"Tinkering at the edges does nothing to solve the fundamental issue with business rates – the high rate in the pound"
- Chris Grose - Hartnell Taylor Cook
The manifesto we heard from the Labour party last year stated that “the current business rates system disincentivises investment, creates uncertainty and places an undue burden on our high streets. In England, Labour will replace the business rates system, so we can raise the same revenue but in a fairer way.” But almost nine months into their leadership, all we have seen so far is some tinkering at the edges.
It is important to acknowledge that, as a concept, there is nothing wrong with business rates; the collection rates are extremely high (in excess of 96%) and the collection costs are low. But, as was pointed out by many respondents to the previous government’s Fundamental Review of Business Rates, the biggest issue is the rate in the pound.
At the core of the problem
When the current system was introduced the rate in the pound was 34.8p. In 2005/6 the system was tinkered with to create a lower and higher rate in the pound. In 2025/26 the rate in the pound is 49.9p or 55.5p for larger properties, with supplements potentially bringing it even higher in London.
Every time the government look to change the system, they are looking to ensure the changes are revenue neutral. This means the only options are that for one party to benefit, another has to pay more. The intention within legislation that the overall income from business rates should go up year on year, by the inflation rate, worsens this and begs the question: what other form of taxation has the same constraints?
Surely the change in income should be based on the underlying tax base. Fortunately, this was one item suggested in the Transforming Business Rates paper issued by the government in October last year, but it remains the case that fixing the rate in the pound would better enable businesses to have a longer-term budget for business rates.
Capped benefits
This month has seen the reduction of Retail Hospitality and Leisure Relief from 75% to 40%, with parliament also passing the Non-Domestic Rating (Multipliers and Private Schools) Act. This relief will help many small businesses, but that relief is capped. Though the Act introduces a permanently lower rate in the pound for many of the same properties without a cap, which will benefit many High Street and leisure operators, many of those businesses will have some larger units in excess of £500,000, which ultimately means they will be subsidising themselves.
Council tax corrections
To reiterate, though, tinkering at the edges does nothing to solve the fundamental issue with business rates – the high rate in the pound. But government finances are such that, if you are going to suggest a reduction in the rate of the pound, you have to find a way of making up that income to the Treasury. The answer, then, arguably lies in a different property tax that has remained unaltered in England since 1993.
Whilst certain elements of the media will have us believe council tax reform will result in us all paying more, this is not necessarily the case, and with the system as it is, far from fair, it is ripe for reform.
Take, for example, the currently inadequate banding system, which attempts to account for properties ranging from £20,000 to £220 million. In place of this, there should be a banding system that caters for properties of up to a value of roughly £1 million, and then a percentage value above that.
A system that results in an average council tax rate of around 0.6% of capital value should bring in enough to substantially reduce the rate on the pound that businesses pay. It will be essential, though, to avoid pointless shuffling of money around the system, and a redistribution system will be needed.
Looking ahead
Without consolidated council tax reform, the government will continue to tinker with business rates, each time making the system more complex, less easy to understand, and offering opportunities to the unscrupulous to charge businesses lots in return for promises to save them money on businesses rates whilst delivering nothing.
We can expect action to limit rates avoidance on empty properties, despite this, ignoring the fact that properties are usually empty as no tenant can be found, or because they are awaiting a redevelopment scheme. Indeed, the latter is in danger of becoming uneconomical because of the empty rates payable whilst the site is accumulated and planning is sought.
It is only with fundamental reform of both property taxes that we will see business rates off the front pages.
