Guest blog - The Case for Business Rates Reform: A Path to Economic Growth

Business rates have long been a thorn in the side of UK plc. The current system is uncompetitive, complex, and unfair, stifling investment and growth. It contributes to the UK consistently having one of the highest property tax levels in the OECD, with a share of GDP figure more than three times that of Germany in 2022.

As we look towards a more prosperous future, it's clear that reforming business rates is not just desirable but essential. In September 2024, the CBI published a report providing the Government with a roadmap for fixing this antiquated business rates system.

An Outdated and Unpredictable System

For years, businesses across various sectors have voiced their frustrations with the existing business rates system. Although an easy revenue raiser for the government, our members tell us that it’s become unpredictable, burdensome, and inequitable.

For starters, the rates paid are based on outdated property values; revaluations only take effect once every three years, and it takes two years to compile a full list of valuations, so the tax base is always at least two years – and as much as five years – behind current economic conditions.

Furthermore, within a revaluation cycle, the multiplier increases annually in line with inflation which exposes businesses to a high level of volatility. Businesses are given very little time to prepare as the increase comes into effect at the beginning of each fiscal year but businesses generally tend to only have a maximum of six months to prepare for an increase. This unpredictability makes it difficult for them to plan and invest confidently.

A rethink is urgently needed, and with the Government indicating at the 2024 Autumn Budget that business rates reform is a priority, now is the time to weigh into the argument on what that reform should look like.

The Need for a Progressive Tax System

One of our key recommendations is the introduction of a progressive tax system. Currently, small businesses are penalised where they operate out of larger sites or have multiple properties. A move to a 'slice' system where rates are banded in a similar way to income tax would solve this. Such a system would support businesses' ambitions to invest and grow, particularly benefiting smaller enterprises and revitalising high streets.

Under our proposed system, half of all sites assessed for business rates in England would be exempt from paying business rates. This system would also eliminate the cliff edges with marginal tax rates as high as 290% under the current ‘slab’ tax system, ensuring that entrepreneurial businesses are not punished for expanding.

Investment Support

Investment is the lifeblood of any economy. To encourage businesses to expand, the CBI's proposals include making improvement relief and capital allowances more generous. This would incentivise upgrades, renovations, and technological advancements, improving business productivity and the energy efficiency of commercial buildings.

Specifically, a 120% green super deduction is recommended to shift the dial on net zero investment. This would encourage businesses to retrofit properties, making them more energy-efficient and contributing to the UK's environmental goals. This is particularly important as the UK has set ambitious targets for Energy Performance Certificate (EPC) ratings for commercial buildings, requiring these properties to achieve a minimum EPC rating of B by 2030.

Simplifying the System

The current system is riddled with complexities and bureaucratic hurdles with numerous reliefs and exemptions that often create more confusion than clarity. Businesses spend valuable time and resources navigating these challenges, which could be better spent on growth and innovation. The need for a more straightforward, transparent, and fair system is evident.

We are therefore calling for a streamlined approach, prioritising reform over reliefs where possible. A banded ‘slice’ approach, for example, would remove the need for small business rate relief and second property relief as the sites currently benefiting from these reliefs would be largely excluded from business rates anyway.

Transparency, Fairness and Modernisation

Transparency and fairness are crucial principles that have been lacking in the current system. The CBI's recommendations therefore call on modernising the Valuation Office Agency (VOA) to help businesses meet their obligations and ensure a clear and fair check, challenge and appeals process for firms facing higher bills.

The ambition for even more frequent revaluations – ideally annually from 2029 – would provide businesses with the certainty that the tax base will keep pace with economic and property value changes, reflecting a fairer system.

However, reaching this goal should not add to the already high administrative burden on businesses. The duty to notify, intended to help the VOA gather the necessary information for more frequent valuations, places the reporting responsibility on businesses. Reducing the VOA's resources would be unfair and overly burdensome for businesses. Therefore, the upcoming Spending Review must signal to businesses that the Government is committed to creating a business rates system fit for the 21st century. This includes providing adequate resources for the VOA and ensuring the completion of the Digitalising Business Rates (DBR) programme by March 2028.

Conclusion

Reforming the business rates system is not just about making life easier for businesses; it's about creating a fairer, more competitive environment that encourages investment and growth. The CBI's recommendations provide a clear roadmap for achieving this, addressing the key issues of complexity, unpredictability, and unfairness.

By adopting a progressive tax system, supporting investment, simplifying the system, and prioritising transparency, fairness, and modernisation, we can create a business rates system that supports the government’s ambitions for business investment and growth.

The views expressed in guest blogs are those of the writer and are not necessarily shared by CIOT.