Guy Ware: The whacky world of business rates

Business rates bills in London will rise by £1bn next year while bills in the rest of the country go down. Guy Ware argues that the “fixed yield” system that underpins the “train wreck” of business rates needs to end.

Imagine a world where your pay rise reduces my income tax; where your local newsagent’s profit reduces the corporation tax on my global bank.

Welcome to the whacky world of business rates.

Last week, to howls of outrage from telecom providers, the Valuation Office Agency released draft rateable values that will come into effect for every business in the country next April. Overall, London’s RV rose by 23% – while the rest of the country rose by just 3.6% on average.

And there’s the rub.

When personal incomes rise, income tax yield rises; when companies make more profit, the exchequer gets more corporation tax. But when RVs go up? The multiplier changes so the total yield stays the same. And when one part of the country – central London, say – rises faster than elsewhere, its businesses pay a bigger and bigger share of the whole.

Even after the transitional relief proposed, bills in London will rise by more than £1bn next year. Bills on the Central List (which includes the broadband infrastructure that made the news over the weekend) will go up. But bills in the rest of England will go down, even where RVs have risen. London’s businesses currently pay just under 30% of England’s business rates; if things go on as they are, it will be 60% by 2040.

Is this a problem? Possibly not, if you run a business outside London (and you don’t think your business depends on local

services). But if you run a council, or you have any interest in the successful reform and future sustainability of local government finance, it’s a bit of a train-wreck.

Every “fixed yield” revaluation pushes down the tax base outside London, and with it the chance for councils to benefit from rates retention.

Appeals currently bedevil the system. This revaluation will only make them worse. More and more money will be tied up in provisions.

The biggest reform of local government finance in decades is being built on a system that makes fewer and fewer businesses pay for more and more of councils’ services. If most of what your council does is being funded by a handful of banks and West End shops, the system will eventually collapse.

Luckily, there’s a simple solution. It’s in the joint response London’s Mayor and boroughs made to the government’s business rates consultation last week.

Do away with the “fixed yield” principle; break up the national system; stop London’s property market pushing down tax yields everywhere else. London’s rates would be a matter for London’s government – accountable to its taxpayers.

In a saner world, it’s not just London that would win – it’s every council in the country.

Guy Ware is director of finance, performance and procurement at London Councils.

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