Announcing reform was the easy bit. Now the Chancellor has to work out what changes to this £26bn tax revenue stream will be fairer, pro-growth, fiscally responsible and popular.
There are two decisions to make. First, what level of contribution does the Chancellor want business rates to make to the public purse? Because rates go up in line with inflation, the Treasury’s take increases even when the economy is struggling, while corporation tax, income tax and VAT income vary with economic performance.
This is one reason why governments of all shades have traditionally liked business rates – they are stable and also hard for companies to avoid.
There is a strong case for business rates to be scrapped with the whole business tax burden falling on profits, but the Chancellor regards reducing corporation tax as one his landmark achievements. While we believe the Chancellor should consider all options in the reforms, ideas such as basing rates on sales would be worse than the current system for many businesses in the retail sector, and would unfairly hit those selling products at lower margins.
The second question is how to apportion the burden of business rates. Most sectors feel they pay too much but they can’t all be right, and unless the overall take is reduced, some businesses will be disappointed by this review.
Online businesses have to come under scrutiny, as they trade from remote locations attracting low business rates – one Amazon warehouse in Wales is reported to have a rateable value of one-fourteenth of that of a retail business in the town centre at £29.10 per sq m instead of £416 per sq m.
The current system allows for separate rating schemes for sectors where rents do not give a satisfactory indication of the commercial potential of the property. Maybe a separate rating scheme for online businesses would be a good place to start as the Chancellor negotiates this hazardous road.
The Chancellor is doing the right thing in reviewing business rates – now the real work starts.