Freepik | andreypopov | Business rates are a tax paid to local authorities based on a property's estimated rental value.
The Labour Party's 2024 manifesto expressed a commitment to replace the existing business rate system, aiming to create a more level playing field between traditional brick-and-mortar shops and online retailers. The intention is to incentivize investment, reduce the burden on struggling sectors, and support entrepreneurship—key elements necessary for a thriving economy.
Current Challenges With the Business Rate System
In recent years, temporary reductions in business rates for retail properties have been implemented, but many stakeholders argue that these measures are not sufficient. The British Retail Consortium, representing the interests of numerous retail executives, has advocated for a permanent reduction of 20% in business rates, asserting that the retail sector disproportionately shoulders a heavy tax burden compared to its contribution to the economy. The support for this viewpoint is gaining momentum within the industry, indicating a collective need for reform.
Key Points of Contention:
1. Disproportionate Tax Burden - Retail businesses argue that they pay significantly more in business taxes relative to their economic contribution.
2. Temporary Measures Insufficient - While relief has been granted during challenging times, many call for a permanent solution to alleviate ongoing financial pressures.
Possible Mechanisms for Change
Revising the business rate system involves more than just cutting rates. Here are some potential avenues the government could explore:
1. Adjustment of Multipliers
Currently, the government sets two multipliers - one for small businesses and another standard multiplier. There is potential for change here. Legislation could empower the government to establish different multipliers based on property type. For example, retail spaces might benefit from a lower multiplier, easing their tax burden compared to other sectors.
2. Reassessing Rateable Values
The method of calculating a property’s rateable value could also be revised. Currently, this value is based on the estimated annual rent in a competitive market. However, alternative approaches could tie a portion of the rateable value to a business's turnover or profit. This adjustment would allow local authorities to derive more revenue from high-performing businesses while providing some relief to those struggling financially.
Benefits of This Change:
1. Encourages local investment by aligning rates with business performance.
2. Provides local councils with increased revenue from successful businesses.
3. Exploring New Tax Models
Freepik | Some countries tax business profits locally, which is a model the UK could adopt for more stable council revenue.
Looking beyond traditional property-based taxation, some countries implement local business taxes based on profits. This model might inspire reforms in the UK, as it could offer councils a more stable revenue stream that reflects the economic realities of local businesses. For instance, Germany’s local business tax system has proven effective in generating significant revenue based on business profitability.
Implications for Local Authorities
It’s essential to recognize that any changes to the business rate system must also consider the funding needs of local councils, which currently derive a significant portion of their revenue from these rates. Any reform that reduces overall business rate income will require alternative funding sources to prevent cuts in vital services.
Local authorities have approximately £13 billion each year from business rates, and safeguarding this revenue will be crucial. The reform of the business rate system should, therefore, include comprehensive discussions on how to maintain or replace this funding to ensure local services remain robust.
The Path Forward
The dialogue surrounding the business rate system is evolving, with strong calls for reform coming from various sectors. Addressing the concerns of retailers, adapting the calculation methods for rates, and considering new tax structures could create a more equitable and supportive environment for all businesses.
As the landscape continues to shift, the necessity for a modernized business rate system that reflects current economic realities and fosters growth will become increasingly critical. The outcome of these discussions could redefine the relationship between businesses and local authorities, ensuring a sustainable future for both.
