Business Rates and the Effect on the Property Market – Budget Update

March 1, 2017

On the 8th of March, Chancellor Philip Hammond will deliver his first Budget. He had hoped, with Brexit dominating Westminster, that it would be a  ‘low key’ occasion. However, a furore over business rates threatens to force him to make substantial changes to his plans

Business rates are a tax on non-residential property, calculated by combining the amount of rent one could expect from the property market (the ‘rateable value’) with a multiplier, set each year by the Government. Rateable values have not been assessed since 2010, and much has changed in the property market since then. The Government plans to revalue business properties in England so that businesses in areas where rents have risen the most since 2010 will end up paying more compared with businesses in areas with lower rent increases. The Scottish and Welsh Governments plan to conduct their own evaluations in the near future, as the Northern Irish executive did in 2015. The new rates will come into force on the 1st of April this year.

The Government claims that only one-quarter of businesses will see their rates rise as a result of the revaluation, but others are sceptical. Backbench Conservative MPs, especially those representing London and Home Counties constituencies which have seen the biggest rent rises and therefore have most to lose from revaluation, are lobbying the Chancellor to soften the blow on business. Labour’s John McDonnell recently warned that Britain’s high streets could become “a wasteland” if the Government doesn’t change course. He calculated that the average small business will be stung for £3663 more over the next five years as a result of the revaluation.

That the revaluations will hit small, high street businesses far more than bigger companies with online sales and warehouses in low rent areas makes this tricky politics for the Chancellor. And the Government’s handling of the dispute has so far been confused, to say that least. The Chancellor, the Communities Secretary Sajid Javid and the Theresa May herself have all implied there will be assistance for that worst-hit by the revaluation, but a spokesperson for the Prime Minister denied any additional funds had been committed, or announcements made.

Philip Hammond may not look like the sort of man who would pull rabbits from hats, but that maybe what he has to do on 8th March. What options does he have to soften the blow?

  • Chris Sanger, Head of Tax Policy at EY, suggested that the Chancellor might reset the multiplier for business rates from 48% to 41.4%, the multiplier in 2010. This would help businesses, but be costly for the government: currently, the business rate multiplier is calculated so as to preserve the same amount of tax revenue year on year.
  • A transitional relief fund for affected businesses would be the simplest and best-targeted solution. Although the Prime Minister’s spokesperson denied a commitment to extra money, Labour argues that £500m could be found to help small and medium-sized enterprises by making changes to the entrepreneur tax break and using CPI rather than RPI to calculate annual adjustments to rates.
  • Other support for business – through easier access to finance, measures to boost investment, reductions in employer’s NI contributions, and so on – could be announced to soften the blow of revaluation. These could be costly but would distract attention from the business rates issue, which might be politically desirable for the Chancellor.

These recent moves by the Chancellor are causing concern in the recently revived commercial property market sector. Anything that reduces demand and dampens business, will have a corresponding knock-on effect, with potential tenants looking again at affordability, especially in the more popular and expensive locations that have been hardest hit by these rate changes.

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This article was written by Matthew Dailly, Managing Director of Tiger Financial.

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