28 Aug 2017
Expecting the Barclay Review to solve the flaws of our business rates system was always going to be unreasonable. That is especially so since the Review group was asked to make its recommendations without affecting the overall income the Government receives from business rates.
Any reforms were simply going to redistribute the tax burden between different rate-paying groups with a whole new set of those losing out crying foul. Indeed that is exactly what is now happening, with the private school sector and council arms-length bodies reacting badly to the proposals that they should lose existing reliefs.
The Review though is a solid piece of work and makes many valid and helpful points. It deserves careful consideration. When we criticised the outcome of the revaluation process earlier in the year, there were four reasons we felt that business rates were becoming a broken tax. How far does Barclay go in each case?
To begin with, the gaps between revaluations have been too long, seven years in the most recent case. That didn’t actually cause the steep rise in values that affected the hospitality industry in 2017, but it certainly intensified the shock for small companies who are left with little time to prepare. The Review recommendation to limit the gap between revaluations to three years is therefore to be welcomed.
Next, if a business invests in its property it can expect any increase in the asset value to be reflected in its future rates bill. That’s a clear disincentive to investment. Barclay agrees and proposes a 12 month moratorium on rates increases that would follow from investments in either new or existing properties. This is one of the costliest proposals that Barclay makes, estimated at £45m lost revenue each year, and so it is obviously a tangible response to the disincentive point. But of course after that first year the increased rates bill still pops through the letter box.
Our third concern is the difficulty rate payers often have in understanding how the valuation of their property has been arrived at, particularly if they see very different valuations for other similar businesses. Barclay makes several recommendations aimed at improving the transparency of the valuation process including improved information on how the system operates, more visibility of who is getting rates relief and measures to ensure the service given by Assessors is consistent across the country. Any changes which helps ratepayers understand better how their bill was calculated is worthwhile. As it stands our own advice to any business after an increase in their revaluation which they do not understand is to consider making an appeal.
Finally, the most common argument we heard from our hospitality industry members was that the rates revaluations didn’t reflect all the changes affecting the profitability of a business. Restaurateurs, hoteliers and publicans - who incidentally do appear according to a recent Scottish Parliament Information Centre (SPICe) report to be paying well above the average as a share of operating surpluses - were all angry that the basis for their rates bills only considered turnover in their industry and not the rising costs of labour or supplies. Barclay couldn’t find an answer to that challenge. Nor could they answer the challenge that digital industries with smaller property needs were inevitably operating at an advantage over property heavy business models.
The proposal to reduce the Large Business Supplement to keep it in line with England – and avoid Scotland becoming a more expensive place to operate a business – is really the only recommendation that might reduce rates for some of the businesses affected.
Perhaps it’s in this last point where the crux of the unpopularity lies for some businesses. When the economy turned sour in 2007 it became accepted policy to freeze council tax. Barclay shows that whilst the income to local authorities from council tax remained pretty static income from business rates kept on rising broadly in line with the economy. The Scottish Government responded with the Small Business Rates Relief and that helped many businesses with small properties but they also introduced the Large Business Supplement which meant any business with a larger property was paying more. You only need to be above £51,000 rateable value to be drawn into the net. The burden of contributing to local government is being concentrated on a smaller group of companies. We certainly don’t want to lose the Small Business Rates Relief, but you can understand why Barclay suggested it was time to evaluate its impact.
Furthermore, the relationship between what you pay in rates and what you get back in services is not clear cut. Despite the argument that each authority retains the business rates it raises in full, central government grants to local authorities are adjusted to reflect the rates the authority collects. The local authority’s incentive to support business growth is diluted. In effect, business rate income is redistributed from areas with high receipts of business rates like Glasgow to those with lower receipts. So there will be businesses in Glasgow paying rates who can quite legitimately ask if they are getting the services back they feel they have paid for.
Barclay doesn’t attempt to tackle these more fundamental issues. It is a very good piece of work and it will take some of the sting out of the rates revaluation process. But since the overall burden of tax is destined to stay the same – or indeed rise along with RPI – then it is very unlikely that the discontent will abate.