It’s time to abolish business rates

There’s little doubt that our present government is feeling a little chipper. A decent election result and a relatively strong economy have emboldened the Conservatives to make some pretty big reforms. At the party conference this week, George Osborne announced sweeping changes to business rates.

And change can be good. But on business rates, Osborne should have gone much further. It’s time to do away with them altogether. It’s a totally arbitrary tax, it’s expensive to administer, and it’s hugely unfair.

As things stand, local councils collect rates from local businesses. For their trouble, they get to keep half the revenue and forward the other half to central government. The government, in its wisdom, then gives most of the cash back to councils by way of grants.

Sounds inefficient? Well, yes it is. And that’s why Osborne is proposing that councils will be able to keep everything they raise. Moreover, he’s going to get rid of uniform rates (whereby rates are set by central government), allowing councils to lower the charge to attract more businesses to the area.

Sounds good? Maybe. But here’s a better idea.

Why business rates need to be abolished

Business rates remind me of another dreadful tax – the hated window tax. In the 18th century, councils charged homeowners on the basis of the number of rooms (as defined by windows). Little surprise, then, that people started bricking the things up. Let me suggest that basing business rates on the rentable value of a business’s premises is equally dumb.

Think about it. Should a very profitable accountancy firm be paying a fraction of the tax of, say, a struggling engineering company that happens to need a large floorplan for its business? I mean, it’s a generally agreed principle that taxes should be levied on those that can afford to pay. Do we really want taxes to start pushing more and more into bankruptcy?

Look at failing high streets across the land for evidence of the iniquity. Internet businesses don’t need much in the way of premises, therefore they pay little (relatively speaking) by way of rates. The poor old shopkeeper, or pub, or whatever, is still expected to stump up. If you’ve got a nice big pub, but little in the way of punters, then you could be in big trouble. Does the landlord brick up half his pub in order to destroy value, so he can lower his tax?

This is absurd. And somebody’s got to collect the tax, too. They’ve got to perform a valuation, do the maths and send out the bills. Taxes should not only be fair, but they have to be efficiently and effectively collected. Local business rates fail on every level.

But we’re not finished yet. Taxes are also used as a lever to change behaviour. So-called ‘green taxes’ are a classic example. You want to lower greenhouse gases? Simple – stick a load of tax on fuel. It changes behaviour.

But what is a business premises tax saying? That we don’t want businesses taking on space? That we’re happy to see our high streets drift? Our pubs and social centres penalised because they have the temerity to have invested in valuable spaces dedicated to socio-economic activity?

We’ve already got a fair way of taxing businesses

Think, too, about what these changes will mean for the local councils themselves. They’re being asked to act more like a business. But already, some councils have gone too far down this route. According to a report from the Taxpayers’ Alliance, over 500 council bosses are paid more than the prime minister.

Do we really want to give these guys even more power – and more excuses to up their pay? These business geniuses?

The point is, we already have an effective and fair means of collecting taxes from businesses. It’s called corporation tax. On top of that, we’ve also got a tax on business revenues. That one’s called VAT.

Shifting the burden of revenue collection to HMRC will have a cost of implementation of precisely zero – it’s already there. It’ll strip out a level of bureaucracy at a local level that’s simply unnecessary. And if it strips the local council fat cats of power – then good!

Councils can go back to being functionaries of and paid for by the state (and homeowners, of course). Should these things really be considered as businesses in their own right?