11: Have your say on £2 billion charity rates relief – the Government’s business rates review

On 21 July 2020, HM Treasury announced a call for evidence on its ‘fundamental review’ of the business rates system in England. The call for evidence is split into two tranches. The first tranche will be of vital interest to many charities as it looks at business rates reliefs, including charity rates relief which is worth around £2 billion to the sector each year. Charities which claim this relief should review the call for evidence and consider responding by the deadline of 18 September 2020.

Background to the review

The review was expected, having been trailed in the Conservative election manifesto, which promised that the review was to ‘cut the burden of tax on business by reducing business rates’. This is the latest in a number of reviews and consultations across the UK in recent years, including reviews in Scotland leading to the removal of charity rates relief from most independent schools there with effect from April 2021 (deferred from September 2020 due to the pandemic), a review in Northern Ireland in 2019, the results of which are awaited, and a consultation earlier this year in Wales on charity rates relief for independent schools and hospitals (a summary of responses to which has just been published). In England, a review conducted as recently as 2015 was billed as the ‘biggest review of business rates in a generation’. However, there were calls for another review as, for example, the impact continued to be felt on the high street from the competition of online business, even before the pandemic intensified that impact still further.

This latest review is significant as it is deliberately broad in its scope and will now have the added complication of considering an appropriate system in the context of the ongoing pandemic. It is important that the views of the charity sector are taken into account. Charities in occupation of property are eligible for mandatory relief at 80% where they use the property wholly or mainly for charitable purposes, and can qualify for a further 20% at the discretion of the local authority. As noted above, this relief saves the sector around £2 billion a year. Any change to the relief would have very significant consequences for such charities’ cash-flow and operations and, potentially, survival.

The review was due to start in the spring but was delayed when the pandemic hit. Its terms of reference were announced at the Budget in March 2020 and provide for three objectives of the review:

• ‘reducing the overall burden on businesses
• improving the current business rates system
• considering more fundamental changes in the medium-to-long term’.

The call for evidence is not consulting on specific policies, instead seeking views on how the system works, any issues to be addressed and ideas for changes that should be considered.

The document notes that, throughout the review, the ‘government will consider how any changes align with the government’s objectives to deliver sustainable public finances; minimise economic distortions and support growth; increase productivity; deliver a tax system fit for the 21st century; and to deliver on the UK’s legally binding target to reach net zero emissions by 2050’.

The review – tranche one

As the review is wide-ranging, it is split into two parts. Tranche one (in chapter three of the call for evidence) seeks views on reliefs (all reliefs, not only charity rates relief) and on the business rates multiplier. We look here only at the section on reliefs.

On reliefs, the document notes that, when considering the introduction of new reliefs and in reviewing existing reliefs, the government takes into account:

• ‘how effectively reliefs meet their objectives,
• whether they represent value for public money,
• whether they generate unintended consequences such as distorting decisions on use of property, and
• risks from avoidance or abuse’.

In delivering changes to tax reliefs, it states that the government is ‘committed to ensuring that changes are predictable, and that they maintain stability and support the simplification of the tax system’.

The concerns with the current reliefs system which are referenced in the document are:

• complexity – including that administration of reliefs can vary between billing authorities and overlaps in eligibility can cause confusion over a ratepayer’s entitlement to reliefs;
• ineffectiveness of targeting – for example with concerns that business rates cuts are ‘capitalised’ into higher rents that benefit landlords;
• responsibility for administration and determining eligibility – some suggest local authorities should play a greater role, while others argue this could lead to greater variation in reliefs and ‘could create economic distortions’;
• sustainability – especially against the backdrop of the post COVID-19 fiscal and economic landscape; and
• abuse – where some ratepayers misuse relief, an example given being in relation to empty property relief where owners grant ‘leases on vacant properties to charities claiming the property will be used for charitable purposes when next in use’.

The questions posed on reliefs are:

1. How well do current reliefs and exemptions deliver their intended outcomes and satisfy the principles of good tax design? What changes would you suggest to the system?
2. How can reliefs be targeted more effectively? How can reliefs and their administration be simplified?
3. What evidence is there on the capitalisation of business rates and business rates reliefs into rents over time? What does any evidence mean for the design of rates reliefs and business rates more broadly?
4. What role should local authorities have in determining business rates reliefs and exemptions? Should reliefs and exemptions be set by central government or set locally?
5. Are you aware of ratepayers misusing tax reliefs or other means to avoid paying their full business rates liability? What could be done to tackle this?

Tranche two – deadline 31 October 2020

The second tranche of the call for evidence, for which views are sought by 31 October 2020, looks at ways the business rates system might be improved, before going on to explore some possible longer term alternatives to business rates. The former seeks views on areas such as valuations, the business rates treatment of plant and machinery and investment, changes which might be considered for valuation transparency, appeals and the accuracy of ratings lists and the billing process.

The longer term proposals consider a capital values tax (CVT), payable by the land owner rather than the occupier, and an online sales tax (OST), perhaps levied on the revenues generated from online sales to UK customers, focused on sales in direct competition with those carried out through physical premises.

Have your say

Business rates may not be a subject to stir the heart but, as the need for extensive business rates assistance in the pandemic has shown, it is a significant cost to businesses across the country, so we should expect a considerable response to this review from businesses small and large from all sectors. It is entirely proper that charity rates relief should be considered as part of the review, but makes it all the more important that charities input into the review so that their views are considered in the process.

The call for evidence sets out (at paragraphs 1.15 – 1.19) how to respond. We will be responding to the call for evidence, so please feel free to contact us (by 8 September 2020 please) with any comments or concerns which we can take into account in our response. Alternatively, the Charity Tax Group invites charities to submit feedback to them.