The government needs to press the reset button on business rates
It now seems like an age-old adage that the business rates system is broken. It is a fact that many in the industry had accepted, despite the best efforts to change it.
That was before the pandemic hit. COVID-19 has wrought massive change across the world and in all industries. Property is not immune, and the current crisis has thrown up a number of challenges and opportunities for the sector.
One clear opportunity is the chance the government now has to press the reset button on business rates.
The government did recognise the significant burden that rates presents for tenants when the pandemic hit, and swiftly took action to waive them for retail and leisure properties as part of its support for businesses during lockdown. It is also progressing a wider consultation on business rates reform.
It must not waste this opportunity to conduct a wide-ranging review of the system and begin an overhaul to ensure the system is fair and equal for all. To do this, the government needs to understand the key problems at hand.
The first issue is that rates are too high. Recent research from Altus Group showed that property taxes in the UK, as a percentage of overall taxation, were 12.33% for 2018/19, more than double both the OECD and European Union averages of 5.48% and 4.49% respectively. In addition, rates currently increase annually with inflation and have accumulated significantly since the 1990s. They are extremely onerous for both tenants and landlords, as demonstrated by the toll they have taken on the retail sector in recent years.
In addition, there is a lack of proper support for landlords of vacant properties, with relief only lasting for three months. The pandemic has caused upheaval to our economy, and there will be many more vacant properties than normal as a result, with the expectation that rates are paid despite lack of income. This is unsustainable.
The administrative process is also broken and outdated. The appeals process in particular is difficult to navigate and has a significant backlog. The number of appeals has grown by nearly 700% year-on-year in the first three months of the financial year, according to data from the Valuation Office Agency (VOA). Even before the pandemic, Colliers International estimated that it would take 4 years to clear all the appeals made in 2017. The new appeal system introduced in 2017, which was designed to streamline the process, only really does this for owners and occupiers of larger portfolios, whilst proving a time consuming burden for smaller businesses.
Finally, revaluations are too complicated, take too long, and are out of kilter with what’s happening in the market. The delay of the current review benefits some that have seen significant rental growth in recent years, like in the industrial sector, but harms others such as retail, which has seen rental values fall by over 50% in many areas whilst rates have increased.
So what can be done? The government needs to find a solution that works for all in an equal and fair manner.
To reflect the changing marketing conditions, revaluations should be carried out more regularly – ideally yearly – to make sure rates are being paid in-line with the economy. This would remove the need for majority of appeals that the rates being charged are unfair.
In the past, reforms have been piecemeal and include so many assistances and exemptions that the system is now like Frankenstein’s monster, having spiralled out of control and understanding. The constant changes have also made the system appear more unfair and open to abuse. Therefore, the suite of exemptions and allowances should be reviewed and streamlined, as a priority, to ensure the system is simple, clear and fair for all occupiers and owners of properties.
The pandemic has shone a light on the problems with the current business rates system. The government has a clear opportunity to improve the system for all stakeholders. It must not waste it.