Business rates, also known as non-domestic rates, represent a significant financial burden for many businesses across the UK. To fully understand why these rates are often perceived as high, it's important to explore their definition, historical context, the current calculation methods, the government's reliance on them, and what steps business owners can take to manage these costs.
Definition and History of Business Rates
Business rates are a form of tax levied on properties used for business purposes. Established in 1990, they replaced a more complex and inconsistent system of local taxation. The aim was to create a more uniform and predictable tax framework. Business rates are calculated based on the rateable value of the property, which is an estimate of its open market rental value at a specific valuation date.
Calculation of Business Rates
The calculation of business rates involves two main components: the rateable value of the property and the business rates multiplier. The Valuation Office Agency (VOA) assesses the rateable value, reflecting the hypothetical annual rent the property could achieve on the open market. The government sets the multiplier annually, which, when applied to the rateable value, determines the rates bill.
Valuation Basis: High property values, especially in prime locations, lead to higher rateable values. This means businesses in these areas face higher business rates. Central London, particularly Westminster, has some of the highest business rates in the country due to its prime location and high property values. Areas like Oxford Street, Regent Street, and Piccadilly Circus are known for their high rateable values.outside London, Manchester as a major commercial hub in the North of England, Manchester has high business rates, especially in the city centre and key business districts.
Tax Rates (Multipliers): The government determines the business rates multiplier, which varies across different parts of the UK and significantly affects the rates bill.
Revaluations: These are conducted periodically to adjust rateable values in line with market changes. While intended to ensure fairness, revaluations can lead to sharp increases in rateable values, particularly in areas where property prices have risen dramatically. The 2023 revaluation of business rates in the UK has had a mixed impact on different sectors and regions, reflecting the changes in the property market and economic conditions since the last revaluation. Across England, the overall change in total rateable values was an increase of 7.3%, with significant regional variations. The industrial sector saw a substantial increase of 27.1% in rateable values, driven by higher building costs and increased demand for logistics and warehousing properties due to the rise in online shopping
Government Reliance on Business Rates
Business rates are a crucial revenue source for local authorities, funding essential public services such as education, social care, and infrastructure maintenance. In the fiscal year 2023/24, business rates raised approximately £25 billion in England alone. This amount is essential for local government budgets, providing about a quarter of their total core spending power.
Factors Contributing to High Business Rates
Several factors contribute to the high costs associated with business rates:
Valuation Basis: Business rates are based on the rateable value of the property, an estimate of its open market rental value as of a specific valuation date. High property values, especially in prime locations, result in higher rateable values and thus higher business rates.
Tax Rates (Multipliers): The business rates multiplier, set by the government, is applied to the rateable value to calculate the rates bill. There are different multipliers for different parts of the UK, and these can vary significantly.
Revaluations: Periodic revaluations aim to ensure that the rateable values reflect changes in the property market. However, these can lead to significant increases in rateable values, especially in areas where property prices have risen sharply.
Local Authority Funding: Business rates are a crucial source of revenue for local authorities. The funds collected are used to finance local services such as education, social services, and infrastructure. The need for substantial funding for these services can drive up business rates.
Transitional Relief: When revaluations result in substantial increases in rateable values, transitional relief schemes are sometimes introduced to phase in the changes. However, businesses might still face significant increases over time.
Economic Factors: Economic conditions, including inflation, can influence both property values and the setting of multipliers. In periods of economic growth, property values typically rise, leading to higher business rates.
Comparative Lack of Reliefs: While there are reliefs available (such as small business rate relief, rural rate relief, and charitable rate relief), not all businesses qualify for them. Larger businesses and those in certain sectors might not benefit from significant reliefs.
Property Market Dynamics: The demand and supply dynamics in the commercial property market can drive up rental values, and consequently, rateable values. High demand for limited commercial space, especially in city centres, can lead to higher business rates.
Economic and Legislative Context
Economic factors, such as inflation and property market dynamics, also play a significant role. During periods of economic growth, property values typically rise, leading to higher rateable values. Additionally, the demand and supply dynamics in the commercial property market can drive up rental values, and consequently, rateable values.
Local Authority Funding Needs
Local authorities heavily rely on business rates to fund essential services, including education, social care, and infrastructure maintenance. The need to maintain or increase revenue for these services can lead to higher rates. Business rates form a substantial and stable part of local government funding, making them crucial despite being a smaller portion of the overall tax revenue compared to major taxes like income tax, National Insurance contributions (NICs), and Value Added Tax (VAT).
What Business Owners Can Do To Reduce Rates
Business owners can take several steps to manage and potentially reduce their business rates:
Check for Errors: Ensure the rateable value assigned to your property is accurate. Mistakes in valuation can be corrected by appealing to the VOA.
Explore Reliefs: Various reliefs are available, such as small business rate relief, rural rate relief, and charitable rate relief. Determining eligibility for these can lead to significant savings.
Professional Advice: Engaging a business rates consultancy, like Commercial Property Advisors (CPA), can provide expert guidance. CPA specialises in meticulously examining rateable valuations and identifying potential reductions. Their no-win, no-fee model ensures that businesses only pay if savings are achieved.
Appeals Process: If there are grounds for appeal, such as changes in the property’s use or market conditions, business owners can challenge the valuation. CPA can manage this process, ensuring that appeals are well-supported with relevant evidence.
While business rates are a significant expense, understanding their calculation, the government’s reliance on them, and available reliefs can help businesses manage these costs effectively. Seeking professional advice from experts like CPA can further optimise business rates, ensuring a fair and accurate assessment. By leveraging these strategies, businesses can navigate the complexities of business rates and mitigate their financial impact.
Comments