The government must scrap downwards transition in its 2023 revaluation if it is serious about cutting taxes and saving the high street, writes John Webber
The government’s consultation on transitional relief arrangements closed on 25 July and, with Revaluation 2023 approaching, we wait with bated breath to see if the government has listened to the industry.
Currently, the government is required by the Local Government Finance Act 1988 to introduce transitional arrangements at each revaluation to enable businesses to adjust to their new bills. Transitional relief (TR) smooths the effects of rising valuations on business rates, but funds that by limiting the benefits of the falls. It does not apply in Scotland or Wales, where business rates are an issue for the devolved governments. The legislation also requires that the aggregate amount of business rates collected is unaffected (so far as practicable) by the TR scheme.
We at Colliers have responded to several consultations over the past few years that relate directly or indirectly to the issue of TR. Our responses illustrate how little seems to have been learnt and highlight mistakes that must be avoided in Revaluation 2023.
Learning from past experiences
Following the 2017 revaluation, despite TR, some of the levels of rate bills increases were frightening. In particular, many ratepayers in central London faced an increase of more than 100% in their rates bill. This had a significant effect on the property market in parts of central London, resulted in a correction of values both rental and capital and undoubtedly led to an increase in the level of void properties
On the other side of the equation, businesses that had survived the worst recession in living memory and retailers who had survived major changes in shopping habits found no relief in their rates bills. By implementing downwards transition, properties throughout the Midlands and North, where rateable values had reduced by up to 60%, only saw tiny reductions in rates liability in the early years. They had already been asked to pay significantly higher bills between 2015 and 2017 following the government’s decision to postpone the 2015 revaluation and then they were expected to pay significantly higher rates bills than they should potentially for the next five years, until the transition worked through. This was not fair; certainly not good for business on the high street or for UK plc – as subsequent years and the failure of household brands such as Toys R Us and Laura Ashley have proved.
Turning to Revaluation 2023, we worry the same mistakes will be made in the desire to make the scheme revenue neutral. We believe the government instead has a moral and economic responsibility to completely remove downward transitional relief and to restrict the increases on those businesses that will see significant growth in values, particularly those in the logistics sector. Given the pressure on business from spiralling costs, wage growth and tax increases announced by this government, we believe no business should have to pay more than a 15% rise, including inflation. For smaller and medium-sized businesses, these increases should be limited to no more than 5-10%, including inflation.The government has overseen one revaluation in 13 years – the problem of significant changes in values has in part been created by their policies. Business should not have to pay the price for short-sighted government policy.
The impact of inflation
It’s also worth noting that the levels of any proposed reductions or increases will also be heavily influenced by potentially double-digit inflation. As an example, if the 2023 downward TR scheme mirrors the 2017 one, when bills in year one (2017/18) for large properties reduced by only 4.1%, less inflation, then rate bills in 2023/24 would actually go up by at least 6%. Equally, increases for large properties comparable to 2017/18 would go up by 42%, plus inflation, in year one post-revaluation, thus giving an increase well in excess of 50%. Again, this cannot be right or make economic sense if we are looking to stimulate growth in the economy.
Downwards transition in practice
This following example highlights the issue around downwards transition: A shop in a regional centre which saw significant reductions in value between 2008 and 2015 (the valuation dates for the 2010 and 2017 rating lists). In 2010, the rateable value was £225,000. In 2017, it was £110,000. In 2023, it is estimated to be £50,000. The first box shows the rates payable from 2017. So, in just three years, because of TR, a struggling retailer paid over £158,000 in business rates more than it should have done. Is it surprising the high street is littered with empty units?
Looking ahead, a similar scheme in 2023 will result in an overpayment of £196,410 for the three years of the 2023 rating list – something no struggling retailer can surely afford.
The pandemic effect
We also believe that for this revaluation, the government has a further moral obligation. In 2021, the government introduced legislation to outlaw Covid material change of circumstance appeals, and in doing so promised clearly that the general impact of the pandemic would be reflected in the next revaluation in 2023.
We believe that to now introduce a downward TR scheme will result in the very businesses that had their appeals on the 2017 rating list outlawed, because of Covid, being forced to pay a pre-Covid premium potentially for the complete duration of the 2023 rating list. Again, this is not right.
Finally, the government will argue that a transitional scheme is supposed to be self-funding but, in our view, as the problem has been created, certainly in part, by the government, then businesses should not be penalised for its decisions. The government needs to look again at the whole issue of business rates and work out how it can fund the reductions through other means and limit the increases as set out above.
We wonder if it will do this. Neither of the Tory leadership candidates have been forthcoming on business rates – yet. However, if the government is serious about levelling up, it now has a golden opportunity to make a major impact on the future of physical retail and breathe new life into the high street. Reassurance that rates bills next year will immediately reflect the lower rents we are seeing in the market will provide incentives for businesses to keep or expand space – and for property investors to invest in the sector across the UK.
Let’s hope immediate short-term gain doesn’t drown out the economic long-term benefits of flexible thinking.
John Webber is head of business rates at Colliers
