Bulletins | April 21, 2016

Business rates: Who pays and why it matters

Regeneris were appointed by the British Property Federation with the British Council for Offices and the British Council of Shopping Centres to explore the evidence on the economic effects of business rates. Our research seeks to answer the question ‘on whom does the economic incidence of business rates fall?’

The “incidence” of a tax refers to who ultimately bears the cost of the tax. For business rates, the key issue around incidence is whether the occupier really pays the tax or whether it is reflected in higher or lower rents, with the ultimate incidence falling on the landlord. The economic and financial incidence are often very different, and will depend on demand and supply conditions in the relevant markets.

Our research found:

  • In the medium to longer term, changes in rates paid appear to be reflected in corresponding adjustments in rental values. This relationship appears to be stronger for the retail sector than the office sector. However, there appears to be a significant relationship between the centrally
  • set uniform business rate multiplier and rental values for the office sector.
  • There is a lagged relationship between changes in rates and the feed through impact this can have on property rental prices. This is to be expected with the average lease only renewed every three to five years.
  • The relationship between business rates and rents is stronger in regional markets than in London. This may be because leases tend to be longer for prime London property, or it could be down to the relative balance of power between landlords and occupiers in different markets.
  • The relationship between business rates and rents appears to break down after 2008. This period contains historically unprecedented changes in rental values, rents paid and capital values. It is also unusual in that there have been no revaluations since 2010 and rateable values are still based on 2008, pre-recession, values.

From a policy perspective, the question of business rates incidence matters because it affects investment, employment and regeneration. From 1990 until now decisions on the size of the business rate multiplier and allowances have been made at a national level. From 2016 onwards, this will no longer be the case.

There are a number of important policy conclusions that can be drawn from our analysis:

  • The current structure of periodic business rate revaluation creates uncertainty in future rental returns and is likely to reduce investment. Implication: more frequent revaluations, would avoid much of this uncertainty and also remove the need for complex transitional reliefs.
  • To the extent that the business rates burden falls on landlords, this reduces the development capital available for reinvestment. To the extent that the burden falls on occupiers, this is an extra cost to businesses and reduces their ability to invest. Implication: whichever way the incidence falls there are significant economic effects. In the absence of rapid changes these will tend to fall on owners of property rather than occupiers.
  • The use of rate reductions as an incentive for occupiers to invest is likely to be ineffective. Longer term predictable reliefs are instead likely to be capitalised into a one-off uplift in property values. Implication: local authorities and Local Enterprise Partnerships need to be realistic about the limited incentive effects of business rates relief for occupiers.
  • Short term temporary reliefs targeted at particular groups of occupiers are likely to benefit the occupiers rather than landlords. However, to the extent these reliefs become a permanent feature, they would become less effective. Implication: local authorities and Local Enterprise Partnerships need to be aware that long term reliefs can create unintended consequences.

Given the announcements in the March 2016 budget, and particularly the reforms to business rate reliefs, it seems that the question of ‘who pays’ will remain an important issue for many owners and occupiers. However, the new dynamic entering the picture is a political one, and this centres on how local Government will discharge its tax raising responsibilities in a new era of devolution and localisation.

This guest piece was authored by Stephen Rosevear, Director at Regeneris Consulting.