25 September 2017
Over the last few years we have seen some eye-catching additions to the vocabulary of public finance. Following the ‘Pasty Tax’[i] and the ‘Bedroom Tax’[ii] we now find that the latest alleged taxation by stealth comes in the form of a ‘Staircase Tax’. This time small businesses are the victims and the issue has sparked a debate on the fairness of business rates and much discussion on possible alternatives.
A number of individual issues have combined to create a storm of protest. First, the five-yearly revaluation of property rates, which was deferred from 2015 to 2017. As you will know, the rates payable by any given business are the rateable values subject to the ‘multiplier’. Outside London there are two multipliers, a standard one and another for small businesses. Businesses with a rateable value of up to £51,000 apply the small business multiplier. Those businesses with a rateable value of less than £15,000 were previously eligible for small business rate relief, which in most cases reduced the bill to zero. But the second factor that came into play in April this year was that the threshold for small business rates relief was reduced from a rateable value of £15,000 to one of £12,000. A substantial number of small businesses therefore lost their relief, (although transitional arrangements do apply). Businesses with more than one property can still get relief if the total value of all their properties does not exceed £20,000 (£28,000 in London.)
The third contributory factor is the enforcement by the Valuation Office Agency of a judgement handed down by the Supreme Court in 2015 (Woolway v Mazars). This dealt with the rates that are levied on businesses that use communal stairwells, walkways or lifts. Briefly, the change applies to businesses that occupy adjacent properties, typically two floors of a building connected by a stairway of which one business does not have exclusive use. Previously, the two floors would each be rated as one building, but now the Supreme Court ruling dictates that they should be valued individually. The effect is generally to increase the rateable value of the premises, and therefore the amount of rates payable. In some cases it leads to the loss of small business rates relief. Worse still, the increases are being backdated to 2015.
Whilst rates are predominantly used to pay for local services, it is not unreasonable to regard them as a tax on businesses, and there has long been a convention that taxes should not be retrospective. If a business makes an investment decision – buying or leasing a property – having taken account of the rules that apply at the time of the decision, it is entitled to believe that laws made in the future should not be backdated to affect that decision. But there is another question, one that is being raised increasingly by large retailers. Why should companies such as, for example, Tesco, pay rates that are eight times higher than Amazon (pro-rata with turnover) just because they occupy larger premises? The argument is that Amazon benefits to the same extent as Tesco from public services but pays a fraction of the rates. Among those pressurising the government for fundamental change are the Federation of Small Business and Justin King, former CEO of Sainsbury’s. The latter advocates some type of sales tax. Other suggestions included in a report published in 2014 for the British Retail Consortium were:
- measuring energy usage rather than property values;
- offering discounts for employing workers;
- linking business rates to Corporation Tax; and
- changing the existing system by introducing more frequent revaluations.
In fact it will be difficult to persuade government to change the system, no matter how unfair it may appear. To start with, business rates are one of the principal ways of funding local government, as well as allowing some measure of autonomy. Also, raising tax on property is easy and effective, and minimises evasion and avoidance. We can at least hope that some dispensations are offered to those small businesses whose prosperity or even existence is threatened by recent developments. If your business is affected by changes to business rates don’t hesitate to contact us; we can advise and, if appropriate, introduce you to a trusted, suitably qualified expert.
[i] The enforcement of standard rate VAT on takeaway food retailed at above ambient temperature.
[ii] The reduction of Housing Benefit payable to those whose homes included a bedroom not used by the claimant.
