One size doesn’t fit all

The burden of taxation is falling on the small

THE Uniform Business Rate (UBR) is a property tax where the valuation is based on the building’s potential rentable value. It has no link with the business carried out in that property. For those reasons, UBR creates a disproportionate burden on smaller firms as a percentage of turnover, overheads and profit.

For very small businesses – those with a turnover under £50,000 – business rates represent nearly 8% of turnover, 14% of overheads and 36% of profits. For a business with a turnover between £50,000 and £100,000 the corresponding figures are 6%, 11% and 32%.

However, for a business with a turnover of between £100,000 and £500,000, rates represent only 2.5% of turnover, some 5% of overheads and 17% of profits. And for even larger businesses (with turnover between £500,000 and £2m) the burden is greatly reduced, with percentages of 1%, 3% and 16%.

What this picture means is that small businesses are faced with twice the burden of larger companies, and 10 times as much as very big businesses. But this is not the end the burden on small firms paying for local government.

The FSB continues to be worried by the introduction of Business Improvement Districts, or BIDs. These have been used in the United States to clean-up retail centres by giving businesses a direct say in how money should be spent, in return for making higher contributions – which will come in Wales as a levy on business rates bills. And despite recent reassurance from ministers that small businesses will be excluded from BIDs, we await definitive confirmation that they will not have to pay the extra charges.

Former Cabinet Minister Stephen Byers gave a speech in which he argued that pensioners and the poor are subsidising businesses because business rates are pegged to inflation but council taxes are not. He called for a new system under which “business pays its fair share”. The main problem with this is that Britain’s 1.6m businesses contribute £19bn to the public purse through business rates, compared with the £18bn of council tax contributed by 22m householders.

For this businesses do not get a vote, they do not get a say in how councils are run and in many cases they do not even get their refuse collected for ‘free’. Some difficult decisions need to be made on local government finance, but small firms must not be seen as an easy way out.

One of the proposals for these difficult decisions has been to bring business rates back under the control of local authorities. Small businesses have a strong local identity and many have been set up in responses to local needs. Eight out of 10 small businesses trade within a 50-mile radius of their base and therefore small firms are particularly susceptible to local authority decisions. However, as business owners have no vote in this decision-making process, particular problems occur when the owner has their business and residence in different local authority areas.

The ability to pay is where we have to look to those who in many cases occupy property which is and has been owned by families for a number of years.

It is more than likely that the rates bill is the single highest overhead, and as property values have tended to rise with a knock-on effect on rateable values, the imbalance of the rates bill has become disproportionate.

Instead of picking on business rates as a way to boost coffers, we need to target rate relief by, for example, introducing a banding system, along the lines of council tax bands, to ensure the application of UBR is more equitable. We also need a business rates relief scheme that gives all properties, with a rateable value of up to £5,000 a 50% business rates relief, and all properties with a rateable value from £5,001 to £7,500 a 25% business rates relief.

It is imperative that the disproportionate burden of business rates is removed from small businesses. This will assist the very smallest businesses and foster economic growth.

Above all, there remains the issue of what will happen when, as seems likely, the council tax is abolished or reformed. Any move towards shifting more of the financing of local government away from individuals towards businesses has been put on hold, at least until after the next General Election.

We are concerned this could lead to the end of the Uniform Business Rate, to be replaced by an even more burdensome, locally-controlled rate.

Surely the priority for ministers should be the implementation of a more general rates relief scheme that brings genuine benefits to small firms, rather than ripping up the UBR system that, for all its ills, has brought stability and certainty over the past decade?

There is a lot more thinking to do and I hope that the FSB is involved in this process.