Rates redistribution delayed again – are rates still a workable tax?

Buried at the back of the Programme for Government is the Scottish Government’s decision to postpone the revaluation of non-domestic rates in Scotland by a year. True, the government is delivering on one aspiration of the Barclay Review, supported by SPF, for a much closer, one-year gap between the point a revaluation takes effect, and the date that rateable values are set to inform that revaluation. This is welcome as it should support the alignment of rateable values to market realities when coupled with more frequent three-year revaluation cycles. But, what will not be welcome is a delay to the next revaluation itself, meaning ratepayers will be paying their rates based on 1 April 2015 commercial property rental values.

The consequences of these outdated rating assessments for businesses can be severe.  There are instances where some businesses pay the government rates based on values that are twice as much as they pay their landlord in actual passing rent. This cannot be right.  Moreover, it distorts the actual property market because there is only so much a business can afford to pay in terms of occupational costs.

We feel that there is also a missed opportunity here. Yes, the government are committed to a one-year gap between rating assessment and the moment that new assessment becomes an actual tax liability at the point of revaluation. But, why delay the point at which rates are reassessed and the tax base is redistributed?  It feels as if the government’s assessors are waiting for more ‘normal’ market rental values to return and cash flow, that has been choked off by COVID-19, to power businesses again. But what if this new normal persists and consumer behaviour has fundamentally changed in relation to retail, hospitality and leisure choices?

There is also a bigger picture that cannot be ignored any longer. Retailers still pay some 23% of rates across Scotland.  The retail sector before COVID-19 was already under seismic changes in terms of structure and investment. This has now been accelerated by the pandemic, reducing the sector’s capacity to contribute to business rates revenue. Yet, the traditional approach to revaluation, which would see other sectors picking up a considerable part of the rates burden previously paid by retailers, has also been disrupted. Offices may not be occupied to the extent they were before COVID-19 as employers adopt more flexible working practices; and the conversion of shops to cafes and restaurants, or of offices to hotels, must also seem less attractive given the drop in demand for those premises.  So how, does the government intend to spread its £2.8bn non-domestic rates tax base? 

Many commentators have proposed a form of digital tax that would seek to capture the growth in online businesses. This may not be as straightforward an idea, as there is also VAT applied to many online purchases. Neither would it be the whole answer itself as rates cover many forms of activities including government offices who do not necessarily ‘sell’ anything.  There is likely to be a continuing need for a property based tax, but some might argue that it will need to be complemented by a larger commitment from the digital world in order to support and equalise the tax base.