The government needs to replace a “broken” business rates system that deters investment in the declining British high street, a report from parliament’s Treasury committee concluded.
The MPs’ critical report raises new questions over a property tax that raised £31bn for the UK’s public coffers last year.
MPs said that business rates were an “unfair system” that levied “a greater cost on high street shops and sectors like manufacturing than online businesses”. The group urged the government to consult on alternative systems in the Spring statement next year.
Retailers have long complained about the onerous burden of paying business rates on their properties, which has added financial cost to businesses sometimes struggling to survive on high streets hit hard by the rise of cheaper online rivals exempt from such taxes.
The committee of MPs questioned how revenue from rates could have outpaced inflation since the system was introduced in 1990, and has grown as a proportion of the tax paid by business. But the group did not offer any clear-cut solutions, saying that further work was needed to model different proposals so that the government can prepare a consultation next year. Alternatives to business rates presented to the group included land value tax, online sales levy and a profits tax.
“Its abundantly clear that the current business rates system is broken,” said Alison McGovern, the Treasury committee’s lead member. “The tax represents an increasing burden on businesses, particularly those with a physical high street presence struggling to remain competitive.”
Peter Wood, chief executive of AllSaints, the fashion brand, said: “The whole model is outdated and needs a complete overhaul.”
The MPs said that the UK had one of the highest property-based taxes in the OECD as a proportion of GDP, which has had an impact on the attractiveness of the UK as a destination for investment.
The number of business rate appeals still outstanding
She added that the government must ensure that business rates align with its aim to boost productivity and “not disincentivise growth”, pointing out that it was unfair on the manufacturing sector that rates were also included on essential operating equipment.
The committee said that the existing complex web of reliefs in place to mitigate business rates showed that the system was broken, but said that improvements could be made quickly such as improving these reliefs, reducing statutory limits for responding to appeals and ensuring that the right level of resource is directed to the Valuation Office Agency (VOA) — the body which advises the government on property evaluations for tax purposes.
Under the existing system of relief, investment can lead to an immediate rates revaluation based on a presumption of increased turnover which deters extra spending by businesses.
The committee also criticised the rates appeal system overseen by the VOA, pointing out that an “unacceptable” 16,000 appeals remained outstanding, “years after they were first raised”.
It said: “Such long delays bring the work of the VOA into disrepute and undermines trust in the UK tax system . . . It is unacceptable to bring in a system that creates so many difficulties for taxpayers, for example, ratepayers with multiple properties. The VOA must address these problems.”
Jerry Schurder, head of business rates at property consultancy Gerald Eve, said that the recommendations in the Treasury committee’s report fell short of the “radical reforms that are essential if the rating system is to be made fit for purpose for a modern economy”.
He said the recommendations would provide ratepayers with some relief,” but “in truth it is only reductions in business rates bills that will help struggling firms, and bring the UK into line with other developed nations”.