Artificially high business rates are hitting the high street

An official study is calling for major changes to the way in which property is taxed as a means of attracting more investment into Britain’s high streets.

The flaws in the system are one of the factors behind the decline of Whitefriargate in Hull because businesses were left facing rates which were artificially high.

We’d like to see the new government keep its promise to review business rates, but business owners shouldn’t hold their breath because a future government is unlikely to make wholesale changes to a tax which is so effective.

Within days of the election result, the British Retail Consortium called for action over business rates. Chief Executive Helen Dickinson said: “The Prime Minister must now fulfil his manifesto pledge and urgently begin a fundamental review into the broken business rates system to relieve the burden on retail businesses and create a system fit for the 21st century.”

Mike Ashley, CEO of Sports Direct, took the opportunity of announcing his half-year results to indicate that the “broken and unworkable” business rates system could be a factor in his decision about whether to close loss-making House of Fraser stores.

But the prospects of real change are slim. It’s clear one of the reasons the government likes business rates so much is that the system is very efficient. The system collects 98 per cent of the tax that’s due. It brings in the money.

“Impact of business rates on business”, a report from the House of Commons Treasury Committee, highlights problems with the system including the complications with transitional relief, built-in delays with the “check, challenge appeal” (CCA) system and dwindling resources at the Valuation Office Agency (VOA).

Whitefriargate is an example of a once-thriving retail area which ran into severe difficulties in part because the planned 2015 revaluation was delayed until 2017 and left many businesses paying rates based on rental levels from 2008, before the financial crash.

The 2017 revaluation took into account the property market after the crash but because the reductions were phased in a lot of the businesses were still paying higher – in some cases more than 50 per cent – than the equivalent rateable value. This added significantly to the costs facing some businesses in Whitefriargate and it is entirely likely that the assistance came too late to save many of them.

The Treasury Committee report says government plans to increase the frequency of rates revaluations to every three years will increase the demands on the VOA, which it says needs to be “properly staffed” to deal with cases brought under CCA from the 2017 revaluation and to resolve appeals which are still outstanding from 2010.

The report notes that CCA was intended to address the ease with which businesses could submit “spurious appeals”, creating an “unsustainable workload” for the VOA when it comes to investigating the claims.

But its introduction created confusion at a time when the VOA was about to embark on a round of job losses and office closures which in turn brought lengthy delays in processing grievances. CCA allows up to 12 months for a formal check, simply to confirm the facts of a business’s rateable value. It can then take up to four months to prepare a challenge and 18 months for the VOA  to respond. Proceeding to the appeal stage will cost a business £300, and the Treasury Committee’s study reveals that just getting to that point could take 950 days.

The question is: How many businesses which are paying higher business rates than they should can afford to sustain the drain on their finances for more than two-and-a-half years?

Such delays are the main concern of Mike Ashley, who said: “All we want to do is pay what the correct rateable value is from the last set of valuations.”

Alternatives to business rates considered by the Committee include a land value tax, online sales levy, sales or turnover tax, profits tax or a hybrid tax combining a charge on property and profits.

It said of CCA: “It is unacceptable to bring in a system that creates so many difficulties for ratepayers. No business should be waiting for over two years into the next rating list for their checks or challenges from the previous rating list to be resolved.”

Of transitional relief it said: “The number of reliefs that are needed for business rates to work indicate a broken system. Each additional relief adds a further layer of bureaucracy to an already complex system. The treasury should review all business rate reliefs to ensure that they remain necessary.”

Our concerns are not with the billing authorities or the VOA but with the system which is unlikely to change significantly because it is simple, effective and works for the government even if it doesn’t work for business.