There is a problem with business rates because
1. they depress start-up activity and,
2. they act as a fixed cost overhead based on workspace occupied, making them particularly punitive to businesses which employ lower paid workers.
In the USA... more there are no property taxes suppressing start-ups
On a trip to the US recently I sat eating an inexpensive pizza in a large restaurant in a run-down mall. There were two other customers there. Beside an enormous stack of pizza boxes were two young men, one wearing an apron and the other with a helmet on his lap. They were sitting on the counter chatting with not much to do because business was slack. They were talking about the profit margin on their anchovy pizza!
I have never in Britain seen so many square feet of commercial premises being put to such low return use, or two such young men concerned with profit margins. Why? Because in Britain it is impossible to recognise that an existing commercial property's only viable business use offers a low return; one that is insufficient to pay the large fixed overhead of business rates.
Those two apprentice entrepreneurs could not exist in Britain. In Britain this property would be empty and falling derelict, and those two young men would be unemployed, rather than learning how you can make ends meet through low-skill, yet profitable work.
Business rates are disproportionately punitive to the lower paid
Business rates are the biggest lower-paid job-killer in Britain today. Almost all employing businesses need commercial premises of some description. But when they first open for business, or often during quiet periods of off-season demand, young businesses lose money fast because they have a HIGH fixed overhead in business rates.
Running young businesses requires LOW fixed overheads. Where costs are variable, not fixed, they can be brought down to match the level of revenue and minimise early or seasonal losses which in young businesses are almost inevitable, and often fatal.
But business rates are a high fixed overhead. They have nothing to do with sales revenue, or employment, or profits. Business Rates are a tax on business existence. Government is waiting in the delivery room to tax any infant business, and what is worse, because the tax relates to workspace, it applies at a far higher marginal rate on lower paid workers than it does on higher paid ones.
Everyone who thinks about it realises this is dumb. But because a business has no vote it is convenient for government to dump higher taxes on business rates. Consequently - on a per-square-foot basis - business rates in my experience have been six times as much as the residential council tax (the equivalent private residence tax) in the same area. A similarly inexcusable multiple applies between a residential parking permit and a business one. This anti-business policy kills young businesses stone dead.
Can this problem be fixed? Yes it can.
A solution in "Low Paid Worker Relief from Business Rates"
Businesses collect and pay employees' taxes through the PAYE scheme. Young businesses should be able to reclaim their business rates with a PAYE tax receipt for a low wage worker.
The policy statement (below) denies relief to property asset holding businesses, and to established businesses, and to businesses which employ only high wage earners. It targets relief at young organisations which have created new jobs on lower wages. This is the sector of the economy which currently shoulders a disproportionate and punitive share of business rates.
Just as importantly its implementation is very easy. Business rates are collected and paid in the normal way, and later redeemed by submitting a simple claim composed of the employer's NI account number and the relevant employee's NI number. The place and period of employment, the rate of pay, and the amount of tax already paid via PAYE, are all already on the employee's NI record held by HMRC.
Like any good relief this should reduce on a sliding scale, so that a mature business pays its taxes on the same scale as other mature businesses and so that there is no sudden cliff, but a gradual stepping-up over time to the normal tax rate.
"Young Businesses" are defined as those which have not yet made taxable profits in five tax years.
"Qualifying Lower Paid Workers" are defined as workers whose PAYE income tax records show that their income is below 80% of the national average wage.
Policy : Where a Young Business employs Qualifying Lower Paid Workers they may claim, and HMRC will redeem to the business, paid PAYE contributions as follows, up to but not exceeding the net total of business rates paid on the building:-
Age of Young Business not exceeding
1 year 2 years 3 years 4 years 5 years
1 year -100% -100% -100% -100% -100%
2 years n/a -80% -75% -50% -50%
3 years n/a n/a -50% -45% -25%
4 years n/a n/a n/a -30% -20%
5 years n/a n/a n/a n/a -10%
NB. Currently there are several forms of business rate relief, but they offer lower tax bills to a mixture of charity, religious, and amateur sports premises, and one to very small businesses which serves primarily to dis-incentivise growth. These existing reliefs incentivise property speculators to house charity shops (which is perhaps why there are so many of them doing so little business) and - in one case I have heard of - to found a religion!
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