Give SMEs a break on business rates

Small companies have to shoulder an unfair burden on business rates, says David Prosser. The government should give them a break.


Sajid Javid: reviewing the rates system
(Image credit: 2016 Getty Images)

Small companies have to shoulder an unfair burden on business rates.

Last week communities minister Sajid Javid announced an official review of the way the business rates system operates. The investigation cannot come a moment too soon for hard-pressed retailers and other businesses with substantial business-rates bills.

In the digital economy, the big issue with business rates is that the tax gives online businesses an unfair advantage over retailers, pubs, restaurants, garages and other firms that have a physical presence in their communities. It is also a tax that falls disproportionately on smaller businesses. Smaller firms inhabit one million of the 1.7 million premises on which the tax is payable, suggests analysis from the Federation of Small Businesses (FSB) and the British Retail Consortium (BRC).

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The latest blow for these businesses will come with their next business rates bill. Rates went up this month with the start of the new financial year. All bills will go up by at least 3% the increase is now pegged to the prevailing rate of Consumer Price Index inflation in the preceding September and, unluckily for small businesses, last September's rate was the highest in almost six years.

It could have been worse. Business rates increases used to be pegged to Retail Price Index inflation, which was 3.9% last September. Still, some businesses will pay much more because, alongside the annual increase, ministers are revaluing English properties for the first time in seven years. As a result, the business rates bill for almost 250,000 business premises has increased by more than the headline 3% rate, suggests research from analyst Altus.

In the longer run, campaigners want reforms that will take more smaller firms out of the reach of the tax altogether. Many of the FSB's members pay more in rates than they do in rent, it says. In the short term, however, it is imperative that smaller businesses claim all the help they are due on rates bills. Most importantly, if you think that the size and value of your business's premises mean you should qualify for "small-business relief", make sure your local authority is applying this.

The relief exempts any business occupying a property with a ratable value of less than £12,000, while businesses in properties valued at between £12,000 and £15,000 pay lower bills, with the charge calculated according to a sliding scale. Meanwhile, if you're above the £15,000 cap, but below £51,000, check that you're being charged the "small-business multiplier", the business-rates formula that local authorities are duty-bound to apply to these properties.

Also, if you're in a property affected by the revaluation, check that you're not being asked to pay too large an increase in one go. Ministers have promised to cap the amount by which councils can raise business rates in any given year, irrespective of the revaluation, with no business expected to pay more than 7.5% extra in the 2018-2019 financial year.

Entrepreneurial spirit sags in UK

For several years now the UK has been said to have a problem with scaling start-up businesses. Four months into the new year it is becoming easier to understand why the number of start-ups launched last year fell for the first time since 2010. Last year, 589,009 new companies were incorporated, down from 657,790 in the previous year, according to data from Companies House.

This 10% drop was partly due to tax reforms, which made it less attractive for contractors to register as companies in order to save on tax bills. Nevertheless, the underlying picture is one of declining entrepreneurial activity in the UK.

Higher costs are almost certainly deterring would-be business owners in addition to higher business rates, employment costs have risen, with this month seeing rises in both the minimum wage and pension contributions for employees.

Uncertainty is part of the explanation too both about the final outcome of the Brexit negotiations and the broader economic outlook, particularly with interest rates expected to rise this year. Then there's the question of funding. Bank support for more mature businesses is now relatively healthy, but brand-new start-ups must still navigate a confusing panoply of grants, loans and other support to get their ventures off the ground.

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.