Autumn Statement 2013: why we need a freeze on business rates
When George Osborne stands up on Thursday to deliver his Autumn Statement, there will be many claims on any spare cash he has managed to scrape together. But one of his top priorities should be a very simple issue: the inexorable rise of business rates.
Writing on the Telegraph website, Simon Danczuk – the Labour MP for Rochdale – told the story of an unemployed constituent of his, from one of the poorest estates in the country. Rather than staying on the dole, he cashed in his pension to set up a fish and chip shop in the city centre. But despite a loyal customer base, his firm was forced to close – not because of the rents charged by the landlord, but because of business rates that were twice as high, at almost £2,000 a month.
Next year, the rates are set to go up again: in fact, during the course of the parliament, it is projected that £6.5 billion will have been added on. The Chancellor has hinted that he may freeze them, in part to help ailing high streets. If so, it can’t come soon enough.
At the moment, business rates rake in some £25 billion a year – roughly the cost of the police, the Ministry of Justice and the Home Office. This is simply too high. The average bill has now reached roughly £14,000, compared with council tax of around £1,400. Obviously, business premises tend to be larger than homes – but not 10 times the size.
To make matters worse, business rates are linked to the retail price index. This is meant to ensure fairness – but if costs such as electricity rise rapidly, it pushes up inflation. That means retailers are hit twice, first by rising utility bills and second by higher rates. On top of this, those rates are calculated using increasingly out-of-date valuations, meaning that struggling firms are seeing them rise from figures set before the recession even began.
Equally difficult is the demand for up-front payment. Imagine if you told someone starting a business that they would have to pay income tax according to a government calculation of what their annual profit would be, regardless of what they actually made. It would be seen as monstrously unfair. Yet this is what business rates do by relying on rateable value. Rather than looking at companies’ ability to pay, in terms of their profits or even their turnover, rates are set based on rents. This is particularly unfair to new companies, such as that chip shop in Simon Danczuk’s constituency, meaning that these rates constitute a serious barrier to entry for start-ups.
So there is clearly a strong case for freezing business rates. But there is an equally strong case, as the Telegraph has argued, for taking a serious look at how the entire area operates. It might be that the problem could be solved by a few years of frozen rates and a fairer way of calculating increases. Or it might be that rates need to be replaced with a tax on turnover or a similar measure of ability to pay.
In the short term, freezing the rates while reforms are considered is clearly the right thing to do. The politics are also appealing: although the freeze would apply to all businesses, it would help small firms more than large, as rates can be especially onerous for small and sole traders. It would not distort the market, or pick winners, but encourage competition, making it easier for new firms and ideas.
This is not to say that freezing or reforming business rates will, or even should, preserve every high street or company. The truth is that British business is in the midst of a revolution: 80 per cent of households are now online, and it is likely that by 2020, internet use will be near-universal. The pressure on traditional bricks-and-mortar retailers, in particular, will be immense.
Some people, surveying the thousands of empty shop fronts that fill our high streets, have suggested that as well as freezing business rates, we should impose taxes to deter people from shopping online. That would be harmful and counter-productive: one of the strengths of the British economy is that it accepts that experimentation, failure, and change are the necessary precursors for greater success.
We shouldn’t tilt the playing field against online firms – but nor should we discriminate, as we currently do, against those whose companies are based around offices or shops rather than websites. What is most frustrating and demoralising for an entrepreneur – especially in those first few uncertain years – is to be driven under not by inefficient management, or poor business planning, but relentless increases in taxation, such as our ever-rising business rates. They are the silent equivalent of government saying that it does not care about risk-taking and hard work – and in the long run, we will all suffer, as innovation is driven out of the economy.
That is why George Osborne should say clearly that he supports and celebrates those who dedicate themselves to serving the consumer, whatever the size of the company they run. And he can best do that by putting the money where his mouth is – and freezing business rates.