The business rates system is “broken” and needs to be reformed for the benefit of councils and businesses alike, according to a report from the treasury committee released today.
It revealed that the tax generated £31bn in the UK in the last financial year, with revenues rising faster than inflation.
MPs also found councils have applied business rates reliefs inconsistently and urged the government to create a “single comprehensive” guide on how they should operate.
The report acknowledged the government’s plan to increase councils’ retention of business rates from 50% to 75% – but this move, which was meant to start in April 2020, has already been pushed back by a year.
“Any reform of the system should have particular regard both to the need to maintain the total income for local authorities, and to keep the link between individual authorities and the current and potential new businesses in their areas,” it said.
Alison McGovern, Treasury committee’s lead member of the inquiry, said: “It’s abundantly clear that the current business rates system is broken. The tax represents an increasing burden on businesses, particularly those with a physical high street presence struggling to remain competitive.”
Commenting on previous attempts to improve the business rates system, she said: “Odd reliefs here and there are nothing more than sticking plasters to a system in urgent need of reform.”
The committee has heard arguments for alternatives to business rates, such as a ‘land value’ tax – a levy on the land a property exists on rather than the property itself. Another suggestion has been to have online sales levies as the system places a “disproportionate burden” on bricks-and-mortar high street shops compared to online businesses.
However, McGovern said that alternatives had not been “sufficiently modelled to examine who would be the winners and losers of any change.”
The report concluded that it should not be up to “external stakeholders” to develop and evaluate detailed proposals for a new system. Instead, the government should prepare a consultation on the business rates system by the next Spring Statement, it said. …”
Source:Public Finance (pay wall)
“The number of empty shops in town centres has reached its highest level since 2015, figures have shown.
The national vacancy rate was 10.3% in July, the highest since January 2015, according to the BRC (British Retail Consortium)-Springboard footfall and vacancies monitor.
Footfall also fell by 1.9% last month, marking the worst decline for July since 2012.
Helen Dickinson, chief executive of the BRC, said retailers had faced a “challenging environment”.
“High streets and town centres play an important part in our local communities, and we should be concerned by the rise in empty store fronts,” she said.
The figures showed that high street footfall declined by 2.7% last month, while footfall at shopping centres fell by 3.1%. …”
“The Local Government Association (LGA) will support 45 councils defending a challenge to business rates levied on NHS hospital properties that could see £2.35bn clawed back and set a significant precedent.
Consultants advising a group of 17 NHS trusts challenging the business rates on their properties said this week that a High Court trial has now been set for a test case in which Derby Teaching Hospitals NHS Foundation Trust and the others will seek 80% relief on its rates bill.
The move aims to gain the same charitable-status rates relief enjoyed by many private healthcare operators and, according to property firm Altus Group, would see the affected trusts get mandatory relief on their business rates backdated to April 2010 – costing town halls and the government around £2.35bn.
Data released by Altus ranked the Royal London Hospital in Whitechapel, east London, as the biggest single source of business rates payments to any council affected by the challenge.
It said the hospital would pay £9.16m in business rates in the current financial year to Tower Hamlets Council in London.
Altus said the Queen Elizabeth Hospital in Birmingham and Bristol’s Southmead Hospital will pay £7.15m and £5.99m respectively to their local collecting authorities.
NHS Trusts – and other organisations – have the right to challenge their business rate assessments if they believe they are not fair and correct.
However, formal advice pre-dating the 2017 revaluation suggested trusts are not entitled to relief under Section 47 of the Local government Finance Act 1988 as they were not considered charitable organisations but public-sector funded organisations with boards of directors and rather than trustees.
The LGA, which is the lobby group that represents the vast majority of English councils, said it would back town halls involved in the November challenge on that basis.
“The LGA is supporting member councils who have received applications for mandatory relief from business rates on behalf of a number of NHS trusts and are working with them,” it said.
“We have sought legal advice from counsel.
“We believe that NHS Trusts and Foundation Trusts are not charities, and that the applications for rate relief are therefore unfounded.”
Altus Group said around one in four private hospitals are registered as charities – and benefit from the 80% mandatory business rates relief.
It said Nuffield Health, is the UK’s third largest charity by income.
Altus head of UK business rates Robert Hayton said many people would consider it “iniquitous” that NHS hospitals were treated like businesses and called on the government to end the dispute before the Derby-led case came to trial.
“If the case was successful it risks setting a precedent for other deserving public services with the significant loss in revenue which goes to fund essential public services having to shift to businesses at the next revenue neutral revaluation in 2021 at a time when the tax burden is already far too high,” he said.
The court case is scheduled for trial at the Royal Courts of Justice in the week commencing 4 November.”
“The government has been left red-faced – and potentially £15m out of pocket – by repeating an error which last year cost it £36m and prompted major reforms to its administration of local government finance.
Last year, the government issued a correction to its top-ups and tariffs formula, after it led to a number of business rate pilots receiving more grant than they were entitled to.
Last week, Ministry of Housing, Communities and Local Government permanent secretary Melanie Dawes wrote to the National Audit Office (NAO) admitting that the incorrect formula was used again this year after officials failed to update it.
In her letter to Sir Amyas Morse, comptroller and auditor general at the NAO, Dawes said: “We are looking into the precise circumstances of how this happened.
“However, it originated from a failure to correct the guidance following last year’s error, rather than a new mistake in our computations.”
The error, which exaggerates the forecast benefit of participating in a pilot, appeared in the formula used to calculate section 31 grant payments to business rates pilots in the ministry’s NNDR1 guidance note.
Dawes admitted some local authorities – especially those participating in a pilot for the first time this year – may have based some element of their budget planning on the incorrect formula.
She said: “Given that the financial year has already started, and particularly since the error in the guidance repeats the same mistake as last year, the secretary of state has exceptionally decided to offer a goodwill payment to those councils who used the incorrect guidance for their financial planning in 2019-20, and where the consequences of doing so could be more difficult to mitigate.”
The cost of the payments is expected to be up to £15m, according to the permanent secretary’s letter.
Pilot authorities have been asked to contact the department by 21 June if they think they would qualify for a payment.
In her letter, Dawes said that the sums involved represent the equivalent of less than 0.2% of spending power for those affected.
Last year, the government admitted that the mistake led to 27 local authorities and the Greater London Authority being over-compensated by £36m in 2018/19.
At that time, former communities secretary Sajid Javid issued a direction to allow the department to ignore the rules and allow councils to keep the cash.
In a statement to Parliament, Javid said officials would “use the corrected methodology to calculate the Section 31 grant compensation due to authorities”.
However, the department omitted to update the original guidance note, and the error was repeated in this year’s NNDR1 form, which was issued to local authorities on 17 December.
The problem came to light when the correct figures for 2019/20 were issued to pilot local authorities in late April.
The repeat of the mistake is doubly embarrassing for the government because it carried out a thorough review of governance processes relating to business rates following the original incident. …”
James Timpson, chief executive of Timpson Group:
“I have just got back from Germany, where I’ve been looking for ideas to bring back to Timpson shops in this country. Germany is a good source of inspiration because the weather there is similar to ours — it rains a lot. And rain is good for cobblers. The more it rains, the more shoes wear out. If we were to open in Dubai, I doubt we would do well.
The German retail scene is different from what I see when I travel around Britain, visiting more than 1,000 of our shops each year. There were hardly any vacant sites over there, no closing-down sales — and the high streets and shopping centres were busy. I’m sure the landlords are also doing well.
The Germans are just behind us in the amount they buy online, and they have many of the same brands as our high streets. The problem in Britain is that we have way too many shops — far more than in Germany.
My company rents 95% of its shops from landlords whose aim is to get us to pay the highest rent possible. My fantastic property team battle to find evidence to prove that rents should be lower. We were on the losing side of this cat-and-mouse game for years after I joined the business in 1995. In the past four years, however, the tide has turned.
In the 40 lease renewals we have completed in the past three months, the rents have come down by an average 9.6% — and that doesn’t take into account the generous rent-free periods we’ve also pocketed. There are some shops where the rents have come down by 80%, and more than a dozen where we pay no rent at all.
You will find many retailers complaining about high rents, but you will find even more complaining about high business rates.
When I became chief executive, in 2002, I started a discipline I still abide by today, and still hate doing just as much. I go through the profit-and-loss accounts for every one of our 2,100 shops every month, looking for errors and bad performance. While I’m no accountant, it’s amazing what you can learn.
The biggest change over this time has been how much the rates bill — the amount we pay local authorities as a property tax — has gone up (business rates brought in £25bn for the government in England last year).
The rule of thumb used to be that rates made up 30% of the rent. The figure is now 44% and growing. You can see why many retailers find this difficult to afford and difficult to understand. With online shopping growing, more out-of-town retail parks popping up and consumer sentiment weak, retailers are closing shops at an alarming rate.
However, I don’t think rates are the real problem — it’s rents.
Rates are based on the value of the property. If that goes up, the rates go up. It can take some time for the figure to reflect the true value of the building — and years to be adjusted to a fair level. The lag is the problem.
The Louis Vuitton shop on London’s Bond Street saw its annual rates bill soar from £3.9m to £8.5m a couple of years ago — up 118%. The nearby Chanel shop suffered a 135% increase. The rents rose so steeply because the value of the buildings they trade from had also gone up dramatically. These prized assets come with big bills.
Because of the lag in assessing what each property is worth, many in my chain have been overpaying rates for some years. In essence, Timpson shops in less glamorous locations have been subsidising global designer brands such as Chanel. While we never look for pity, we do like to play a fair game.
Now, on to rents. As they come down, we are seeing a drop in the rates we pay. Landlords are becoming more astute in recognising that it’s often better to take a reduced rent than to receive no rent at all and be forced to pick up an “empty rates” bill on top. This process takes years to unwind — up to 10. Most leases we sign run for 10 years, with a break clause at five. Only at these two points can we challenge the landlord to get the rent down. We still don’t win them all — the rent in Nantwich went up last week!
So retailers shouldn’t worry about the rates, which they can’t control, and concentrate instead on battling with landlords to get the lowest possible rent. This will, in time, lead to lower rates.
I’m proud of the amount we pay in rates (£8.6m last year, against a rent bill of £19.3m). This money pays for our customers to drive on roads to get to the shops, for our sick colleagues to go to hospital, and for schools to educate our children.
While we may not like paying too much, our rates go a long way to help the communities who shop with us. Other retailers should think the same way.”
Source:Sunday Times (pay wall)
“Theresa May’s Government today stands accused of failing to back small businesses, in a report due to be launched by Home Secretary Sajid Javid.
A damning poll reveals three in five people think the Tories are letting down the army of small firms which are vital to the economy and town centres.
The findings come from a YouGov survey of 1,644 adults for the Centre for Policy Studies think tank, which was founded by Margaret Thatcher.
It revealed 60% of people believed the Government “is not on the side of small business”, with just 14% disagreeing. …
This report shows how bureaucracy and paperwork are stifling the growth of our small businesses and offers a series of compelling ideas for how Government can roll back the tide and show that the Conservatives are backing entrepreneurs.”
“Councils may be left unable to claim some £10m in business rates after Rossendale Borough Council lost a test case in the Court of Appeal over empty properties.
The case arose over property owners who lease unoccupied premises to another company which then becomes liable for business rates. The second company is then either voluntarily liquidated or struck off without liability for rates returning to the first company. …”