The Chancellor recently announced a number of positive measures to reform business rates in the UK:
Firstly, business rates have been devolved to Scotland, Northern Ireland and Wales.
Secondly, there will be cuts on business rates for approximately half of all properties in England from 1 April 2017.
The key changes to business rates
Changes from 1 April 2017
In particular, the government proposed to permanently double the Small Business Rate Relief (SBRR) from 50% to 100% and increase the thresholds to benefit a greater number of businesses. Businesses that occupy property with a rateable value of £12,000 and below (doubling from £6,000 and below) will receive 100% relief.
For properties will a rateable value between £12,000 and £15,000 there will be a tapered relief. There will also be an increase in the threshold for the standard business rates multiplier to a rateable value from £18,000 to £51,000.
Announcing the reform, the Chancellor stated that the changes to business rates means that 600,000 small businesses will not pay a penny in business rates from April 2017, while a further 250,000 small properties will see a reduction in their rates.
What are business rates?
Business rates are charged on businesses that occupy non-domestic or commercial properties, such as shops, offices, pubs and factories. There are a number of exemptions, including some farm buildings and land. Find more information here.
To understand the changes to business rates from April 2017 please see the two worked examples below.
As you can see, some small businesses will make significant savings.
Current rules (2016/17)
Peter owns a property (outside of the City of London) with a rateable value of £10,000.
As the rateable value of the property is less than £18,000 Peter uses the small business multiplier which, in England (outside of the City of London), is 48.0p for 2016/17. To calculate Peter’s business rates due he multiplies the ‘business rates multiplier’ by the rateable value – 48.0p x £10,000 = £4,800.
Peter may also be eligible for small business rate relief as her rateable value is less than £12,000.
If he is eligible for the 50% relief he will pay £2,400 in business rates.
If he is not eligible, he will pay £4,800 in business.
New rules (2017/18)
Under the new rules, from April 2017, Peter will pay £0.
Peter will receive 100% relief and therefore make a saving of either £2,400 or £4,800.
Current rules (2016/17)
Sarah owns a property (outside of the City of London) with a rateable value of £30,000.
As the rateable value of the property is more than £18,000 Sarah uses the standard (higher) multiplier which, in England (outside of the City of London), is 49.3p for 2016/17. To calculate Sarah’s business rates due she multiplies the ‘business rates multiplier’ by the rateable value – 49.3p x £30,000 = £14,790.
New rules (2017/18)
As the rateable value of the property is less than £51,000 Sarah uses the small business multiplier which, in England (outside of the City of London), is 48.0p for 2017/18. To calculate Sarah’s business rates due she multiplies the ‘business rates multiplier’ by the rateable value – 48.0p x £30,000 = £14,400.
Under the new rules, from April 2017, Sarah will therefore make a saving of £390.
The government also proposed to modernise the administration of business rates to revalue properties more frequently and make it easier for businesses to pay the taxes that are due.
Business rates will also, from 2020, be updated by reference to the CPI instead of the RPI (which is generally lower).
Comments on the changes to business rates for small businesses
Looking at the changes for a small business perspective Scott Sanderson, Partner at Hawsons, commented: “Of course, any changes that signal a simplification of the tax system is a welcomed announcement for small business owners, but there were also supportive measures to help small businesses that are struggling financially.”
“The Chancellor has acknowledged the calls from small businesses to expand the business rate relief available to them and this is the single biggest tax cut in the 2016 Budget for the small business sector.”
Scott added: “From a retail perspective, the business rate relief is critically important to the sustainability and stability of many high street shops, particularly with the continuing emergence of ‘online only’ retailers. These changes to business rates should go some way to helping level the playing field for retailers with office or shop premises.”
Commenting on the changes to business rates CBI Director-General, Carolyn Fairbairn, said: “Businesses will welcome the Chancellor’s permanent reforms to business rates – taking more small firms out of the regime and changing the uprating mechanism from RPI to CPI, which the CBI has long been calling for.”
An unintended consequence?
Following a number of previous funding cuts, the major changes to business rates may leave local councils bracing themselves for even greater financial uncertainty. The Chancellor revealed that estimates suggest the business rate reforms could take as much as £7bn out of the total business rate revenue in England over the next five years.
This reduction in local authority budgets could then have a knock-on effect on businesses, such as care home fee levels, for example.
The impact for care homes
Whilst many small businesses will have welcomed the news to overhaul the business rate relief, the changes could have a long-term unintended consequence for the care sector. Local councils have already been subject to considerable funding cuts in recent years and this latest latest change could see councils hold or even decrease their fee levels paid to care homes.
There are suggestions that local councils may be compensated for their loss following the changes to business rates, but the details behind this are not likely to be announced for some time.
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