference of the review.

The government has also asked whether changing patterns in property usage are affecting some industries more than others, and whether the current system has a disproportionate impact on smaller businesses. It has also asked for examples from other jurisdictions and tax systems that it could draw on as part of the review. The review also seeks views on allowing local authorities to retain locally-collected business rate revenue, and whether the rules should be changed to encourage firms to invest in plant and machinery, energy efficiency and similar property improvements.

"Our system of business rates was created nearly 30 years ago," said Danny Alexander, the chief secretary to the Treasury. "Since that time, the worlds of commerce and industry have changed beyond recognition."

"The government has taken measures to help businesses by capping rates and introducing reliefs for smaller businesses. But now the time has come for a radical review of this important tax. We want to ensure the business rates system is fair, efficient and effective," he said.

The consultation exercise runs until 12 June 2015, and the government has said that it will report back before the next Budget in 2016. The review covers business rates in England only as Scotland, Wales and Northern Ireland have their own rules