Tax policy can power economic development

The Welsh Government’s review of business rates offers an opportunity to overhaul the way they are levied in Wales. However, it is essential that is does not become a bean-counting exercise that simply tinkers with the way government, councils and businesses account for their business rates. The review should be an opportunity to fundamentally overhaul the system, using business rates to promote economic growth. However, if that is to be the case, we must be open to radical ideas.

In recent years, there have been calls for business rates to be abolished for businesses with a low rateable value. No doubt this would be a simple, if expensive, approach to supporting small businesses. But I fear that without a more comprehensive overhaul, the system will still remain unfit for the future.

I have written to the business rates review group, outlining five areas that the review must address if it is to produce radical proposals to support business and promote local growth:

1. We should avoid any scenario in which, if improving premises are improved, it automatically increases their value and therefore their business rate

I am concerned about the current system’s damaging effect on the incentive for business improvement. Businesses or networks of businesses, which invest in their premises see an increase in their rateable values and then see their business rates rise.

An example has occurred in Narberth, in Pembrokeshire. Over several years, local businesses, along with other parts of the community, were involved in improving the town’s centre.  The effect was that during the 2008 re-valuation, the rateable value of many of these premises increased. Thus, in 2010, the average increase in business rates was 158 per cent. One business property had to be divided into four to survive.

The current system creates a double disincentive for investment. Often it is not financially viable for businesses to invest in their own premises. Moreover, there is no incentive for local authorities to invest in economic growth. The Federation of Small Businesses has recognised this. If the review does not, we will continue to punish ambition and reward decay through our rates regime.

2. We should end huge rises in business rates when values increase

Recent examples of huge increases in business rates paid by some bed and breakfast establishments (up to 400 per cent in one instance) have shown how much the current system can rapidly change the amount paid by business owners when their valuations change. This cost for most businesses is usually unexpected and can create a considerable challenge at short notice. This can undermine a business’ viability. For small businesses with limited turnover, it can even lead to closure.

I believe that there should be an automatic tapering system built into the revaluation process that would ensure that businesses seeing significant rises in the rateable value (in percentage terms) should be allowed to phase in the increase over several years to adjust to new costs. The percentage rise for premises should also be capped to prevent the kind of excessive increases that are forcing growing businesses into bankruptcy.

3. We should give local authorities responsibility for collecting and retaining business rates

Welsh Liberal Democrats have long advocated conferring greater legal and financial powers on local authorities. A long-standing policy has been to devolve business rates to local authorities. I believe that local authorities should be responsible for collecting their own business rates. This system could be made more efficient than contributing to a national pool. It would also reward local authorities that successfully stimulated growth by allowing them to keep the extra revenue that was generated.

I acknowledge that this system would have a disproportionate impact on authorities with fewer businesses. To address this a proportion of the proceeds would need to be returned centrally and re-distributed to ensure that this impact was mitigated. However, if we want to see local authorities driving economic growth in their communities, it makes sense to give them an incentive to do so.

There should also be Tax Increment Financing. This would allow the local authorities to invest in major regeneration programmes and service the loans from the additional business rates income that would be generated. Currently, this would require the Welsh government to consent to individual projects and so far they have been unwilling to endorse such a programme. However, with the localisation of business rates, local authorities could undertake such programmes on their own.

4. We should extend business rate relief to more community facilities

It is a source of real concern that business rates, designed to levy income from businesses, often place burdens on community facilities. There is already a large range of exemptions for business rates but these should be reviewed to include social enterprises and commercial facilities that exist as a lifeline for their community. Examples would include village shops, pubs and post offices.

If business rates were controlled by local authorities an added advantage would be that they could be given greater discretion over which properties they felt should not pay rates, based on their knowledge of local needs.

5. We should investigate whether Wales would benefit from adopting the same accounting arrangements as occurs in Scotland and Northern Ireland

The reduction in public expenditure has highlighted a discrepancy in the different ways in which business rate expenditure is accounted for by the Westminster Government. The Welsh Government’s accounting arrangements subject it to Departmental Expenditure Limits (DEL). On the other hand the Scottish and Northern Irish government treat it as Annually Managed Expenditure (AME). This has led to greater cuts to the Welsh block grant than would have been the case had we used the same accounting arrangements as the Scottish and Northern Ireland governments. The Chief Secretary to the Treasury has signalled his willingness to review this arrangement if the Welsh Government agrees.

The Welsh Government’s business rates review should seek to establish whether, given the increased variability in annual income from moving to AME arrangements, whether Wales would benefit from such a move. The review would have to establish the likely short-term cash increase as a result of moving to an AME arrangement as well as the likely volatility in the medium-term.

These five proposals for reform aim to tackle some of the flaws in the current arrangement for business rates. But I’m keen to see the contribution that others will bring to the debate. An overhaul of the system could provide a much greater incentive for economic growth and supporting smaller businesses across Wales. Given the role that small businesses are going to have to play in that growth, this review is a huge opportunity. We must not let it pass us by.