By Joanne Pitt, CIPFA Local Government Policy Manager
It’s a busy time of year for financial planning. Local authorities are finishing up their budget setting, central government’s national Budget is scheduled for 11 March and hopefully a comprehensive spending review won’t be far behind. It’s therefore no surprise that the conversation around business rates is once again raising its head. Business rates have become an increasingly important source of income for councils following recent local government funding reforms. However, we’re continuing to see the vulnerabilities of the business rate system present risk and uncertainty.
Business rates are a property tax on commercial premises, like shops, offices, factories and pubs, which has worked well for decades and provided a stream of funding for the public sector to the tune of £22bn a year. However, the business rates system is starting to show its age and there are questions about its viability in a world where economic value is increasingly transferring to the digital space. In the Queen’s Speech we were promised a fundamental business rates review. In addition to the broader review, the government also committed to increasing the retail discount for retailers from one third to fifty per cent and extending reliefs, all to help struggling local shops and high streets. More frequent revaluations were also covered and are seen as making the system more responsive to changing economic conditions.
For those relying on business rates as an income stream a main issue has been the seismic shift in consumer behaviour. Online shopping is increasingly regarded as cheaper and more convenient, and shoppers understandably flock to wherever they can get the best deal, and that’s often not on the local high street. While this change may suit shoppers, it is a cause for concern for both businesses and councils reliant on business rates.
Business rates is also a complex system. Discussions about how it’s paid, what it’s for, and who gets it are often opaque. Over the last seven years, complications have grown faster than ever as authorities and businesses attempt to balance fairness with both local need and the requirement for transparency.
One of the areas that has seen change in recent years is the appeals process. The Check Challenge appeal process allows business owners (rate-payers) to dispute the valuation of their commercial property. If the appeal is successful, then their business rates bill is likely to be reduced. While this is good news for those paying the bill, it’s less good news for councils. For local authorities up and down the country that are balancing their budgets and having to fund local services, such appeals can prove a challenge. Cannock Chase District Council in Staffordshire recently lost over £1 million through this system.
With less income in the budget, there are implications for service delivery. At this point, good financial management becomes essential to manage the increased risk. Local authorities have to ensure they have the funds in place to respond to the financial uncertainty that comes with increasing reliance on business rates. Robust data and timely information around appeals, particularly if it’s likely that they will increase, is vital for good risk management.
Unfortunately, risk is not spread evenly across the country or even between councils. You only have to compare your own high street to that of the next town over, and the town after that, to see the stark difference in vitality of an area’s 'bricks and mortar' retail market. Where there are fewer high business rate payers, there is a disproportionate amount of risk due to the lack of diversity in the local income stream. It only takes one of these high business rate payers to go under for it to become an issue for council finances.
What makes this issue so tricky is that the problems are rarely of the individual local authority’s own making. This means that finding a local solution within their gift can be difficult. If business is buoyant, there is no problem. The challenges arising are a result of the broader changing landscape for the retail industry. As long as local authorities are dependent on drawing income from bricks and mortar businesses, they are, to some extent, at the mercy of consumer habits.
Reform is needed to the business rate appeal system and CIPFA has already expressed our support for the alternative model, put out to consultation by the government last year. We look forward to engaging further in the debate with the aim to make the new system less volatile and more transparent.
This article first appeared in the MJ.