Replacing business rates with tax based on energy use among potential reforms proposed by retailers

Out-Law News | 18 Feb 2014 | 3:31 pm | 3 min. read

Replacing business rates based on property values with a tax based on energy use, or discounting company rate bills based on employment or corporation tax contributions are among "radical" options for reform proposed by the retail sector.

A group of industry executives headed by Sainsbury's chief financial officer John Rogers has also proposed modifications to the existing system as part of a new report, produced by the British Retail Consortium (BRC) and Ernst & Young (EY). This reformed system would be based on a simplified, banded revaluation system, with revaluations on a more regular basis than the current five years. However, the BRC said that it did not believe this alone would remove current disincentives to invest in property.

"The current system is outdated and cumbersome and does nothing to encourage retailers to invest," said Rogers, who was appointed to lead the project in November 2013. "We believe we can do better for business and for taxpayers, and these options represent tangible progress in the debate on what reform could look like if we think about retail in the future, rather than the past."

Property law expert Stuart McCann of Pinsent Masons, the law firm behind Out-Law.com, said that the industry was sending a "clear message" with its proposals that only a "fundamental review" of the current business rates system would be acceptable.

"It is common ground between retailers and the Government that the current system of business rates needs modernising," he said. "The process of doing so is never going to be straightforward and the BRC has presented some radical thinking. In linking rates liability to energy usage, or with discounts based on job creation and corporation tax receipts, the BRC is no doubt being shrewd by pressing the correct political buttons. By considering alternative ways to levy the tax, the proposals are likely, though,  to go substantially beyond the administrative reform that the Government apparently seems to envisage."

However, he said that not all of the BRC's suggestions would be "universally popular", adding that manufacturers would "no doubt baulk at the idea of a tax linked to business energy consumption" given the number of green levies already in place.

Business rates are charged on most non-domestic premises including shops, offices, warehouses and factories and form the third biggest outgoing for small businesses after rent and staff costs. Retailers have repeatedly called on the Government to re-examine the effect of business rates on their businesses, with some saying the regime disadvantages traditional shop owners compared to their online retail counterparts.

Rates are based on the rateable value of the business premises, which is set by the Valuation Office. This valuation is used by the local authority to calculate how much the occupier of that property should pay. Revaluations usually take place every five years; however, the revaluation that was due to take place in 2015 has been postponed by the Government until 2017. This was done to provide "tax stability" to shops and businesses, it has said, although industry groups reacted angrily to the decision.

The Government announced a number of measures to ease the burden of business rates on UK retailers as part of the Autumn Statement, but declined to carry out a full review of the current system. It has, however, recently published the terms of reference for a review of the administration of the business rates regime post-2017.

The report sets out three "radical" options for reform, as well as proposals for modernising the existing system in line with the Government's review. Although stating that modifications to the existing system could not on their own deliver effective results, it suggests that this could be combined with some of the more radical proposals. The report proposes a simplified, banded revaluation system based on location, type and size of property rather than rateable value. This system would avoid the need to value every property, and so would allow for more regular revaluations.

Two options that the BRC would like to see considered alongside these modifications are discounting the rates bill of a business based on job creation or corporation tax receipts. The report suggests that rates could be discounted based on a given value per employee, capped at an overall proportion of the rates bill; or based on a percentage of corporation tax payment, again capped at an overall proportion of the rates bill.

The most radical option proposed in the report is to abolish business rates altogether; instead shifting the basis for taxing property from rateable value to a new measure, such as energy usage or efficiency. According to the report, this new tax could potentially raise the same amount of tax revenue as business rates and could be delivered through an amended and enhanced climate change levy (CCL), therefore allowing for the removal of a tax altogether. Existing exemptions and reliefs built into the rates and CCL systems should be preserved, the BRC said.

"We have a once in a generation chance to fundamentally change the business rates system and the time is right to think creatively and in the best long-term economic interests of the UK," said BRC director general Helen Dickinson. "These potential options would be good for the public, the economy and businesses small and large, while still providing significant tax revenues for the Government."

The BRC now planned to analyse each option in more detail in consultation with its members, along with fuller economic modelling and assessment. It intends to publish the results of this further analysis in May.