Thursday 2 March 2017 6:00 am

Tinkering with business rates won’t fix a fundamentally broken tax on investment

Business rates reform is crucial for the health of local communities across the country.

Retailers pay a quarter of all business rates and it is the single largest tax paid by the industry. Put simply, the burden of property taxation is too high. It is a disincentive to invest in physical space. A system where rates are the highest in the G7, and have risen from a third of rateable value in 1990 to half today, is not financially sustainable.

We have long made the case that, to maintain a competitive tax environment for business, further measures to reform business rates are needed to fix a tax that is no longer fit for purpose and that continues to discourage local investment in jobs and growth.

Read more: The cost of running a firm in London is starting to outweigh the benefits

While for many business rates may sound dreary, the topic has attracted considerable attention over the last two weeks, as it’s become caught up in a perfect media storm. The significance of the impact of the coming revaluation, and the realisation that the transitional relief scheme is much less generous than last time around, is hitting home. It has shone the spotlight once again firmly on the inequities of the system.

Government data showing that nearly three-quarters of businesses will see no change, or even a fall, in their business rates after the revaluation overlooks the significance and real world impact of the increase. The other quarter of businesses face a rise of up to 42 per cent and that is after taking into account the upward cap available under the transitional relief scheme.

For any retailer, large or small, operating in a highly competitive market with narrow margins, an eye-wateringly high rates bill is the last thing they need when the decision as to whether to keep a store open or invest in it may already be hanging in the balance. Local communities up and down the country need that investment.

The theory is that these rate increases for businesses in geographical areas deemed to have done well should be offset by lowering rates for businesses that may have suffered in areas which have performed less well. This further calls into question the logic and sustainability of a tax system which disproportionately penalises businesses looking to upscale and invest.

Read more: Spiking business rates will lead to an East London tech exodus

The divisive framing of the current debate, which isolates “winners” from “losers”, misses the real point that there can be no winners from a fundamentally broken system. Limited targeted relief that benefits some but not all merely acts as a sticking plaster and deflects the real need for reform of business taxation in its entirety.

Instead, we need a system which is flexible, simple and competitive, focused around promoting economic growth rather than just raising revenue.

First, the government should commit to three yearly revaluations together with bringing forward the switch from RPI indexation to CPI. This will allow the tax to flex with economic conditions.

Second, the chancellor in his Budget should seize the opportunity go further with the transitional relief scheme and implement the same protections for all those facing increases that were in place during the last revaluation in 2010.

Finally, there must be potential to address the disconnect between a tax system that acts as a disincentive to innovate and invest and the government’s commitment to a low tax economy which works for everyone. Only through this fundamental reform of the system will we continue to enjoy the benefits of growing numbers of new local jobs, especially in deprived areas, improved productivity, the delivery of training and apprenticeships and, critically, the successful reinvention of our high streets and town centres.