Change business rates more often and avoid the shock of a huge rise

The political reverberations of a modest national insurance increase in last week’s budget have overshadowed what many thought would be the most toxic and controversial issue in the chancellor’s inbox, namely how to deal with the revaluation of business rates. Philip Hammond appears to have successfully defused this particular time bomb, at least for the time being.

It is difficult to have much love for any of the myriad taxes in Britain’s complex tax rulebook. Work, consumption, domestic property, profits, drinking, smoking, driving and countless other activities all attract the attention of the taxman, determined to extract his slice. In the case of business rates, however, there is actually some underlying method in the madness of the growing set of exemptions and reliefs that puts a full understanding of the rules beyond the comprehension of a typical person.

Despite the misleading name, business rates are not really a general tax on doing business, but are instead intended to capture the advantage you get from undertaking business from particular premises in a specific location. If the overall market value of your office and the postcode it is in goes up, so do your taxes. If you can conduct your business as successfully from a commercial estate in Hartlepool as you can from your current address in Mayfair, the tax system gives you an incentive to move and to release your prime real estate to someone who can squeeze greater value out of it. That is the theory, anyway.

As is often the case when politics becomes involved, the tax system has become less rational and more perverse. Any tax based on property values requires periodic — and preferably frequent — reassessments of value. This scheduled activity does not fit well with the electoral cycle faced by political parties. If you are going to hit people with a tax rise, however justified, you tend to be averse to doing so immediately before facing judgment at the ballot box. George Osborne cancelled the 2015 revaluation of business rates. He didn’t want substantial changes in the tax burden, essentially beyond his control, to undermine the Conservatives’ re-election prospects.

By kicking the can down the road, Mr Osborne left his successor with even more of a headache. Commercial property values can change a lot in five years, even more in seven. The shock to the system for those faced with increasing business rates is therefore that much greater. Adapting to slow and steady rises in the tax burden is a pain, but one that most of us are used to managing. However, suddenly being hit with a tax bill that has doubled or trebled could pose more of an existential threat. In Welywn Hatfield, for example, the local chamber of commerce fears that there could be increases of 190 per cent in the local marketplace and as much as 400 per cent on the Welwyn bypass. Without additional assistance, this could mean some companies having their business rates liability raised from zero to more than £6,000 a year. “That is a lot of extra sandwiches every day,” the chamber remarks.

Mr Hammond decided to tackle this problem by brandishing a £435 million sticking plaster at the dispatch box last week. Hundreds of millions of pounds will be disbursed by local authorities to ameliorate those worst hit and companies no longer eligible for small business relief will have their rises capped at £600 per year. In one of those absurd, fiddly exceptions so adored by politicians, special measures have been taken to protect the pub trade. There is no rational rhyme or economic reason for this exemption.

The chancellor’s rescue package should mean that most businesses can cope with any rise they face. There may be some anger and resentment, but few enterprises should find they become unviable. Donald Trump will face an additional bill of nearly £500,000 for his Scottish resort and golf course, but until we hear otherwise from the president, we should assume this tax will be paid rather than that his leisure empire will desert these shores.

Having bought himself some time, Mr Hammond should seek to reform the system so that a similar problem does not arise again. The very early signs are not altogether promising.

The chancellor laments the fact that he has yet to find “a better way of taxing the digital part of the economy”. If his reported love of spreadsheets is not merely apocryphal, perhaps he really does look at all productive parts of the economy merely as constituting opportunities to raise tax revenues.

But business rates do not exist to draw in cash from the likes of Amazon. Quite the opposite. They are designed to penalise those who need to operate from expensive real estate in London to sell books and to reward companies who can do so from cheaper warehouses in Burnley.

Mr Hammond could make the system fairer and simpler by adopting a three-point plan. First, the levy should be entirely based on the underlying land value, not on the quality of the premises themselves. If you invest in a redesign of your storefront, you should not be penalised by a rates rise.

Second, revaluations need to be frequent and predictable. A five-year gap is probably too wide, particularly if further extended for cynical electoral reasons.

Finally, the chancellor should ensure that there is a functioning market for insuring against rises in rates. There is no reason in principle why companies should not be able to pay an insurance premium to guard against a rise in business rates in much the same way that they can hedge against exchange rate volatility.

Such an approach would be bold, radical and imaginative. If Mr Hammond can be persuaded to look up from his spreadsheets and to think strategically rather than tactically, he might even embrace the idea.

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