Government efforts to reform business rates have been dealt a major blow this week, after the House of Lords voted to block part of the plans.
On Tuesday, the Lords voted to remove key provisions that would have imposed a new surcharge on some properties next April. The extra tax would have been used to fund business rates discounts for local retail, hospitality and leisure firms.
Concerns were raised that the impact of the Non-domestic Rating (Multipliers and Private Schools) Bill had not been fully considered. One expert described it as “rushed”.
For years, UK SMEs with physical locations have called for reforms to business rates. The Labour party, in its pre-election manifesto, previously promised to overhaul the system. Whether it can deliver on this promise now looks uncertain.
Why does the Government want to reform business rates?
Business rates are a charge imposed on commercial properties, similar to how council tax is paid on homes. Local firms pay rates to councils, who keep 50% of the money collected. The other half goes to the UK’s central government.
During the pandemic, business rates were frozen to help struggling UK high streets. But in April 2024, the rates were unfrozen and a key relief scheme was scrapped. Next month, rate bills are set to increase by around 3% (the current rate of inflation).
Labour first unveiled its business rates reform pledge in November 2023, of which this latest Bill would have played a big part.
As part of the measures, the Government intended to apply a supplement of up to 20% on all large properties with rateable value assessments of £500,000 and above.
The money raised would have been used to fund retail, hospitality and leisure relief (RHLR) for all eligible properties. Small pubs, restaurants, bars, and shops in England and Scotland all currently benefit from RHLR.
“Rushed” plans
According to a report by Costar, opposition Lords voted against the Bill after it emerged that the Government had not carried out an impact study into the changes.
Peers voted to exclude certain ratepayers, such as large healthcare, manufacturing, and retail sites from the plans, due to concerns they would unfairly penalise bigger businesses.
Simon Green, Head of Business Rates at Newmark, argued the House of Lords were right to question the reforms, which he said were “rushed through without prior consultation”.
“England’s business rates are among the highest local property taxes in the world, and rather than reducing the burden for all businesses, the Government is further squeezing large businesses with additional supplements”, added Green.
Large firms have previously expressed concerns about the impact of rate bills on cash flow. Last August, the CEO of Sainsbury’s publicly appealed to Whitehall lower rates, arguing that it would help to fund the creation of 17,000 retail jobs.
Deadline doubt looms
With this latest development, there is doubt that the Government’s pledge to reform business rates will happen ahead of its self-imposed deadline of April 2026.
The plans have already been watered down. At first, Labour said it would completely abolish the business rates system and replace it with something fairer for bricks and mortar businesses. In its campaign manifesto, this was softened into a promise for reform.
Whitehall has already introduced other measures designed to ease the financial pressure on SMEs. Last year, local councils were awarded the ‘right to rent’ under new laws that allowed them to rent out long-term empty commercial properties for less money.
The Government must deliver deliberate, well-planned reform policies if small businesses are to survive the next year, especially ahead of next month’s tax rises.
