Inflation figures announced, Tuesday this week are likely to show that the Government’s decision to delay the switching of business rates indexation from the RPI to CPI measure of inflation until 2020 could have costly implications for businesses, already heavily suffering from business rate rises in 2017, according to Colliers International, the global real estate agency and consultancy.
Business rates for April 2018/April 2019 are currently linked to the rate of inflation six months earlier. The September 2017 RPI inflation figures to be announced this week are likely to show inflation running at 4%, or higher, which will mean businesses will see at least a 4% rise in their rates bill in April next year. This is on top of some of the most punitive business rates rises ever seen that many businesses suffered in April 2017.
If business rates were tied to CPI figures (currently running at 2.9%) instead of RPI, at least some of the pain would be reduced.
“It’s a bizarre scenario” says John Webber, Head of Business Rating at Colliers, “The Treasury has recognised that many businesses are suffering from the business rating revaluation in 2017 and has finally accepted that CPI rather than RPI is a fairer measure of inflation to link business rate rises to. So why instead of introducing the new indexation immediately, is it waiting three years to 2020? How much pain do businesses have to suffer? With inflation on the rise at the moment, by the time we reach April 2020, we could see some very uncomfortably high rating levels.”
Webber points to some London high street retailers who saw massive rises in their rates bill last year and are already looking at further rises this year, as the impact of the April 2017 Revaluation is phased in. Bond Street for example saw its rateable value climb over 100% in the revaluation, Westfield White City saw a 62% hike rise and London's Regent Street saw close to 40% increases for its prime retail locations. These were translated to some retailers paying a rates bill of close to 50% higher for 2017/18 and they will be facing similar rises in 2018/19 of close to 40%.
According to the British Retail Consortium, (BRC) retailers, which account for a quarter of business rates, will face a rate hike of £280 million in the coming year if inflation is 4% as forecast. On top of the other issues retailers are facing- rises in the NLW and uncertainty over sterling, many are going to struggle with such punitive rates.
And as Webber points out, it is not only those companies that saw business rate hikes in April 2017, following the Revaluation that are finding the situation difficult. Those businesses located in areas that were particularly hard hit during the financial crisis and are continuing to get back on their feet and have seen their rateable value decrease following the Revaluation, are not benefitting as much as expected. This is not just because of the two-year delay in the reduction of their rates bill when the Revaluation was delayed from 2015 to 2017, but also because of the introduction of the five-year transition period before they are allowed to pay their bills at the new lower revalued level.
As John Webber continued, “A company could find itself with a lower rateable value, but because of transition, is only seeing a 2% or 3% decrease in its rate bill each year for the next five years. With RPI at 4% or above any benefit is immediately wiped out. And for some companies, it is even more ridiculous. They could have a 50% decrease in rateable value but due to rising inflation actually find themselves with higher rate bills next year. Hardly an improvement in their finances!”
“The Treasury has claimed the change to CPI indexing would save companies £1bn in the first three years, including a £250m saving for the retail sector. If this is the case, the Government should act now. Many businesses have been hammered in the recent business rates revaluation, particularly the high street retailers and with delays in receiving promised reliefs and the failures of the new business rates appeal system, many are finding themselves squeezed or even worse."
" Yet again the Government is tinkering at the edges, rather than tackling the issue. The whole business rates system needs root and branch reform."
Colliers Manifesto for Business Rates Reform includes:
1. More frequent revaluations, three-yearly, at least, by 2022;
2. Increase funding for VOA in order to deal with existing appeals’ backlog;
3. Release VOA from pressure exerted by local councils and HM Treasury;
4. Introduce a register of appeals professionals – removing the ‘cowboy’ element;
5. Root and branch reform of current business rates exemptions and reliefs.