Nobody likes Business Rates. Some people dislike them simply because they are a tax – and any tax is to be avoided. But even among those who understand and accept that a modern, organised society really does require some form of taxation in order to function properly, Business Rates (in the form that they exist today) are a particular bugbear.
Among the many criticisms of the rating system are complaints that the taxation is based on concepts which bear little relevance to the modern retailing environment, using historical data which is rarely related to actual trading conditions. And as anyone who has had to complete the paperwork for a valuation or an appeal will know, the administration requires a great deal of historic accounting - and other - information to be entered into long and quite complicated forms. Perhaps more importantly, as with any tax based on ‘property values’ (however calculated) the system takes no account of any particular taxpayer’s ability to pay at any given time.
The principle behind Business Rates is that they’re based on a nominal valuation of the property (the ’Rateable Value’) which is supposed to represent that property’s ‘open market rental value’ at a particular time. This valuation is intended to reflect all of the economic activity taking place on the property, so taking petrol retailing premises as an example, among the factors affecting the valuation would be:
- Fuel Volumes
- Bunkering volumes
- Fuel Card volumes
- ’Retail’ volumes
- Shop size
- Shop turnover
- Lottery turnover
- ‘Paypoint’-type turnover
- Carwash turnover
- Jetwash turnover
- Carvac turnover
- Any other facilities – eg income or rent received from used car sales area, workshops, etc.
And there’s one of the problems – much of the activity is defined by ’turnover’, rather than ’profitability’. There’s an implicit assumption that all of this activity will generate something in the way of ‘industry-standard’ profits; that the fuel volumes will result in so many pence-per-litre of gross profit, that the shop will generate so many percent gross profit, ditto the carwash and vac. It doesn’t really take much account of why individual business operations may not be able to achieve ‘industry standard’ profits, no matter how hard they try. But then again, it is a ’property’ tax, not an ’income’ tax.
These valuations are carried out every five years – in England and Wales the current valuation dates back to April 2015, and they’re based on trading data from the previous three full financial years. So, in effect, the valuations currently assigned to sites in 2021 are based on data going back nearly a decade. As far as many retailers are concerned, that now seems like a different age.
The next re-valuation is currently intended for 2023, using values from 2021 – although all of this has been rather confused by the Covid pandemic. The government has suggested three-yearly revaluations instead of the current five-yearly period, but this suggestion has been criticised by the PRA who want an ’annual’ re-valuation period. While that would at least make the valuations more up-to-date at any given time, there are practical issues: the VOA (Valuation Office Agency) who are responsible for these valuations in England & Wales (and their equivalents in Scotland and Northern Ireland) already seem to struggle to complete a five-yearly cycle; to move to an annual one would presumably require a massive increase in resources – and hence cost. As far as individual retailers are concerned, having to complete the VOA forms on an annual basis might also be seen as yet another chore that they will have to pass on to a rating consultant or accountant – and hence another cost.
Nobody is happy with business rates as they are. But what are the alternatives? Let’s not forget that these taxes go to ’local’ government, not Westminster. They’re one of the few sources of income which local authorities raise themselves (as opposed to receiving a ‘grant’ from central government) and they’re used to help fund all of the services that local governments provide. As such, you can imagine that local governments of every political persuasion would be reluctant (to put it mildly!) to lose this income and have to rely on further ‘grants’ from central government.
In some parts of the world (notably some US states), the alternative is a local ‘sales tax’; but this is not without its own problems. For example, is a tax on ‘sales’ actually any more likely to reflect the business’ ability to pay (ie profitability) than the current system? Not in principle anyway, although it would at least reflect ‘real time’ trading conditions a little better than using trading data from five or more years earlier. Another potential issue with a local sales tax is that unless it was set at a uniform rate across the country, imagine a place with two businesses that may be only a dozen yards apart from each other but fall under different local authorities with different rates of sales tax. Much screaming in the marsh, perhaps?
As far as any form of taxation based on profitability is concerned, there’s an unspoken issue which we might as well bring into the open: let’s call it the ‘Treasury view’ (applying that term to both national and local ‘treasuries’). Put quite crudely it is that whereas a tax based on property values is in principle quite easy to define, one based on a taxpayer’s declared ‘income’ or ‘profit’ depends on what that taxpayer’s accounts show from time to time. And unless you employ an army of tax inspectors (or some very clever AI programme?) to check those accounts, there is more scope for ‘depressing’ profits than there is for depressing turnover figures…
It would probably take a genius to come up with an alternative tax that satisfies the needs of the taxpayer and of local and national government, while being transparent and equitable. Sadly, in the absence of such genius, maybe the business rates system (perhaps updated every two years, rather than one, three or five) is still a reasonable compromise.
EKW Group provides accounting and payroll solutions for independent petroleum and convenience dealers, including fully outsourced accounting options: