Thursday, 23 September 2010

Business Rates

It is not the first time that I have commented upon business rates but it is worth mentioning them again because the BRC have issued a warning about the impact of rises. I believe that the BRC members are well capable of withstanding some rises but that is not the issue with Business Rates, or Non-domestic rates as they are more correctly known. The issue is the manner in which they are assessed and the apparently spasmodic manner in which the revaluations are applied. There is also a serious associated issue about appeals; the sad fact is that it is not the average BRC member who is most at risk with this arcane and discredited system it is the smaller business (SME) - and I believe that I can demonstrate that fact.

In a paper that was published in July 2009 (Hallsworth A and Orchard J, 2009, Retail regeneration in Southampton: seeking the bigger picture, Journal of Place Management and Development, Vol 2 Issue 2, pages 140-153, Emerald Publishing) , John Orchard's work in reviewing the entire functional city centre of Southampton demonstrated that SME businesses are most at risk of higher relative valuations and are less likely to appeal. He demonstrated that the valuations are not correlated to position within the town or of any other factor that might be regarded seriously as relevant to such a valuation. In more recent work in Barnsley he has identified that the highest rateable value rises for the current 2010 list were applied to SMEs in a street which is demonstrably not a thoroughfare that would ordinarily attract an increase in excess of 70%. This apparent unfairness is not justified but when challenged various authoritative sources have rejoined that there is a discount for small businesses!

Well, they are right of course, there is a small business discount. The question then is "Is that the logic of government that you provide a hefty discount and that justifies a even more hefty rate hike?"

The problem lies with the arcane system of basing a tax upon a notional rental value. There is a correlation between the paper value of properties owned by landlords and the rental returns that they expect of them - true it is in some degree mitigated by market forces, but when the main drivers for decades are the landlords with 'upward only' rent review clauses then it is not difficult to see that market forces are being manipulated against the interest of just one side in the contract. I have listened to the arguments from landlords saying that if retailers had only one price rise in five years they'd be wanting upward only clauses, but that, put simply, is hogwash. If retailers charge other than a market rate then their customers simply go elsewhere - if a retailer who is entailed in a ten year lease, or longer, then they are not in a position to just change landlords, but they'd have to pay higher rents irrespective of the condition of the trading environment - and they would have a higher rates valuation because the rents are higher.

Many smaller businesses, wishing to ensure the survival of their businesses for a long time (and as a retirement fund) purchase the freehold of their businesses - in these cases the 'tone' of the area is applied, meaning that the landlords of other shops, who are not retailers themselves, will effectively force a decision of a rateable value on the landlord who does happen also to be a retailer. If this new government really wants to show that it is in support of small businesses then it will radically overhaul the business rates system and provide a taxation system based on matters that businesses feel that they have some control over.

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