In this article, Luke Springthorpe argues that it is time for the business rates structure to be fundamentally reformed, and George Osborne’s Budget presents an ideal opportunity for such a review to be announced.
When the Conservatives entered office in 2010, they were quick to place localism at the heart of their agenda and within a year had passed the Localism Act of 2011 . This made some real strides in devolving real power to local authorities in areas such as housing and planning and saw a raft of new powers given to the London Assembly and the Mayor of London.
Despite this, there is still work to be done to drive localism further, and the revolutionary zeal of the Conservatives-if returned to office in May- should not fall by the wayside. One key area that Conservatives should place at the heart of their next wave of localisation is that of business rates.
Business rates were given something of a shake-up in 2012 through the Local Government Finance Act (2012) which allowed them retain up to half of the growth in business rates and it also split the revenue growth in to a ‘local share’ and a ‘central share’. Although this was a stride in the right direction, it is time for business rates to be localised entirely in what would prove to be a watershed moment for localism.
Local devolution of business rates would be an immediate and effective way of encouraging councils to foster economic growth and job creation in their locality as well as handing responsibility down to local level where planning decisions are primarily made and where nascent business clusters can be cultivated. Although business rate retention was a start, there is scope for to be more ambitious by ending the centralised distribution of business rate revenues entirely. This is done in the name of fairness but by choosing to make fairness, rather than localism, the focus of business rates, the government is unintentionally penalising clusters of high business activity that are in fact our most productive areas. It would be more logical for these rates to both be set, collected and retained at a local level whilst continuing to use income tax, VAT and the likes as the centralised pots which are available for redistribution as the central government sees fit.
Just as councils collect the revenues of council tax in order to provide services for their populace, it is equally important that they are able to benefit from retaining a greater share of the revenues from business rates to properly finance the needs of local businesses. There are a number of good reasons for this: First of all, it will afford local councils greater resources to mould the local infrastructure to adapt quickly to changing business needs. Secondly, the localised incentives to boost growth will be more keenly felt if growth in revenues from business rates contribute to local budgets as well as providing incentives to adopt a ‘business friendly’ approach to planning considerations.
As the business rates retention policy acknowledges, allowing councils to retain the taxation brought about by growth in business activity can be an important stimulus for councils to place business and job creation at the forefront of their thinking. By going the whole hog, we would see this incentive become irresistible and almost at the stroke of a pen, every local council across the land would scramble-regardless of their political persuasion- to boost business activity in their areas.
There is also significant support among local authorities for a greater local retention of business rates, with 81% of councils reportedly signalling their desire for a higher local share than what is currently catered for via business rates retention. Given that there is a demonstrable appetite from local councils to reap the rewards for their efforts to incubate thriving business clusters rather than the continuation of a centralised pot being evenly distributed, the case for reform is compelling.
There is also scope for the very nature of business rates to be reformed. The starting point should be to shift it away from levying taxation on buildings, which are for many businesses an essential form of capital that they actively want to add value to in order to improve their business. This applies just as much to a local restaurant as it does to a manufacturing business. Instead, it should be based on the land which is itself an unproductive asset whose value is only affected by supply and demand. This would have the doubly beneficial effect of encouraging land to be immediately put to productive use, whilst avoiding penalising businesses for adding to the value of property. That said, exemptions should be made for necessarily land intensive industries such as agriculture whereby the land they cultivate will never be built on. Alternatively, taxation based on sales would be an option. Although this would allow councils to enjoy the full benefits of an increase in business activity in their area, it would expose them to more volatile revenues that would be prone to drop sharply in a recessionary environment. It would also hit companies that generate large volumes of sales online.
It may not be a glitzy and glamorous election winning policy, but announcing such a fundamental reform to business rates would signal that a Conservative government after May will be just as bold and ambitious as they have been to date.
Luke Springthorpe is Parliament Street’s Head of Policy. Follow Luke on Twitter
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