2020 will bring an overhaul of UK business rates as they’re linked to national consumer prices, according to the British finance ministry. Touch Financial investigates the background context of this significant news, as well as industry reactions on how the move could affect company finances.
What are business rates?
In the most basic term, business rates are a form of taxation aimed at all UK individuals and firms in possession of properties such as factories, retail stores, restaurants, offices, guest homes or any other premises used for non-domestic, generally revenue-generating purposes. According to Reuters, this levy helps fund many of the country’s civil services like police forces, fire brigades and medical facilities, albeit on a county-to-county basis as opposed to national funding injections.
Come February or March each year, local councils send those to whom the levy applies a business rates bill. The amount owed is – generally speaking – calculated by combining a ‘multiplier’ value – currently 47.9p for standard businesses and 46.6p for small firms – with the property’s ‘rateable value’, meaning the full amount that a tenant would expect to pay were they undertake all of the associated rates and taxes for the building(s).
But in order to fully understand the UK government’s future plans for the indexation of this tax, not to mention its implications for domestic firms, it’s also important to know that until now, the level of business rates imposed has been linked to the retail price index (RPI), an inflationary measure used to monitor prices of household goods, consumables and other products. As such, the yearly levels of business rates could and have often had a profound effect on the RPI and vice versa.
How is business rates indexation set to change?
“Until now” was the operative phrase in the previous paragraph, though, since the current system of business rates indexation will soon take a new trajectory. As was announced by the government in February this year then re-asserted by British finance ministers after June’s UK general election, April 2020 will see the levy linked to the consumer price index (CPI) instead. The Financial Times defines this inflation measure as a “superior” calculation method to the RPI, the main distinguishing factor being their contrasting approaches to estimating the prices of owner-occupied housing.
This potentially crucial amendment to UK business rates has come as part of a series of changes announced for the wider tax system by Theresa May’s government, after first being broached as part of its Spring Budget earlier this year – more details on which can be found in our April report here. Starting this year, applicable SMEs will experience a twofold increase in the levels of Small Business Rates Relief available to them as well as the introduction of Making Tax Digital, an online system allowing firms to begin keeping digital tax records at a time convenient for them between now and 2019.
Will the new rate-setting process affect your business?
According to the Department for Communities and Local Government, this revised approach to business rates indexation will have minimal effects upon around three-quarters of business thanks to their Small Business Rate Relief scheme, which will henceforth provide 100% relief on properties with up to £12,000 rateable values and “significant reductions” for those with £12,000-15,000 facilities. It’s thought that as a result, 600,000 UK firms won’t have to pay any business rates for the time being, while other companies will save £370m in 2020-21 alone.
That said, numerous organisations and experts have already called into question the potential consequences the new system will have for a range of different UK sectors. For instance, the Evening Standard reported in June that the rates revaluation could amount to London’s Metropolitan Police force paying £22.35m additional taxes to fund their premises during the next half-decade, while the Association of Licensed Multiple Retailers (ALMR) has raised fears from the capital’s pub scene that rising business rates levels will prompt venue closures.
Another industry set to be affected is communication, where firms could face substantially altered business rate levels depending on the broadband lines they employ in their offices. Thanks to the recently-unveiled Telecommunications Infrastructure Bill, any companies which invests in fibre optic, ultra-fast broadband cables going forward will – as with the Small Business Rate Relief scheme – receive 100% relief on their properties, whereas those which focus on upgrading non-fibre optic cables such as copper variants will have no such get-out clause available to them.
Looking at the situation more broadly, even Small Business Rate Relief hasn’t proven exempt from criticism, with the Telegraph highlighting in July how 29% of SMEs cited business rates as a high source of pressure on their finances and experts’ claims that the scheme itself had yet to be implemented. Any businesses based in Wales shouldn’t react too hastily to such suspicions though, since the Welsh government is currently asking local businesses to suggest reforms for their version of the Scheme, then will presumably implement these recommendations next year.
How can your firm prepare for what comes next?
Whatever direction the path of UK business rates takes in the near future, there are a number of ways to calculate your property’s rateable value before the local council’s annual bill reaches your letterbox, and to raise concerns if something doesn’t seem right. Visit the GOV.UK website to obtain a reliable estimate for your business rates at their current RPI-tied levels, and if issues arise here – or with the final rates presented on your bill next year – then be sure to contact the Valuation Office Agency in order to resolve any objections.
Touch Financial is also here to help with any concerns your firm has about the ever-shifting levels of business rates, offering a range of funding solutions to offset the unpredictability of future indexation. If your property’s rateable value changes drastically in tandem with RPI or CPI levels, this could put considerable strain on your business’ cashflow, but an invoice finance facility could release a high percentage advance of your sales ledger in order to help ease this pressure. Why not contact one of our expert brokers today and learn how they can find you the best-suited candidate from a panel of over 30 different lenders?