The going rate
by James AitkenThe factors affecting a firm's business rates bill and the policy issues still facing the Executive following the change to the poundage rate
The Journal, October 2005, page 22
The amount of press coverage devoted to the subject of local government taxation over the last few months is testimony to how important an issue this has become to the business community in Scotland. When a review of all local government taxation was announced by the Scottish Executive last year, most of the initial coverage concerned whether the council tax regime should be overhauled or even replaced with a local income tax. However, a second debate and at least initially a lower profile debate also began on the future of business rates in Scotland.
The four main business rates issues featuring in this debate have been whether a Scottish business pays more than its English counterpart, the “pooling” of all revenue collected from business rates in Scotland, the availability and use of reliefs, and how to deal with the “prescribed” industries in Scotland.
How the present system works
The occupier of a non-domestic property normally pays business rates. If the property is empty the owner or tenant may be entitled to pay a reduced rate. Non-domestic properties are properties such as shops, offices, warehouses and factories and other property that is not classed as domestic property. In some cases properties may be used for both domestic and non-domestic use, for example a guest house or hotel, in which case both council tax and business rates will be charged. Some non-domestic properties such as agricultural land and buildings are exempt from business rates.
Business rates are levied on the basis of a uniform poundage rate, multiplied by the rateable value of each non-domestic property on the valuation roll. The valuation roll is a public document which contains an entry for all non-domestic properties.
The amount payable therefore depends on three factors: national poundage, rateable value and availability of a relief. The poundage in Scotland for 2005-06 has been set at 46.1p. Non-domestic rates raised £1.8 billion in 2004-05. This was an increase of 5.7% from the previous year.
Every five years the rateable values of all non-domestic property in Scotland are revalued. The latest five yearly revaluation took effect on 1 April 2005. In Scotland the work is undertaken by the assessors, who are independent of both central and local government. Revaluation results in the production of a new valuation roll.
The stated aims of the revaluation are maintaining stability for business, ensuring the rates burden is distributed equally amongst business sectors and continuing the harmonisation of rating practice north and south of the border. In theory following a revaluation the amount received from business rates should be the same in overall terms as before.
The purpose of a revaluation is to update rateable values to reflect current rent levels, as the rateable value of a non-domestic property is supposed to be broadly equivalent to the rental a reasonable landlord would charge. However, as rateable valuations can increase or decrease fairly significantly between these five yearly revaluations, “transitional arrangements” are used to soften the impact. The 2005 transitional arrangements came into force on 1 April 2005. Under this scheme increases above 12.5% will be phased in over three years.
Are Scottish rates higher?
This was, until the Scottish Executive announced that it intends to reduce the poundage rate in Scotland to the same rate set in England, the most fiercely debated of the various business rates issues.
The argument for a reduction centred on the fact that the poundage rate in Scotland was higher than that set in England. The various business organisations in favour of a reduction simply pointed to the fact that this year the rate set in Scotland is approximately 4p higher than that set in England. The poundage rate is though only one factor in determining what your business rates bill would be. The valuation given to your property is just as important. The fact that property valuations in Scotland are generally lower than in England means that the higher Scottish poundage rate is to some extent meaningless.
That was in fact the argument put forward by the Scottish Executive when defending the higher poundage rate in Scotland. Property inflation in the major Scottish cities was though rapidly undermining this argument.
Notwithstanding the reason for the change, it is a change that has been almost universally welcomed and it is likely to give Scottish businesses a small competitive advantage over their English counterparts as a result of lower Scottish property valuations.
It is not yet clear when the reduction will take place or even if it will be phased in over a number of years. Details are to be announced in a few weeks’ time.
Is “pooling” revenues unfair?
Now that the Executive has announced plans to reduce business rates in Scotland, the “pooling” of all business rates revenue in Scotland becomes the most contentious business rates issue.
Business rates formerly retained at local council level are now forwarded to the Scottish Executive. This total is then redistributed according to the Executive’s grant-aided expenditure formula, which looks at how much it costs to provide local services. This formula is used as the basis for calculating the amount of revenue support grant that the Executive provides to each local council. The result of this is that a number of local authorities make a net contribution. The City of Edinburgh Council recently published figures showing that it had made a net contribution of nearly £700 million in business rates to the national purse over the last nine years. The Glasgow figure was £538 million, Aberdeen £391 million and Dundee £30 million.
Edinburgh and Glasgow are both campaigning to be able to retain a greater share of the business rates collected in their respective areas. As part of this campaign they are pressing the Scottish Executive on its failure to introduce a similar incentive scheme to the one recently introduced in England. The Local Authority Business Growth Incentive Scheme was introduced in April of this year to give English local authorities the right to a proportion of increases in local business rates revenue, provided it is spent on direct business creation in their areas.
Automatic small business relief?
The Small Business Rates Relief Scheme was introduced in 2003. This relief gives small firms rate reductions of up to 50%, with the maximum reduction applicable to businesses occupying premises with a rateable value of £11,500 or less. This is funded by a supplement on larger businesses that occupy non-domestic subjects with a rateable value in excess of £29,000. These larger businesses are liable to pay a supplement on the poundage rate of 0.45p.
The Scotsman reported earlier this year that thousands of small businesses throughout Scotland are missing out on £15 million of financial help available under this scheme because they do not realise they are entitled to it. The FSB is also campaigning for this relief to be made automatic.
What about prescribed industries?
The prescribed industries are: electricity, gas, water, railways and large docks and harbours. The prescribed industries’ rateable values are set by Scottish Ministers and there is no right to appeal. Prescribed assessment was introduced in the post-war years when conventional valuation became increasingly unreliable. This was because there were very few comparable properties to which the assessors could turn for rental evidence and the newly nationalised industries did not, in general, operate with a view to profit. Some prescribed industries (telecom and waterways) were returned to conventional valuation at the 1995 valuation. In England the prescribed industries were returned to conventional valuation in time for the 2005 revaluation. No decision has yet been made in Scotland.
Issues to address
It is on the whole agreed that the Scottish system of local government taxation, both domestic and non-domestic, needs to be reviewed and that is why the review initiated by the Scottish Executive was broadly welcomed. Also, and although not officially linked to the review, the announcement by the Executive to reduce the poundage rate to that set in England has been extremely well received. The review does though still have a number of contentious issues to address such as the pooling of all Scottish business rates. Part of the answer here may be to introduce a scheme similar to that introduced in England whereby each local authority is given a proportion of any increase in business rates revenue collected. The only condition attaching to the retained funds is that they are then used by the local authority to create or support new businesses.
James Aitken, Tax Associate, Bell & Scott LLP
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