Rates relief for smaller businesses

Many smaller companies will pay less in business rates than expected next year, thanks to a last-minute concession announced in the Budget.


Tax relief comes too late for Toys R Us
(Image credit: youngvet)

Many small- and medium-sized enterprises (SMEs) will pay less in business rates the commercial version of council tax than expected next year, thanks to a last-minute concession announced in Philip Hammond's autumn Budget.

The chancellor is bringing forward a change to the way in which business rates increases are calculated: he had planned to switch the inflation benchmark to which rises are pegged from the retail prices index (RPI) to the consumer prices index (CPI) in April 2020, but this shift will now be made from next April.

The move will reduce total business rate revenues to the Treasury by £253m next year, since inflation in October on the RPI measure was running at 3.9%, against 3.0% as measured by CPI. The switch is also likely to save businesses money on an ongoing basis, as RPI inflation generally runs ahead of the CPI measure.

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The announcement follows an intensive lobbying campaign by SMEs, which had called for business rates to be completely frozen in the 2018-19 tax year amid growing concern about the impact of the tax on many firms.

In the retail sector, for example, an average of six shops a day in England and Wales have closed over the past seven years, according to research published recently by the Centre for Retail Research; business rates, which are based on the value of the property occupied by a business, rather than its trading performance, had played a huge part in the high failure rate, said the group.

The pressure has increased in recent months, following the first revaluation of properties for seven years in April, which resulted in sharply higher bills for many firms. In London, some business reported increases of more than 100%, although ministers subsequently promised to phase in the changes over several years to mitigate the impact.

In last month's Budget, Hammond promised that property revaluations would now be carried out every three years, to reduce the chances of businesses being hit suddenly with very large increases. But the move comes too late for retailers such as struggling Toys R Us, where analysis by Colliers International suggests that a government decision in 2015 to delay the last revaluation exercise has led to it paying £17m extra in business rates.

The growing cost of business rates makes it especially important that businesses eligible for "small business relief" register for the help with their local authority. Any business occupying a property with a rateable value of £12,000 or less currently does not have to pay rates at all, while businesses in properties valued at between £12,000 and £15,000 get relief, according to a sliding scale.

In addition, firms occupying premises valued at below £51,000 pay business rates calculated on a formula that reduces the final bill. April's revaluation may have pushed some businesses beyond the business-rate relief thresholds, but ministers have promised no firm in such a situation will have to pay more than £50 extra a month during the 2017-18 financial year.

Climbdown on staircase tax

In an apparent acknowledgement that small businesses have been hit hard by the most recent business rates valuation, the chancellor's autumn Budget also contained some other concessionsfor SMEs.

Significantly, Philip Hammond's speech included a promise to abolish the so-called "staircase tax", a legal loophole that has seen many small businesses charged thousands of pounds' worth of business rates when they had expected to pay little or nothing.

The bills followed a Supreme Court ruling in 2015 that potentially affects any business that has more than one office or room in a building shared with other businesses. The ruling means that where these rooms are accessed by communal corridors, staircases or lifts, they must be counted as separate properties for business-rate purposes; by contrast, if rooms are connected by private areas only, it counts as one property.

As many as 80,000 properties across the UK are affected by the staircase tax, estimates the Federation of Small Businesses, landing many SMEs with bills calculated as if they occupy several buildings, rather than a handful of rooms in a single property. Often, these bills, already much higher than necessary, are being backdated to the 2015 Supreme Court ruling.

However, Hammond has now pledged to change the law to close the loophole so that businesses are no longer caught out in this way. The Treasury will also refund any staircase tax payments already made by SMEs and cancel the bills of others, says Hammond.

And in one final nod to small businesses, the chancellor also announced the extension of the £1,000 rates discount for pubs (with a rateable value of less than £100,000) for a further year to March 2019. This should apply to 90% of the pubs in England.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.