Guest column: Andrew Chapman – big changes to business rates on the horizon

Small firms were thrilled by a Budget announcement which cut business rates. But this won’t be the last major change to the system, warns rating expert Andrew Chapman of FHP.

A LOT of small businesses were rightly pleased when they learned in the recent Budget that they would no longer be paying business rates in the future.

While some aspects of the Chancellor’s statement have since become mired in controversy, there was a near-universal welcome for the announcement that from next April there would be a doubling of the rateable value threshold below which small businesses are exempt from these payments.

It’s reckoned that this measure will mean that around 600,000 businesses will pay no rates at all in future. But not only has the Chancellor removed a financial burden from a significant number of businesses – at a stroke, he has probably also reduced the burden on a rating appeals process that has been almost drowning in claims.

While business rates are something which SMEs and larger companies can usually live with, they are one of those costs that eat away at scarce profits in small firms – profits sometimes so precarious that they can be the difference between just surviving and going under. Nowhere is this more visible than in the retail sector where the values on which business rates are calculated were set before recession struck and bear no relationship to the under-pressure commercial world of today.

Put that together with the growth of so-called ‘specialist’ rating surveyors – who prey on struggling businesses by telling them what they want to hear rather than offering sound advice – and you can see why there was a ready appetite among small firms for appealing their business rates. The Government’s own decision to time-limit the back dating of appeals to April last year simply made the situation worse, leading to a rush of appeals before the deadline kicked in.

This, then, is the bigger picture of George Osborne’s Business Rates announcement: rateable values which are long overdue for a revaluation, and a Valuation Office Agency appeals process which is struggling to cope. Take several hundred thousand businesses out of that system and you are losing relatively little revenue whilst gaining significant administrative breathing space.

But the iniquities of rateable values based on figures which are eight years out of date have not gone away, and the most important signal Government has given is that it is willing to look at more frequent revaluations in future. It is already committed to a revaluation in 2017, with a suggestion that they will be considered again in 2020 (and at least every three years from then on). The property industry needs to keep the pressure up on Government to make sure that it honours this promise so that we rid ourselves of distortions that have hung over the market for years.

The retail industry is likely to be in the vanguard of making sure Government doesn’t forget its pledge for more timely revaluations. It suffered the double-whammy of recession and the growth of internet shopping, leaving many high street retailers struggling to make ends meet while paying business rates which had their origins in the boom.

Their predicament was made worse because increases in rates were pegged to the Retail Price Index rather than the more relevant Consumer Price Index. This simply magnified the distortions in business rates thrown up by out-dated values and Government has at last recognised this with a switch to the CPI. Disappointingly, this won’t come into effect until 2020.

Bear in mind, too, that the extended reliefs announced in the Budget apply only to small businesses primarily based in a single property – so a small chain of outlets won’t benefit. There might be some business planning opportunities which would enable a multi-site business to take advantage of the relief. But it isn’t clear yet if, or how, this might be allowed.

Though George Osborne’s announcement will be welcome news for many smaller firms, there is an argument which says businesses of all shapes and sizes ought to be contributing to some form of local property-based tax. After all, it is difficult to defend a situation where one firm contributes to local funds but a competitor doesn’t simply because of a slightly lower rateable value. They are clearly not competing on a level playing field.

That ‘local’ issue is now starting to loom over the horizon, too: I anticipate that the push for devolution will eventually see responsibility for setting business rates revert to most local authorities, with London already entitled to retain 100% of the rates that it collects from April next year and other cities gradually progressing down a similar path.

With such tumultuous changes afoot it is unclear who the winners and losers will be once the sands have stopped shifting. The big question is what cash-strapped local authorities with devolved powers will start doing to business rates when central government support and control drains away.

Business rates have been around in one form or another for over 400 years, yet I struggle to identify a period when there has been as much change in such a short period as we have seen recently.

This is why the business rates cowboys who promise you a quick buck from an easy appeal could not be more wrong. You need market knowledge and experience to understand how the business rates system operates and where the opportunities really lie, and I’m pleased to lead a professional team at FHP which not only has those abilities but has also worked on both sides of the business rates fence.

Enjoy the good news while you can, but don’t expect the business rates landscape to stay the same for long. As the Chancellor himself has discovered, finances can be a moving target.