Vulnerable small businesses need help on rates

Two separate debates are taking place over the future of business rates. One is whether to give rate relief to businesses and the second is whether to allow some of the rate growth to be kept by the local authorities that collect the money.

The business rates review by Professor Brian Morgan was “very much in favour” of extending the relief scheme beyond its scheduled withdrawal in March next year, Instead, it proposed that it should be extended until at least 2015. However, it said changes to business rates should not be seen as the only solution for the economy. As Professor Morgan put it:

“Although business rates relief are an important part of the policy framework, they are not a panacea for economic regeneration.”

During 2010-11 £858,943,000 was collected in national non-domestic rates in Wales, not an insubstantial sum. At a time of a reducing Welsh block grant any support needs to be targeted in such a way as to increase Welsh GDP so that the benefit gained makes up for the loss of revenue to the Welsh Government and subsequently to local councils.

Currently business rates are a tax paid on non-domestic properties. Some businesses may be exempt whilst others may qualify for relief under the small business rate relief scheme. There are also other rate relief schemes that include relief for properties occupied by charitable and not-for-profit organisations as well as relief on empty properties.

Currently the non-domestic rating (small business relief, Wales) Order 2010 provides the statutory framework for the provision of rates relief for small businesses in Wales. This relief is funded by the Welsh Government and applied to rates bills by local authorities.

Between the 1 October 2010 and 31 March 2013 the relief scheme means that most businesses with a rateable value up to £6000 will pay no rates and those with a rateable value between £6001 and £12000 will receive some relief. If a business property is empty they are exempt from rates for the first three months with additional exemptions available.

There is no doubt that rate relief is very popular with local businesses and that it is also very simple to organise a scheme to provide such support. One of its weaknesses is that it fails to distinguish between types of businesses so pawnbrokers and money for gold shops also have business rate relief, not just businesses such as the greengrocer and the cake shop. Also a number of buildings are rented with payment covering both rent and rates which leads to any reduction in rates having no benefit for the shopkeeper but increasing the profit of the landlord.

One of the problems that have afflicted small shopping centres has been the loss of diversity. There are other options that exist to promote diversity including providing subsidised rents tapering over a three year period to new shops setting up in an area selling goods or services not available in that area. Whilst this is much more complicated than a blanket rate reduction it could help create more diverse shopping centres in the small towns and suburbs of Wales.

For larger businesses and manufacturing there is a whole range of more suitable ways of supporting businesses than blanket rate relief. These can vary from start-up grants, capital allowances to research and development grants or training grants for each new employee. Again these are far less simple than a blanket rate reduction but they can be targeted at growing both employment and indigenous research based companies.

With a decision needed soon to start in April 2013 it is probably best to continue with the blanket rate relief until 2015. However, I also believe there is need to undertake a consultation exercise to decide a better way to support vulnerable small local businesses to be completed in time to be implemented in 2015.

More worryingly, especially for the poorer parts of Wales is the suggestion that local authorities should keep some or all of the growth in business rates. As the table below shows, the rate of growth of business rates across Wales between 2001-2 and 2010-11 varies between 6.3 per cent in Anglesey to 77.92 per cent in Wrexham. If a proportion of business rates had been kept by Councils over the last ten years then there would obviously have been big winners and big losers.

Business rates changes by local authority between 2001-2 and 2010-11

	2001/2	2010/11	Percentage	Actual
Authority	Receipts(£,000)	Receipts(£,00o)	Increase	Increase
Anglesey	13,614	14,472	6.30%	858
Gwynedd	29,764	32,433	8.97%	2,669
Vale of Glamorgan	28,349	36,690	29.42%	8,341
Rhonda Cynon Taf	34,886	45,857	31.45%	10,971
Newport	43,023	57,087	32.69%	14,064
Denbighshire	13,783	18,497	34.20%	4,714
Monmouthshire	13,877	18,760	35.19%	4,883
Flintshire	39,661	55,014	38.71%	15,353
Torfaen	14,480	20,179	39.36%	5,699
Blaenau Gwent	8,201	11,457	39.70%	3,256
Neath Port Talbot	25,693	36,403	41.68%	10,710
Bridgend	26,262	37,729	43.66%	11,467
Powys	15,127	21,867	44.56%	6,740
Caerphilly	20,623	31,016	50.40%	10,393
Swansea	45,305	68,539	51.28%	23,234
Conwy	17,026	26,692	56.77%	9,666
Carmarthenshire	23,381	37,486	60.33%	14,105
Merthyr Tydfil	9,146	14,687	60.58%	5,541
Cardiff	101,412	169,448	67.09%	68,036
Pembrokeshire	23,336	40,499	73.55%	17,163
Ceredigion	9,111	16,191	77.71%	7,080
Wrexham	26,944	47,940	77.92%	20,996
Total	582,904	858,943	47.36%	276,039

If business rates were devolved to local authorities now it would mean that those authorities receiving a higher adjusted business rates than they actually raise, would experience decreased revenue support. From 2015 Professor Morgan’s Group says that local authorities should be allowed to keep 50 per cent of any additional business rates raised – covering a five year period until the next rates review. The other additional revenue would go back into a pot to support authorities struggling to increase business rate income levels.

What would have happened is that money would, in simplistic terms, have been diverted from north-west Wales. Whilst past performance is not necessarily an indicator of future performance allowing some of the money collected to be kept by the collecting authorities would lead to some winners and some losers. The consequences would either be to affect Council tax rates or lead to fairly arbitrary reductions in service. There are three options.

1. To allow the Councils to keep any growth but to increase the rate support grant to local authorities who are increasing their business rates at below the average rate. However, this would be very expensive.
2. To allow each authority to keep its growth. However, this would cause problems with income for Council’s in poorer areas and impact on both Council tax and service provision.
3. To keep the system as it is now because it is for the employment opportunities and economic growth that local authorities seek new developments rather than an increase in rates.

As additional substantial support for the local authority settlement remains unlikely then I believe that for the poorer parts of Wales the current system is best.