Introduction
Business Rates – how can the new Government take the tax forward?
In the run up to the General Election, Labour questioned the tax, calling it outdated and in need of significant reform or even abolition. Since coming into power, the government’s focus has been on addressing the imbalance between high street and on-line retail, and creating a fairer system for small businesses. However, despite this commitment, Labour still requires the tax - whether business rates or another form of property tax - to remain revenue neutral and collect a minimum of £27bn in revenues.
Avison Young believes that the government is missing the point. The fundamental issue with business rates is the high tax rate of the UBR.
This is apparent throughout all our client conversations. Since the introduction of a UBR in 1990, the standard multiplier has increased from 34.8p to now sit at 55.5p, a rise of 60%. At this level the UBR is the highest tax rate in the UK. It simply needs to come down.
The previous government made a start. In 2019 it shifted the inflationary index from an artificially high RPI to CPI, so that at long last the tax aligned with the annual increases in state benefit payments. By freezing the UBR, tax revenues have also in effect remained frozen since 2020.
In 2019/20 the net tax take after reliefs was £25.3bn. If the UBR had increased in line with inflation, we calculate that it would now be 60.7p. This move has saved business around £4.5bn per annum. Despite the 6.7% inflationary increase, by 2024/25 the net tax take had increased by only 4% to £26.3bn. If you allow for upwards transitional relief for the first time since 2023 being funded by Treasury outside of the business rates system, by 2024/25 the tax take has barely moved over the last six years.
The number one priority for business must be reducing the UBR
This is complex, and we must bear in mind the government’s commitment to largely keep the tax revenue neutral. The vast majority of businesses don’t see a wholesale replacement of the system as the solution. A new tax would be too disruptive, creating new and unforeseen imbalances. They want the tax to be equitable, to align with other tax rates and not inexorably rise with inflation. This means a tax that is underpinned by transparency, which allows businesses to make prudent financial decisions.
This research paper considers the potential outcomes of the 2026 revaluation. Avison Young believes this offers the new government the opportunity to change the direction of the tax, reducing the UBR to a more sustainable level. No longer aligned to the artificial Covid-19 market for the current 2023 revaluation, we predict that the increase in the total tax pool to £82.4bn in England and £2.94bn in Wales will facilitate a significant reduction in the UBR from April 2026. This trend can then continue through to 2029, if the government makes the right decision and decouples the tax from an annual inflationary increase so future performance of the property market at each revaluation solely determines the extent the tax can rise.
This paper explores how the market performance has shifted against the previous backdrop of Covid-19.
We consider how the government can achieve the aim of a medium to longer term lowering of the UBR and other reforms necessary to ensure the tax remains relevant and fair.
Avison Young continues to believe that within the basket of taxes, a business rates system has a future. It offers the fairest method of valuation being largely evidentially based through an active rental market. Rather than tamper with the basis of valuation, the government needs to focus on delivering a system where its number one priority is to establish a tax take which is at a more sustainable level for everyone.
