In October last year, Chancellor George Osborne announced plans to devolve business rates to local government in what was dubbed the “devolution revolution” and heralded as “the biggest transfer of power to our local government in living memory”.
The move is intended to give regional cities greater control over how they collect and spend the money generated from business rates receipts. Under the current system, local authorities are allowed to keep half the revenues collected from business rates, with the other half pooled centrally and redistributed back to local authorities.
However, from 2019/20, the year in which the new system is due to come in, local authorities will get to keep the £26bn raised from business rates in exchange for taking on new responsibilities. The Chancellor even threw in an extra benefit for those authorities with an elected mayor, giving them the power to raise business rates provided the money is spent on improving local infrastructure.
Interestingly, if the new proposed system had been in place last year, the city regions that have already agreed devolution deals, which includes the West Midlands Combined Authority, could have raised £76 million to spend on infrastructure to support local businesses and economic growth.
However, with or without greater devolution of business rates, there needs to be comprehensive reforms to the system in order for the tax to be fit for purpose.
For example, the current five-year revaluation cycle means that businesses are paying rates based on out of date valuations. This penalises businesses in struggling economies and subsidises them in thriving economies. Valuations should therefore be conducted every year or, at a minimum, every two years.
Furthermore, Rateable Values (RVs) along with the current Uniform Business Rates (UBR) sets what the ratepayer is liable for year-on-year. The RV is, in most cases, arrived at by establishing what is essentially a hypothetical rental value of the property at a specific point in time.
Business rates are therefore based upon the physical property that the business occupies. A fairer system would see the calculated rateable value take into account the type of business in occupation and not just the space they occupy at a snapshot in time.
Devolution, as well intentioned as it is, should be just the start of a major overhaul of the business rates system.