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Business Rates – unsuitable for the digital age?

Posted by Tom West on Feb 22nd, 2017 | Tax

Business Rates - unsuitable for the digital age?, image of man checking bar codes

As part of The Entrepreneurial Audit (a joint project from the RSA and Crunch) twenty policy ideas have been proposed to strengthen self-employment in the UK. In order to make the business rates system fit for purpose, proposals in the report recommend that the Government:

  • Conducts more regular revaluations of properties
  • Transitions to a ‘revenue rates’ scheme 

How are business rates decided?

Currently, most non-domestic properties including shops, warehouses, factories, and offices have to pay business rates – essentially the business equivalent of the council tax you pay for where you live.

Rates are calculated by multiplying the ‘rateable value’ of a property – its open market rental value – with a figure set by the Government (a ‘multiplier’).

As it stands, local authorities keep up to 50% of the money raised in their area, but under new plans, councils will be able to keep all of the proceeds and some authorities will be able to tweak their multipliers.

Valuations are not regular enough to be accurate

Although a revaluation is set to take place this year, the last audit occurred nearly a decade ago in 2008, and were brought into effect way back in 2010.

While the report acknowledges that revaluations are expensive and time-consuming, it argues that conducting more frequent property surveys would allow businesses to absorb smaller, more manageable tax changes over time, rather than sudden large hikes.

An increase in frequency, as recommended by the RSA, would also benefit those businesses where the rateable value of their property has dipped in the period since the last revaluation, and would result in them paying a much fairer and more relevant business rate.

Is a ‘Revenue Rates’ system a better idea?

Business rates have been around long before the the internet, back when high streets were thriving and businesses needed a physical shopfront to trade goods and services. It may have been a suitable system for back then, but nowadays a multinational online company with an out of town warehouse can pay the same, or less, than a struggling independent shop on the high street. Is this fair?

The report proposes a transition to a ‘revenue rates’ system, where how much tax you pay is based on turnover (or some other indicator of business performance). This would rise and fall in line with economic cycles, while capturing all businesses in a given area (including online traders).

It would also be more objective, therefore less prone to costly and time-consuming appeals, and would do away with the incentive that business rates create to leave properties undeveloped.

This doesn’t come without its challenges, for instance working out how the location of sale would be determined for companies engaging in internet trading. Other alternative proposals included a Land Value Tax that would be a levy on land rather than property, and a Point of Exchange Tax that would charge taxes at the point of delivery or purchase.

Do you think this would be a good idea, or are you happy with one revaluation per decade? Let us know your thoughts in the comments below!

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