Here are five reasons why the business rates system doesn’t work

Chancellor Philip Hammond, with his friends and allies from the prime minister's team. Image: Getty.

In recent weeks, the upcoming revaluation of business rates has risen to the top of the news agenda, prompted by opposition to the changes from some of the UK’s biggest employers’ groups; the debate led the chancellor, Philip Hammond, to take steps to soften the impact in his recent budget.

The impending revaluation is intended to ensure business rates are set at a level which reflects the rental value of the property they occupy. This has a significant bearing on how competitive a business environment cities can offer, and the revenue generated by the tax is crucial for funding local government.

The problem is, however, that the forthcoming revaluation comes two years later than planned and seven years after the last revaluation. This delay has worsened an already dysfunctional business rates system, which increasingly does not work for either businesses or local government, for the following reasons:

It’s volatile. The lengthy gap between revaluations creates major shocks to the business rates system for both local government as a revenue stream, and for firms as ratepayers.

As a result, businesses across the country are facing dramatic changes in their business rates bill – with many in London and the South East facing significant increase in rates.

It’s not responsive to economic conditions. The current five-year revaluation cycle means that over time businesses are often paying rates based on out of-date valuations.  This is the especially the case since the last revaluation, which occurred before the 2008 recession and came into force in 2010.

Since 2010, businesses in prosperous areas such as London have been paying less in rates than they should be, while companies in poorer places such as Burnley and Hull have been paying more – hence why London firms are now facing particularly large hikes in their rates. 

It’s complex and poorly understood. The long and technical process of valuation, the lack of correlation between the rates and businesses’ ability to pay, and the annual changes in the business rate multipliers, all combine to make the system opaque and hard for businesses to navigate. 

The appeals system creates financial uncertainty for local authorities. The large volume of appeals to the Valuation Office Agency (for example, to raise issues or changes in property valuation),  and the delays in solving cases, mean that many places might have to refund several years’ worth of rates to businesses, putting their budget at risk.

It can reward perverse behaviour. Because the tax is primarily based on growth in commercial floor-space within the revaluation period, the current system rewards space-hungry developments which are often out of town. This can be to the detriment of town and city centres, and the firms based in them. 


By the same logic, the system does not reward behaviour that supports business and public investment, and economic growth which does not increase net rateable floor space.

With the government now considering reforms of business rates ahead of the tax being devolved to local authorities in 2020, how can it make the system more effective and ensure it maximises the benefits from devolution? Three things stand out in particular.

Firstly, more frequent revaluations are needed on a yearly or bi-annual basis, to make the system more accurate and timely, reduce volatility, and to maintain the legitimacy of the tax. More frequent revolutions would also have the additional effect of reducing the significance of appeals. 

Secondly, the government should replace the fixed yield with a fixed rate. The current system requires that business rates should generate a fixed yield in revenue, irrespective of the state of the overall economy. This both amplifies the volatility in the system and creates distortions which benefits more economically vibrant places. 

Removing the cap on business rates and moving to a fixed rate system would make it more responsive to the wider economy and the ability of firms to pay.

Finally, extend the period of time between resets of the system. Revenue from business rates is used to fund local government, and the amount of baseline funding places receive is reset every five years to ensure that it broadly reflects their level of need. This creates uncertainty for local authorities towards the end of this period, as they don’t know how much business rate income they will retain after resetting. It also gives places only a small time-period in which to accumulate growth, and therefore less incentive to make this a priority.

Carrying out the reset every 10 years instead wouldn’t prevent similar issues arising at the end that period – but it would provide authorities with more long-term certainty and greater incentive to grow their economy.

Making these changes will be critical in creating a business rates system that works for both local government and businesses, makes the most of devolution and offers the stability places need to drive local economic growth.

Andrew Carter is chief executive of the Centre for Cities. This is an edited version of an article first posted on the think tank's blog

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Which pairs of capital cities are the closest together?

Vienna, which is quite close to Bratislava, but not quite close enough. Image: Thomas Ledl

It doesn't take long to get from Paris to Brussels. An hour and a half on a comfortable Thalys train will get you there. 

Which raises an intriguing question, if you like that sort of thing: wich capital cities of neighbouring countries are the closest together? And which are the furthest away? 

There are some that one might think would be quite close, which are actually much further part. 

Buenos Aires, Argentina's capital, sits on one side of the estuary of the Río de la Plata, while Montevideo, Uruguay's capital lies on the other side. 

Click to expand: Image: Google Maps

But at 207km apart, they're not really that close at all. 

Similarly, Singapore – capital of, er, Singapore – always sticks in the mind as 'that bit on the end of the Malaysian sticky-out bit'. But it's actually pretty far away from Kuala Lumpur, Malaysia's capital. A whole 319km away, in fact:

Click to expand: Image: Google Maps

Thinking of 'countries that cause problems by being close together', you inevitably think of South Korea and North Korea. 

Click to expand: Image: Google Maps

And while Pyongyang in the North and Seoul in the South are pretty close together, 181km just isn't going to cut it. 

Time to do some Seoul-searching to find the real answer here.

(Sorry.)

(Okay, not that sorry.)

Another place where countries being close together tends to cause problems is the Middle East. Damascus, the capital of Syria, really isn't that far from Beirut, in Lebanon. Just 76km:

Click to expand: Image: Google Maps

Seeing as Lebanon is currently host to millions of refugees fleeing the horrors of Syria's never-ending civil war and the atrocities of Daesh, or Isis, this is presumably something that authorities in Beirut have given a certain amount of thought to.

Most of the time, finding nearby capitals is a game of searching out which bits of the world have lots of small countries, and then rooting around. So you'd think Central America would be ripe for close-together capital fun. 

And yet the best option is Guatemala and El Salvador – where the imaginatively named Guatemala City is a whole 179km away from the also imaginatively named San Salvador.  

Click to expand: Image: Google Maps

Another obvious place with lots of small-ish countries is Europe – the site of the pair of capitals that drove me to write this nonsense in the first place. 

Click to expand: Image: Google Maps

And in fairness, Vienna and Bratislava do make a pretty good showing of it. Austria's capital sits on the Danube; drift downstream, and you swiftly get to Slovakia's capital. As the crow flies, it's 56km – though as the man swims, it's a little longer. 

There are more surprising entries – particularly if you're willing to bend the rules a little bit. Bahrain and Qatar aren't really adjacent in the traditional sense, as they have no land border, but let's just go with it. 

Click to expand: Image: Google Maps

Manama, Bahrain's capital, is 140km away from Doha, the centre of the world's thriving local connecting-flight-industry which moonlights as Qatar's capital. 

Sticking with the maritime theme, Port of Spain in Trinidad and Tobago is 152km from St George's, Grenada. 

Click to expand: Image: Google Maps

Good, but not good enough. 

Castries, the capital of the Carribbean country of St Lucia, is 102km north of Kingstown, the capital of St Vincent and the Grenadines. 

Click to expand: Image: Google Maps

Better, but still not good enough. 

Basseterre, the capital of St Kitts and Nevis, inches ahead at 100km away from St John's, the capital of Antigua and Barbuda.

Click to expand: Image: Google Maps

But, enough teasing: it's time to get down to the big beasts.

If you ask Google Maps to tell you the distance between the capital of Congo and the Democratic Republic of the Congo, it comes up with a rather suspect 20km. 

 

Click to expand: Image: Google Maps

A short distance, but considering the only thing separating the two is the River Congo, something's up: Google places the centre of Brazzaville a little north of where it should be, and the centre of Kinshasa many many miles south of where it should be, in some sort of suburb.


So, in true CityMetric style, we turn to train stations. 

Though such transport hubs may not always perfectly mark the centre of a city – just ask London Oxford Airport or London Paddington – in this case it seems about right. 

Kinshasa's main train station is helpfully called 'Gare Centrale', and is almost slap-bang in the middle of the area Google marks as 'Centre Ville'. On the other side of the river, 'Gare de Brazzaville' is in the middle of lots of densely-packed buildings, and is right next to a Basilica, which is always a good sign. 

 

Click to expand: Image: Google Maps

And when marking that distance, you get a more realistic 4.8km. If you want to be really keen, the ferry between them travels 3.99km, and the closest point I could find between actual buildings was 1.74km, though admittedly that's in a more suburban area. 

Pretty close, though. 

But! I can hear the inevitable cries clamouring for an end to this. So, time to give the people what they want. 

Click to expand: Image: Google Maps

If you ask Google Maps to tell you how far away the Holy See, capital of the Vatican, is from Rome, capital of Rome, it says 3.5km. 

Click to expand: Image: Google Maps

If you set the centre of Rome to be the Palatine Hill, the ancient marking point for roads leading out of Rome, that narrows to 2.6km.

 

Click to expand: Image: Google Maps

Fiddle a bit and put the centre of the Vatican as, well, the middle bit of the roughly-circular Vatican, that opens up a smidge to 2.75km.

Click to expand: Image: Google Maps

Mark the centre of point of the Vatican as the approximate location of St Peter's Tomb within St Peter's Basilica, which is after all the main reason the Vatican is a thing and not just a quirky suburb of Rome, and 2.67km is your answer. 

Though obviously in practice Rome and the Vatican are as far away as one single step over the railings at the entrance of St Peter's Square, which fairly blatantly makes them the closest capital cities in the world. 

But that would have been a very boring thing to come out and say at the start. 

Oh, and if you hadn't worked it out already, the longest distance between a capital city and the capital of a country it shares a land border with is 6,395km. 

Click to expand: Image: Google Maps

I know it's tough for you, Vladimir and Kim. Long-distance relationships are a real struggle sometimes.

I can't make a pun work on either Moscow or Pyongyang here, but readers' submissions more than welcome. 

Jack May is a regular contributor to CityMetric and tweets as @JackO_May.

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