The Chancellor has announced plans to double business rate relief and make it a permanent fixture in a move that’s expected to cost the exchequer £1.6bn.
“Business rates are the fixed cost that weigh down on many small enterprises,” George Osborne said in this afternoon’s Budget statement. “From April next year, 600,000 small businesses will pay no business rates at all. That’s an annual saving for them of up to nearly £6,000 – forever. A further quarter of a million businesses will see their rates cut.”
The changes provide eligible properties with rateable values up to £12,000 with 100% relief, double the previous £6,000 threshold, with the relief tapering to 0% with rateable values up to £15,000.
The tax break was welcomed by business advocacy groups and entrepreneurs who were calling for a reduction in rates.
“The Chancellor’s announcement on the extension of the business rate relief on a permanent basis is one which should be applauded, especially in a time where we are working to encourage more potential entrepreneurs to start their own business," said Jim Duffy, BusinessZone columnist and founder of leading startup incubator Entrepreneurial Spark. "An ongoing challenge our Chiclets (entrepreneurs) face as they gear up to fly the coop, is finding affordable and sustainable business accommodation – be that an office space, workshop or a retail unit.
“While this change to business rate relief is definitely a step in the right direction, with rental and property prices on the increase in cities across the UK we would like to see the budget go further and increase this rate on a grander scale. At government level, we need to be doing all we can to support existing small businesses and fledgling entrepreneurs, in order to be able to further enhance the UK economy and ensure our startups stay in the UK and don’t base themselves in foreign countries with better benefits.”
Mike Cherry, policy director at the Federation of Small Businesses (FSB), added: “The combined measures announced on business rates – the single biggest [business] tax cut in today’s Budget - will be viewed by our members as a welcome and important step on the road to fundamental reform."
However, not everyone was happy with the move. Right-wing think tank the Adam Smith Institute said it was a bad idea.
“Business rates are mostly a tax on landowners, not on firms. Even though firms write the cheques, when business rates are cut, rents rise in proportion, so firms are no better off, but landowners are. Reducing rates for small businesses only makes this problem even worse,” said Sam Bowman, its executive director.
Inflation calculations could provide further savings
In addition to extending the relief for small businesses, the annual adjustment for inflation will move from using the Retail Price Index (RPI) to the Consumer Prices Index (CPI) in April 2020.
Both the RPI and CPI measure a sample of retail goods and services, however, RPI includes housing costs and rent. The RPI is generally higher than the CPI, meaning businesses should save money and the Office of Budget Responsibility expects the change to cost the exchequer £370m in 2020-2021.
Business rate devolution to start early in London
In October 2015, Osborne said local councils would be able to set and keep business rates in what he called the “biggest transfer in power to the local government in living memory”. This means councils could cut rates to attract businesses.
The Greater London Authority will move to full retention of business rates from April 2017 - three years earlier than previously thought – while the government will also pilot the approach in Liverpool and Greater Manchester.
“The decision to devolve business rates to the Greater London Authority in London by 2017 is interesting,” ACCA head of taxation Chas Roy-Chowdhury told BusinessZone’s sister publication AccountingWeb. “It is right that rates are retained by the area in which they are paid, although we could end up with areas of the same countries competing against each other, and when you have competition there is always a loser.”