In a divided world, there's nothing that unites retailers in England and Wales quite as much as their dislike of business rates. This controversial tax on shops, offices, pubs and warehouses has been the target of retailers' ire for many years, and there's no end in sight.

Today on the RotaCloud blog, we'll look at the business rates issue in detail — discussing everything from how they're calculated and discounts that might be available to you as a business owner, to offering up potential solutions for the future.

What are business rates?

Business rates are charged on most commercial and industrial properties in the UK, and are paid by the business operating from the property. The tax is paid to the local authority.  

N.B. In this blog post, we're mainly referring to business rates in England and Wales (Scotland and Northern Ireland use slightly different systems).

How are business rates calculated?

There are two factors at play here: your property's 'rateable value' and a 'multiplier'.

The rateable value is an estimation of the property's open market rental value. It's (currently) based on an estimate made by the Valuation Office Agency (VOA) — the same body that values domestic properties for council tax — back in April 2015. New valuations take place every few years.

This value is then multiplied by the 'multiplier' (unsurprisingly). The multiplier is a figure set by central government (for example, 50p).

So, if your property has a rateable value of £25,000 and the multiplier is set to 50p, your business rates bill for the year will be £12,500.

Are there any special discounts for small businesses?

Yes. First of all, the multiplier is set at a slightly lower rate for rateable values of less than £51,000.

There is also small business rate relief for rateable values of less than £15,000. For properties with values of <£12,000, no business rates are paid.

Retailers and other businesses can also take advantage of other temporary relief like the retail discount scheme.

There are plenty of other relief schemes that you can find out about on gov.uk.

Do business rates change every year?

Yes, they do.

The multiplier changes every year to take inflation into account. For example, the standard multiplier was 46.2p in 2008/09, and 49.3p in 2018/19.

They'll also change more significantly with each revaluation (where rateable values change).

Something to note is that the total business rates takings across the country are the same every year (plus inflation), regardless of rateable value changes — the multiplier changes to compensate. This gives government a more reliable revenue stream that isn't dependent on rents staying steady.

So, what's the problem?

It's rare that taxes are popular, but business rates are particularly problematic — especially for the retail sector. Here's why:

Revaluations bring sudden increases to business rates. The 2017 revaluation was the first since 2010, resulting in business rates increasing by up to 400%.

As a result, transitional relief is required, which limited bill increases to 42% in 2017–18, but also limited rates decreases to fund this relief. The government has promised that revaluation will take place every three years from now on, but this only does so much to eliminate this problem.

The system is complex for businesses to navigate. Different government authorities are involved in different aspects of business rates. Central government sets the multiplier, the VOA estimates rateable values (and handles appeals), while local authorities collect and use the tax, and process relief schemes. This can be frustrating for business owners, and often aren't sure where to pose questions if they have any.

Also, each local authority handles reliefs differently. Some types of relief may be applied automatically, while others need to be requested. The admin burden associated with rates is a particular problem for small businesses with lots of premises.

Business rates place a significant burden on bricks-and-mortar-retailers, while online retailers get off lightly. 'Offline' retailers are more likely to occupy high value properties in city centres, while digital retailers operate from relatively low value warehouses and distribution centres.  Bricks-and-mortar businesses therefore pay a much higher proportion of business rates relative to turnover than online businesses, which many see as unfair.

Following the 2017 revaluation, Amazon's business rates bill decreased.

To maintain tax revenues, these offline retailers will pick up an ever-greater bill. Assuming the government wants to keep business rates revenue growing steadily, it'll keep needing to raise the multiplier as the economy becomes more 'digital' and overall rateable values fall. This means that bricks-and-mortar businesses will need to pay more and more.

Business rates dissuade investment in retail premises and the local area. Rateable values don't just take into account land values, but also certain business assets like plant and machinery. In theory, a shop could face a higher business rates bill if they install air conditioning, CCTV or even solar panels.  

What are the solutions?

First of all, we need to look at the bigger picture — what do we want our high streets to look like?

If retailers are to continue to play a role (and we certainly hope they do!), business rates changes will be just one part of the reform needed for us to get there.

But we've got to start somewhere, so we'll start with business rates. :)

More frequent revaluations to limit sudden changes to rates. While a revaluation every three years is an improvement on the previous five-year rule, annual revaluations would provide far more certainty for businesses and prevent significant rises. Also, businesses would be less likely to review and appeal valuations if the valuations apply only for a year, saving a great deal of time and money on administrating rates.

The next revaluation will come into force in 2021, based on 2019 rental values. It is expected that rates for warehouses and distribution centres will rise, as demand for these premises has increased due to the growth in ecommerce. This may help close the gap between online and offline a little.

Gradually reducing overall business rates takings (in real terms) and ramping up taxes on digital businesses and services to replace the lost revenue. Measures like this reduce the business rates burden while also levelling the playing field between bricks-and-mortar and online businesses. The new digital services tax is an example of this type of measure. The tax is levied at 2% of annual sales made by large digital companies (>£500 million annual turnover) in the UK.

Adjusting the multiplier at local authority level. This gives councils more control over the business rates they charge, letting them either raise more funds or lower the business rates burden — perhaps even using it as a way to tempt more businesses to the area and counter the worrying trend of high street closures.

Scrap business rates in favour of a land value tax for commercial properties. The landowner, not the occupier would pay the tax. It wouldn't include the value of any machinery or plant. Of course, the landowner would pass on the cost of some or all of this tax to the occupier, but neither party would need to worry about the financial impact that improving their premises would bring about, and the occupier wouldn't have to carry out the paperwork involved in paying business rates.

Scrap business rates in favour of a sales tax. Inputs like property, capital and labour are all crucial to a healthy economy. Taxing output rather than inputs encourages businesses to invest in their premises while the tax burden is spread equally (as a percentage of turnover) across all businesses.

Final thoughts

Business rates are a problem for retailers — but they aren't going anywhere. While we'd argue that wholesale change is required, it's unlikely we'll see any significant reform in the next few years. Instead, retailers should expect more temporary relief schemes and perhaps a gradual increase in the rateable value threshold where businesses have to start paying rates.

As ever, if there are any changes to business rates legislation we'll keep you updated! Follow us on Twitter for more small business news.