Business rates are in the last chance saloon as Budget 2021 approaches, says CBRE

Business rates valuations have grown faster than open market (MSCI) rents, suggesting valuations could be too high, according to the CBRE research report, Where Next for UK Business Rates? which was published today. The report is published ahead of the 3 March UK Budget, in which the Government is expected to offer further short-term relief, delaying comprehensive reform of the system until the autumn.

Much of the criticism of business rates has come from the sense that rates have got ‘out of step’ with the market, making them unaffordable. CBRE therefore looked at whether Rateable Value (RV) has risen faster than rents, as measured by the industry benchmark MSCI data over the last two decades. RV is the basis for business rates bills. For all sectors, RV has grown faster than open market rents, even when adjusting for floorspace. The difference is particularly striking in retail, but is present across all sectors.

Miles Gibson, Executive Director, CBRE Research, and a former Head of Property Tax at HM Treasury, comments: “Business rates property valuations have been growing noticeably faster than the underlying market, suggesting that the whole valuation regime has come adrift from the market evidence that everyone else is using. Along with of delayed revaluations, long transitional periods and repeated short-term cash injections, this finding illustrates the unresponsiveness of the system to the very market trends on which it is supposed to be based..”

CBRE found that between 2000-01 and 2018-19, RV per square metre rose by an average of 2.5% pa for Retail, 2.3% pa for Offices and 2.0% pa for Industrials, compared with underlying MSCI rental growth of just 0.7%, 0.8% and 1.4% respectively.

CBRE estimates that RV will rise by 10.3% overall by the next scheduled business rates revaluation in 2023 compared with the last revaluation in 2017.

However, within this overall increase CBRE forecasts very substantial change in the burden of business rates falling on individual real estate sectors. CBRE estimates a -27% decline in the share of RV borne by Retail between the last revaluation in 2017 and the next revaluation in 2023, which will be offset by a +35% increase in the share of RV borne by Industrials. By 2026 the change from 2017 will be -41% and +48% respectively.

Other findings in the report include:

  • HM Treasury will be reluctant to undertake radical reform of what it views as a stable, non-distortionary tax, implying short-term fixes are more likely – not just in the forthcoming Budget, but also when its review of business rates concludes.
  • The cost of these short-term fixes is self-inflicted because of ill-advised decisions to delay the 2015 revaluation until 2017, and the 2021 revaluation to 2023, increasing the system’s lack of responsiveness.
  • An online sales tax is becoming a more credible option, but is very unlikely to be a full replacement for business rates.
  • Property taxes currently account for around 10% of all UK tax revenue, a share which has not changed substantially for many decades. The share of all tax revenue represented by business rates has not increased over the last 20 years.
  • UK property taxes are among the highest in the OECD, having risen from about 3.0% of GDP in 1995 to around 3.7% in 4.2% in 2018. Increases in Stamp Duty Land Tax are the main reason for this; in fact, business rates revenue is no larger as a share of GDP than it was in 1997.

Tim Attridge, Head of Business Rates CBRE, concludes: “A reform of the business rates system is well overdue, the Government needs to be mindful of maintaining the legitimacy and credibility of this tax. An online sales tax would allow the Government to reduce the multiplier used to calculate the business rates tax. This would level the playing field for ‘bricks and mortar’ retail, reduce the burden for occupiers and investors and maintain the level of revenue delivered to HMT. The system’s sluggish response to change in the economy is the main problem. Frequent revaluations, the abolition of transitional relief, a faster appeals system, a wider tax base and a simpler exemptions regime would all help to make the system sustainable. We fear that the Budget will only deliver further short-term fixes – fixes which the Chancellor cannot really afford and which could have been avoided through earlier and more decisive reform.”

Our forecasts provide a guide to the likely scale of sectoral shifts in liability. Retail is likely to be a clear winner in both forthcoming revaluations, but there will be a long wait for this change, partly because of the transitional relief system which delays cuts in bills, and partly because CBRE forecasts continuing falls in retail rents until at least 2023 which will not be reflected in RV until 2026.
Miles Gibson, Executive Director, UK Research