Business rates may need revolution not revaluation
I understand that, for most businesses, rates are the third biggest outgoing after staff and property costs. For me, as a property lawyer, and not a ratings expert, this is interesting, as clients need to ensure that they give consideration to their rates bill and not just their rental when agreeing to take a lease. The recent revaluation has brought the question of rates to the foreground as there is much debate about the charges and the system as a whole.
I’m writing this ahead of the Budget 2017. As things stand, the rates revaluation is causing a headache for many businesses who will see a hike in their rates come April this year. I’ve heard the increases expressed in all sorts of ways – 22,000 more pints, 2,000 more manicures - to add some context and understanding to the size of some of these increases. CAMRA have reported that almost half of England’s pubs will suffer from increased rates so naturally there is concern in this sector. As with retailers, pubs are faced with the difficult decision as to whether to raise their prices to help ease the burden of the additional taxation and face the prospect of losing customers as a result.
The reality is that there will be areas of the country where rates will actually fall in April but the astonishing increases in other parts – particularly in London and the south east – is grabbing the headlines and making eyes water and the licensed trade faces a particular fate, being reported as the only sector in which there are increases in every UK region.
Business rates are calculated on the hypothetical rental value of a property, as estimated by the Valuation Office. This rateable value is then combined with a “multiplier” to ensure that the total amount collected across the country remains the same. For pubs though, the values are assessed by taking account of trading potential as well as the property value, and it’s this additional facet which is adding to the burden in this sector. Whilst other businesses can benefit from taking operations online, pubs, bars and restaurants can’t, so they rely on their physical asset to generate profit and therefore have to pay the associated charges.
Industry professionals are lobbying the Government to take urgent action ahead of the new business rates taking effect on 1 April, especially in the context of Brexit and the need to ensure that the UK – and London in particular - remains attractive as a centre for business, but also in the context of the licensed industry suffering from the turnover element of the calculation.
There is increasing criticism about the rates system as a whole with some commentators suggesting that the system, which effectively penalises thriving areas – and in the case of pubs, penalises landlords for creating successful establishments - and distributes charges across sectors disproportionately to the percentage of the economy they account for, is unfit for purpose.
The Government is doubling small business rate relief, and providing a transitional fund to reduce the impact of rises but many believe these are just temporary fixes for a broken system. In the pub sector in particular, there’s a feeling amongst those whose rates are actually reducing that this is too late for them to benefit and a real concern amongst those who are about to see increased rates that this additional expense will put them out of business.
Let’s see what the Budget brings.