The 2024 Labour manifesto (PDF) committed to “replace the business rates system” in England to “level the playing field between the high street and online giants, better incentivise investment, tackle empty properties and support entrepreneurship”.

Business rates, which are set according to the value of a business’s property and paid to the local authority, have been temporarily reduced for retail businesses in each of the last five financial years, though some have called for them to be reduced permanently.

This Insight explains how business rates work and what mechanisms the government could use to change the business rates system.

Calls to change business rates

In October 2024 the British Retail Consortium coordinated a letter, signed by 71 chief executives in the retail sector, urging the Chancellor to cut business rates for retail properties by 20% from April 2025, when the current relief scheme comes to an end. The signatories said that the retail sector paid a disproportionate amount of business tax compared with its contribution to the economy. Further reports indicated broader support for this position within the sector.

Retail properties have benefitted from temporary business rates relief in each year since 2020/21, as shown in the table below. In the current 2024/25 financial year, retail properties receive 75% relief on their business rate bill (up to a maximum of £110,000 per business).

Year

Retail relief

2020/21

100% (Covid-19)

2021/22

100% (Apr 2021 to Jun 2021)

66% (Jun 2021 to Mar 2022)

2022/23

50%

2023/24

75%

2024/25

75%

However, local authorities retain approximately £13 billion each year from business rates. If any changes to the system reduced this sum, councils would need alternative sources of funding to avoid spending cuts.

Features of the existing business rates system could be altered to make it easier for governments to address the types of concern expressed by the British Retail Consortium. For instance, the government could use legislation to adjust either of the two factors that set business rates: multipliers and rateable values.

Factors in the business rates calculation

Business rates bills are calculated by multiplying the rateable value of a property by the ‘multiplier’. Therefore, a property with a rateable value of £100,000, where the multiplier was 30 pence in the pound, would face a bill of £30,000 a year in business rates.

Multipliers

At present, the UK government can set two multipliers for England: a small business multiplier and a standard multiplier (see the Local Government Finance Act 1988). The small business multiplier applies to properties with a rateable value under £51,000.

Primary legislation could extend this power so that the government could set different multipliers for different classes of property. For instance, a lower multiplier could be set for retail properties, or for certain types of industrial properties. This would allow the government to adjust the tax burden for certain economic sectors.

This change could also allow government set different tax burdens for high-street retailers and online retailers. The Conservative government consulted in 2021 on introducing an online sales tax. This responded to perceptions that the burden of business rates payments falls more heavily on high-street retail than on out-of-town warehouse units that predominantly sell online. The government ruled out a new tax in the 2022 Autumn Statement, because responses to the consultation suggested that an online sales tax would be “complex, distortive, and would not raise sufficient revenue to fund the scale of business rate relief stakeholders have called for”.

Property valuation for business rates

Alternatively, a change could be made to how rateable values are calculated.

At present, the Valuation Office Agency (an agency of HM Revenue and Customs) assigns each commercial property a rateable value based on the annual rent that the property would command on an open market.

Legislation could alter the way in which the rateable value is calculated. For instance, a proportion of a property’s rateable value could be based on the turnover or the profits of the occupying business.

This could allow valuers to set higher rateable values – leading to higher business rates bills – for properties used by businesses that are more profitable (or lower rateable values for less profitable businesses).

This type of change could provide local authorities with an incentive to encourage investment in high-value local businesses, which would contribute to Labour’s manifesto commitment. It would mean that if a firm was very profitable, and this was reflected in its rateable values, the local authority would gain more revenue.

The business rate system already takes account of turnover for some types of property, such as hotels, pubs and petrol stations. Properties in these sectors are valued on the ‘receipts and expenditure basis’, which takes account of the profitability of the business when setting the property’s rateable value.

Business taxes in other countries

Some other countries impose what is, in effect, a local corporation tax on business profits. Businesses pay this type of tax according to their profits rather than their property value.

These taxes can raise considerable amounts of money. For instance, Germany’s ‘local business tax’ raised €55.9bn 2018. The tax rate is normally between 7.5% and 13.5% of business profits. There is also a national corporation tax, with a standard rate of 15% (the national corporation tax in the UK is between 19% or 25% depending on a company’s profits).

In the UK, councils’ main source of revenue is property taxes in the form of council tax or business rates (much of the rest comes from central government grants). In many other countries, councils have access to alternative sources of revenue. This can mean that their level of property tax is considerably lower than in the UK. Germany’s property tax raised only €14bn in 2018 (compared with some £56 billion for council tax and business rates taken together in the UK).


About the author: Mark Sandford is a researcher at the House of Commons Library specialising in local government and devolution in England.

Image credit: Richard Croft on geograph.org.uk. CC BY-SA 2.0.