Tackling the UBR burden
It is undisputed that the business rates system needs reform and modernisation. The magnitude of the reform is open to much debate.
However, there is one issue where we have complete ratepayer consensus. The UBR and associated supplements are set at levels which are out of control, and to ensure we have a sustainable and more equitable tax base the overall tax rate has to come down.
THE UBR - FROM INCEPTION TO NOW
When first introduced in 1990 the UBR was set at 34.8p in England. Except for a marginal supplement applied to the City of London no additional supplements were added, the tax representing a flat rate for all commercial occupations.
The political expectation was that the UBR would be stabilised by rental growth at each five-year revaluation and offset the inflation added annually.
No one envisaged that by 2024/25 we would have:
1. Two multipliers, a small business non-domestic multiplier of 49.9p (smaller businesses) to which additional supplements would then be added to increase to a standard multiplier at 54.6p.
2. In London, a Crossrail (Elizabeth Line) supplement of 2p.
3. In the City of London an additional precept of 1.8p increasing the tax rate to 58.4p.
4. The raising of additional local finance through BID levies, which can add as much as 2.5p.
So, we now have a highest tax rate at over 60p, 72% higher than the initial 1990 UBR.
UBR and total supplements are 33% higher than income tax at 45%, the next highest tax rate.
Reaching this point:
The issue is inflation. The Exchequer largely rely on the performance of the economy to create the environment for higher levels of corporate and personal income tax. Sometimes revenues increase and sometimes they fall, with government borrowing largely compensating the falls.
Business rates are an exception as the total liability from business rates increases by inflation each year. Until 2020, the government applied the higher RPI inflation index to calculate the UBR. This was out of keeping with how they paid out benefits, largely calculated on the lower CPI measure since 2010.
Avison Young calculates that if this switch had been made in 2010, that the UBR in 2020 would have been 48.0p rather than the UBR applied of 49.9p. This has cost business £12bn since 2011.
HISTORY OF THE UBR
THE IMPACT OF COVID-19 – THE WORM IS TURNING
In 2019/20, the rate year immediately preceding the full impact of Covid-19, the government collected a gross income from business rates of £30.4bn, which after reliefs netted down to £25.3bn.
Since 2020/21 no inflation has been added to the base rate of 49.9p. The only significant step to increase the rate was through the small business rate supplement added to assessments with an RV in excess of £51,000, which significantly increased from 1.3p to 4.7p from last April.
The most significant impact of freezing the UBR is the underlying impact on gross receipts. By 2024/25 gross receipts had only risen to £34.6bn.
We estimate that if the government had conventionally applied the CPI inflation rates to the UBR since 2021/22 gross receipts would now be £39.29bn and the UBR would have accelerated to a level of 60.7p plus supplements. We estimate that the freezing of the UBR has in fact saved English businesses £10.47bn over the last four years.
HISTORICAL UBR, GROSS INCOME & RELIEF GRANTED:
INCOME LOSS IF UBR HAD RISEN IN LINE WITH INFLATION:
GROSS TO NET RELIEFS AND UPWARDS TRANSITION
The government has not only restricted business rates growth through freezing the UBR (see table 1) but also sought limited net business rates growth over the same period.
Yes, they gave significant help to the retail and hospitality sectors during the pandemic. However, when you compare the pre Covid-19 net receipts with this year's forecast receipts, net receipts have only increased by £1bn from £25.3bn to £26.3bn. This is due to mandatory and discretionary reliefs increasing from £5.1bn in 2019/20 to £8.3bn in 2024/25. This is largely through continued retail and hospitality relief and small business rates relief.
Furthermore, for the 2023 list the government decided to continue with an upwards transitional scheme to phase in the largest increases ratepayers experience from the revaluation. Historically, the scheme was self- funded through those receiving decreases who would similarly have these phased.
For the 2023 list the government, for the very first time, listened to the inequity of downwards transitional adjustments, and agreed to abolish the scheme. They decided that this would not be funded through business rates and the Exchequer stumped up the cash. So far this has cost £1.795bn for 2023/24 and is forecast to cost £684m this year.
Including this relief into the net calculations the government has only increased revenue by 1.2% or £300m over five years.
THE OPPORTUNITY THE 2026 REVALUATION OFFERS TO DRIVE DOWN THE UBR
The 2026 revaluation offers an ideal opportunity for the government to continue the trend and at long last drive down the UBR to a far more sustainable level.
Firstly, freezing the UBR at 49.9p means the starting point for calculating the new UBR for the 2026 revaluation is at a much lower starting point than should have been the case.
This was requested by Avison Young and was delivered in the Autumn Budget, although there will still be growth in the standard multiplier into 2025/26, broadening the gap between big and small business.
Secondly, the uplift in the RV pool we forecast for the 2026 revaluation means the UBR can come down to a forecast level of 43.8p and the standard rate from the current level of 55.8p to 47.8p.
Our recommendation to government is:
To continue to freeze the UBR for 2025/26. We estimate that this would further reduce the 2026 UBR calculation from 43.8p to 42.9p.
Over the three-year life of the 2026 list continue to decouple the UBR from inflation and then from April 2029 set the base rate at 40p, and just allow rental growth from the 2029 revaluation to determine any additional rates liability growth. This would set the government up for annual revaluations from April 2029, each future revaluation and changes in RV pool being based on the 40p base rate.
We calculate that freezing inflation would cost government £7bn over four years.
FUNDING THIS FREEZE
We consider this a key ask of government. Funding is the issue.
The Government is under extremely tight fiscal restrictions and has made it clear that it intends to keep any changes to business rates revenue neutral.
Options are therefore extremely limited, and the only realistic option is to reconsider the levels of reliefs being awarded. Removing any reliefs will need to be very carefully considered. Current levels of reliefs have escalated over the last five years to £8.3 billion. If they in part reverted to similar levels of relief as those granted in 2019/20 at £5.1 billion, they would comfortably cover the costs of a lower UBR.
In 2020, the CBI and Avison Young estimated the number of reliefs as 26 with an additional 14 reliefs/exemptions either being added or removed since. The system is complex, lacks transparency and is very difficult to navigate.
