Rates increase to be capped, but is it too little too late?

So the chancellor is finally answering the pleas of lobby groups by capping – most probably at 2 per cent – the increase in business rates due to kick in next year.

As we reported on Tuesday night, alongside the cap, George Osborne is also expected to extend rate relief to small businesses whose rateable property value is less than £6,000.

However, those, including the CBI, Britain’s biggest business lobby group, hoping for a root and branch review of the whole system because it’s “uncompetitive, distortive and complex” will be disappointed.

Sources tell me the Chancellor is against that because he fears it could backfire politically for the Conservatives in the run up to the 2015 election. In other words businesses in town centres in (Tory- held constituencies) the south and south-east could end up being worse off while those in worse off northern cities and town centres could end up fairing better.

But nonetheless, capping rates will certainly be applauded by businesses and some would even say the decision should have come much earlier.

That’s because the rates are pinned to the underlying value of a property. But the problem is the valuations of property (for the purposes of business rates) are only calculated every 5 years, with the last valuation taking place in 2008.

Of course that was on the cusp of the great financial crash when property prices were still sky high. That’s meant that during the last 5 years businesses have been paying rates linked to the property value set during the boom, when in actual fact, those values have since tumbled. Making matters worse, business rates also increase annually, in line with RPI inflation (retail price inflation) which has soared in the intervening period – although that’s now come back down to more manageable levels.

And on top of all that, don’t forget businesses have to pay rents on their property too. But because of the high valuation of the property, in many cases, it’s meant that businesses have been paying more for rates than for rent. In other words, the costs have clobbered them, just at a time when consumers have cut back on their spending and the economy has been struggling to say the least. As a result hundreds have gone out of business altogether. One look at your average British high street is testament to that.

But don’t take my word for it. Here’s what one business  – which I won’t name, suffice it to say it’s a successful independent store, told me yesterday: “The key to running any business is to control your costs, and one of the largest costs is business rates. They were one of the biggest barriers to opening our business. Although we have found landlords are being more realistic with their rent demands since the recession started, there is no room for any negotiation on business rates.

“We now have several shops, and in the majority of our stores we are paying more in business rates than we are in rent. We have now been trading for 4 ½ years and have 7 stores, and are currently appealing the business rates using a business rates specialist, on a no win no fee basis.

“However, the process can last up to 18 months to get through, as the Valuation Office has such a backlog of appeals. We actually find that when we look at opening a new shop, we look closely at the business rates payable, and if they are too high, we will look elsewhere, so they can be a barrier to us growing our business and filling an empty unit in a town.

“We have employed over 50 staff since we opened, and business rates are a barrier to us employing more people, getting them off the dole queue, and hence reducing the welfare bill.”

This micro-story is a good example of why lobby groups like the CBI and the Federation of Small Businesses have been lobbying so hard for change. They highlight pretty alarming figures that show tax on property raises higher revenue as a proportion of GDP here in the UK than anywhere else in the OECD’s 34 member countries. Furthermore, they argue that as the economy picks up, businesses must be freed up to do what businesses do. Employ people and sell goods. But business rates for too long have been holding them back and choking growth – exactly as my business case study above describes.

So Mr Osborne’s decision to finally step in will be extremely welcome – even if for many it comes way after the horse has bolted. But for those pushing for a complete overhaul of the system, it seems the Chancellor is set to disappoint.

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