John Swinney’s recent announcement that councils will have the power to reduce business rates in certain sectors or geographical areas from the end of the month is nothing new. It also fails to address the fundamental problems in a rating system which is no longer fit for purpose and requires reform.
Under the Community Empowerment Act published in July 2015, councils were given the right to reduce the Uniform Business Rate (UBR) for the current financial year. However, because the scheme is self-financing to councils, not surprisingly none of Scotland’s 32 local authorities, so far, has made any reductions.
While Section 11 of the Act allows councils greater flexibility to apply greater reliefs and remissions to certain properties, what it doesn’t do is to give councils the power to set their own business rate. From 2020, councils in England will have exactly these powers - leaving Scotland once again saddled with an out-dated rating system.
If the Scottish government is serious about encouraging business growth then it needs to overhaul the entire rating system. The postponement of the revaluation until 2017 and the onerous appeal regulations and complexity of the legislation are having a detrimental effect on business growth - the very thing politicians are trying to encourage. But, until now, rates didn’t factor highly on the political agenda.
The reality is that people, not businesses, vote. So while council tax has remained frozen since 2008, business rates have continued to rise at a greater rate than any other tax, based on the Retail Price Index increase, despite the recession. Surely the Consumer Price Index would be a more appropriate benchmark?
Income from business rates is currently the single largest source of revenue under the control of the Scottish government and will be the second largest after the introduction of the Scottish Rate of Income Tax in August 2016.
Business rates account for £2.8 billion for the current year and this is due to increase to more than £3 billion for the year 2016/17. It is likely the business rate, currently set at 48p and 49.3p for properties with a rateable value in excess of £35,000, will continue to rise over the next seven years. This will mean the tax rate will exceed 50 per cent - unlike any other tax in the UK.
The uncertainty around business rates is a real concern to many businesses with the retail sector and the high streets in particular feeling the effects of the delay in the 2015 Revaluation.
But the renewables, oil and gas, pharmaceuticals, paper and whisky industries are also feeling the pinch. They are especially concerned by the amount of property tax they have to pay whilst other countries in the EU and the Far East pay much less.
This puts Scottish companies at a major disadvantage when competing for work.
The Scottish government recently produced a briefing paper on non-domestic rates and details of the revised Business Rate Incentivisation scheme. It shows that 25 per cent of businesses in Scotland obtain some sort of rates relief without which many SMEs and local businesses would fail.
This demonstrates that the system is at breaking point and needs to be modernised.
It’s time these anomalies were fixed. Although the government has promised a review of the current rates appeal system, it is likely that businesses will become more disadvantaged as the regulations are likely to be tightened. There is even talk of charges being administered to lodge an appeal.
What businesses seek is more clarity, certainty, flexibility and transparency in the current system. The information provided by assessors to explain a rateable value is extremely limited and needs to be fully explained. Only then will ratepayers be in a position to determine whether their rateable value is correct.
They also need to estimate, and budget for, future rates liabilities rather than just guess, as most businesses presently do. The changes to the Business Rates Incentivisation Scheme will only cause further confusion and encourage councils to defer any discretionary reliefs to businesses or organisation.
So what needs to change?
It has been suggested that revaluations should be made every three years rather than the normal five year cycle (or seven year as currently due to the 2015 delay). It has also been suggested that the valuation date for preparing valuations should be reduced from two years to one year.
And why do we need to continually value subjects with a rateable value when they receive full relief on rates? One only needs to review the Scottish government’s Paper to see how many properties receive full or partial rates relief.
The rates relief system itself needs to be reviewed as there are far too many reliefs – a system that causes confusion, not only to ratepayers, but also to councils as to what reliefs should apply and for what period.
Matters will not be improved overnight.
But unless the government takes stock of the requirement to improve the current system, more businesses will find it increasingly difficult to pay.
Ken McCormack is Senior Director, Head of Business Rates, GVA James Barr and past President of the Rating Surveyors Association