Member Article

Business Rates has been a hot potato in the property industry for many years, no more so than in the retail sector. We are a nation of shoppers, yet the outdated system of rates valuation disincentivises investment in retail property and inhibits growth. The way in which we shop has changed, with the growth of online and multi-channel retailing, but the way in which retail businesses are taxed on their bricks and mortar has not. The general consensus is that the current system is no longer fit for purpose and an overhaul is necessary. There has finally been a move forward along the road to reform.

In his Autumn Statement last year, the Chancellor announced a suite of measures and proposals in relation to business rates, giving the issue a level of coverage rarely seen previously in a Budget speech. This in stark contrast to the March 2013 Budget in which business rates did not feature at all. Was the Chancellor turning?

Prior to the Autumn Statement, members of the retail industry lobbied intensely for the Chancellor to review business rates to promote occupancy of retail property, which in turn would create employment and deliver other economic benefits. Whilst he did not confirm an overhaul of the current business rates system, there was however cause for cautious optimism. One of the proposals was a commitment to publish a discussion paper in Spring 2014 setting out the advantages and disadvantages of various options for longer-term changes to the administration of business rates, whilst maintaining the aggregate revenue yield. The Terms of Reference published by the government last week and which outline the scope of the review confirm that (a) the aim is to strengthen how the valuation system responds to changes in property values and (b) that it will consider changes to valuation methods, consistent with the principle that business rates are based on rental property values and must balance the need for any system to deliver fairness, stability and predictability to ratepayers.

Change of this sort does not happen quickly, but the industry is ready, willing and keen to assist in paving the way. The British Retail Consortium established a committee, led by the chief financial officer of J Sainsbury, to find an alternative to the current controversial business rates system. This week the BRC published its report, The Road to Reform, outlining some interesting, radical and innovative options for alternative systems of business rates.

Option 1: Shifting the Basis for Taxing Property

This is the most radical of the proposals and would see the rateable value system abolished and replaced by a new tax entirely. The basis for assessment of the new tax is not clear, but one option could be energy consumption. The benefits of this include the contribution towards meeting the government's green targets and it is envisaged as less bureaucratic. It is ambitious however, given common aversion to change and requires much more exploration to identify a viable new system.

Option 2: Rewarding Employment and Option 3: Supporting Successful Business

The Option 2 proposal is to deliver a discount to the rates bill based on a value for each employee. This proposal supports companies investing in maintaining and growing their workforce, which is in line with other government policies. Option 3 is also a discount to the rates bill, linked to the percentage of the occupier's corporation tax. Both of these proposals are subject to a cap of a percentage of the total business rates bill, which goes some way to ensuring equitable distribution. Both could be implemented more rapidly as they are based on the current system but do not deal with the administrative burden of it, or appeals issues.

Option 4: Modernising the Existing System

This is the least radical proposal made by the BRC's Report, and is seen as the simplest. The proposals for change are that there is a simplified, banded revaluation system, one which avoids having to revalue every property. Instead, it introduces a system of categories based on districts (reflecting location, markets and submarkets), types of property and size. The BRC clearly do not consider this option as sufficiently ambitious on its own to make any meaningful change. However, it is included as it forms the basis of the Government's offering and may be what's needed to lead the Government down the industry's road.

The BRC committee, working with Ernst & Young, will consider these options further, including a full evaluation of policy and supporting economic modelling. The results are expected in May. But before then, will the Chancellor give retailers more hope in March?