“Business rates system is entrenching regional inequalities” says CBI president

“Business rates system is entrenching regional inequalities” says CBI president

Reform to the business rates system cannot come soon enough for British businesses, CBI President, John Allan said yesterday (8th May 2019) as he addressed business leaders in central London. He argued that the system is now ‘uneconomical, unsustainable, and frankly, unintelligible’.

In his speech, John criticised the broken system, identifying two key reasons for serious reform: long gaps between revaluations means punishing areas of the country that are already struggling, which also eventually undermines those that are on the way up. Secondly, the system makes businesses less likely to invest in growth.

When discussing how business rates are entrenching regional unfairness, John continued; “Part of this problem is the uncertainty around when the next rates revaluations occur. The last revaluation period was extended from five years to seven. We can now expect revaluations every three years. In practice, any longer than one year means business rates lag far behind economic cycles and – over the years – the significant rises in UK property costs.

“The result is a system that rewards those places already on their way up in the short-term, but eventually pulls the rug from under them. It’s also a system that punishes those areas that are already struggling, with boarded up shops an all too common sight.

“Take Hackney, for example. Almost a decade ago, the borough was known as the centre of the London riots.  A world away from the Hackney we know today: A vibrant vessel of investment, buzzing with interest – a magnet for new businesses. Part of London’s ‘Silicon Roundabout’ which last year attracted almost 20,000 new start-ups.

“But the lag between the area’s boom in property prices and its latest business rates revaluation has seen firms suddenly having to cope with an almost 50% increase in their bill. A temporary benefit before businesses take a hefty hit to their costs. A hit that some won’t be able to survive”.

Using the town of Redcar as an example John added “Redcar – once considered a powerhouse of coal, steel, and shipbuilding which, following the closure of its steelworks 4 years ago saw a more than 5% rise in unemployment. This 5% increase is well above the UK average. Meanwhile firms in the area continued to pay business rates at up to 20% above their rateable value. It’s clearly counter-intuitive. It’s also the inevitable result of a system unable to account for rapid change – whether growth or decline that we’ve witnessed across the UK.

“It can mean local authorities being underfunded, in areas where businesses are on the rise. Or companies going under, creating a vicious cycle of decline and dependence. It’s the way that business rates currently work against the economic cycle that makes the tax uniquely damaging. Just compare this approach with other types of tax such as fuel duty, or corporation tax. They increase when business is booming in proportion to the amount of fuel you buy, or profit you make. It’s a much fairer system. One that doesn’t reinforce economic disparities – like the current business rates system does.”

Moving on to the business rates system deterring investment, John explained  “The business rates system – in its current form – disincentivises investment. At the heart of the problem is the way we assess property. If you’re a climate-conscious business owner and you want to improve your office, or your energy supply with solar panels – or new energy-efficient lightbulbs. Whether it’s a large capital investment, or several smaller upgrades to existing property, any real efforts to invest will see your business rates rise.

“It certainly doesn’t give businesses a strong reason to invest in the UK. Let alone in areas where capital is most sorely needed. That adds yet another barrier to growth at a time when the UK already faces its lowest level of business investment since the financial crisis far behind our competitors – at only 9% of GDP compared to 13% across the G7 fuelling an ongoing productivity challenge.”

Both the Conservatives and Labour party must make good on manifesto promises to undertake a comprehensive and independent review John clarified this statement by adding “To understand the impact of these problems, we need only look at the headlines of the past few weeks. Debenhams, once a stronghold of the British high street, fell into administration. Exactly ‘why’ is a complicated question. However, I’ve yet to read an explanation that doesn’t cite business rates as at least part of the cause. The same has been true of countless firms over the years.

Continuing this line of thought he discusses how thousands of firms try to appeal their business rates bill. He postulated “it suggests a lack of confidence in the system. While we have seen warm words and small solutions from the Government over the years these tweaks have only served to reinforce the idea that business rates are a high street issue rather than a problem for our whole economy. The more we try to fix it, the more it reinforces the idea that the system is broken and in need of a fundamental re-think.

John closed his speech with a potential solution; a comprehensive and independent review of the business rates system. The CBI president highlights that it’s in the manifesto for both labour and the Conservatives before ending with a final statement “Now, Why not follow through on that promise”

For more information visit the CBI website here 

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