How the 2018 Changes in Business Rates Will Affect UK Businesses

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The new financial year has seen several changes to UK business rates which will affect British businesses, including the over five million small and medium-sized companies operating in the UK.

The changes, which were announced by Chancellor Philip Hammond in the 2017 Autumn budget, were designed to ease the financial burden on UK companies. Many firms have said that they are struggling to survive in a difficult economic climate at the same time as having to deal with the uncertainties around Brexit and its potential ramifications.

In this article for Small Business Achievers, I want to look at how business rate changes will affect small businesses in the UK, in what are still uncertain economic conditions.

Business Rates

The most important change comes down to how business rates are calculated, which will help to alleviate pressure on UK businesses up and down the country. They will now rise in line with the Consumer Prices Index (CPI), not the Retail Price Index (RPI) as previously. 2018 business rates will be calculated against September 2017’s CPI, which was 3% (versus an RPI rate of 3.9%). As the CPI is lower than the RPI, this means that UK businesses will save approximately £2.3bn over the next five years.

The Chancellor’s decision to change business rate calculations brought forward an existing plan by two years and was in response to pressure from organisations such as the British Retail Consortium (BRC), which had said that if business rates remained linked to the RPI, it would mean a £1.1 billion increase. The BRC feared this would discourage growth and investment at a time when Britain needed to show it was open for business.

For small businesses, however, the change may not be enough. A 2017 small business index from the Federation of Small Business (FSB), showed small and medium-sized enterprises are pessimistic about their future: 14% have plans to downsize, sell or close their business this year and 73% say they have seen operating costs rise. As a result, many small businesses and trade associations had asked the chancellor to freeze rates, which did not happen.

Staircase tax

The chancellor also announced an end to the so-called ‘staircase tax’, which saw businesses in shared offices with communal corridors, lifts or stairs in which they occupied only a percentage of the space being charged rates as if they were in separate premises. This led to higher rates which adversely impacted smaller businesses that are more likely to share office space.

The staircase tax had been introduced after a supreme court ruling in August 2017 that defined what was meant by a single business space and the rate charges had been backdated to 2015. This left many businesses unprepared and, potentially, unable to pay their rates bill. The FSB estimated 80,000 small businesses may have been impacted.

Communities Secretary Sajid Javid introduced legislation into Parliament at the end of March 2018 to reverse the impact of the staircase tax. If it receives parliamentary approval, businesses affected by the judgement, including those who lost their small business rate relief, can request a recalculation of their valuation from the Valuation Office Agency based on the agency’s previous practice. Any changes will be backdated.

Revaluations

The final change made by the Chancellor was to the time period for evaluating property values, which has been reduced to three years. This was previously on a seven year cycle. In 2017, revaluations had led to substantial increases in business rates for some companies, especially retailers based in city centres where property prices have risen significantly over recent years. Many found it difficult to cope with the rate increases, especially smaller, independent retail stores. These retailers were forced to look for cheaper properties, often in areas with lower footfall, impacting sales. Some closed their doors altogether.

More frequent evaluations of property values will help create a fairer playing field in competing against online retailers which have lower business rates because they do not have high street stores. Helen Dickinson, director general of the British Retail Consortium (BRC), told the Guardian that the change helps makes the rate system more affordable and puts businesses on a more sustainable footing, supporting local communities and protecting jobs.

The hospitality sector also saw significant increases in business rates following the last property revaluation, with pubs being particularly hard hit and facing over £125 million in increases. To help offset this, the Chancellor extended the pubs relief scheme for a further year. Those pubs with a rateable value of £100,000 or less will have their bill discounted by £1,000.

The change to revaluations will take effect from the next revaluation, due in 2022 and will require business owners to provide information to the Valuation Office Agency on the property, and who has responsibility for the associated business rates.

 

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