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Inflation down, but rates up as business feels the pinch

Inflation is down. Hurrah! That should mean a cut in the cost of living for consumers. However, it ought to benefit business, too. But there’s the rub.

Business rates will go up next month because the annual increase is pegged to the rate of inflation in September (like pensions). And six month ago it stood at what now seems like a whopping 2.3%.

The Scottish government decided to limit the business rate rise to 2% – so be thankful for small mercies – but nonetheless the forthcoming hike will hit smaller firms where it hurts just at a time when they should be feeling the benefit.

The Scottish Retail Consortium and the Federation of Small Businesses have been on the business rates warpath for months, but the Scottish government has done little to acknowledge their concerns and so far have resisted calls to follow Westminster with a review of business rates.

A review of council tax which was unveiled last month was the perfect opportunity to take a look at the whole issue of local taxation, but Holyrood confirmed last month that the Commission on Local Tax Reform will not consider business rates.

Business rates raise more than £2 billion a year for Scottish councils – roughly the same amount as council tax. So, as Colin Borland of the FSB told me, a major review of local government finance excludes half its tax base.

In fact, the revenue from businesses is expected to rise sharply.

David Lonsdale (pictured), director of the Scottish Retail Consortium, has released new figures from the Office for Budget Responsibility showing how taxation revenues from oil and gas in the UKCS will fall to £700m in 2015-16 and £600m in 2016-17. At the same time the Scottish Government is forecasting that tax revenues from non-domestic rates in Scotland alone will swell to £2.8 billion in 2015-16 – four times as much.

The retail industry, which is a property intensive sector, is estimated to contribute around a quarter of tax revenues from business rates so is understandably concerned about the latest increase.

Shops are closing at a rate of knots, leaving empty units in high streets across the nation, and small firms in various sectors continue to cope with tight margins caused by competitive pressures. The fall in the oil price has eased these pressures, particularly for those in engineering or with big transport operations, but the impact of e-commerce has sounded the death knell for many firms.

Last month the SRC published Business Rates: Fundamental Reform, which set out why business rates are no longer fit for purpose and the key arguments for reform. It was supported by a range of companies and industry groups, including whisky producers, manufacturers and representatives of small businesses.

Another uncertainty ahead are the new tax-raising powers handed to Holyrood via the 2012 Scotland Act and the Smith Commission Agreement which means that from next year it will be able to exert significant influence over take home pay and disposable incomes.

The SRC is worried that, unless Holyrood shows restraint, businesses could suffer a double-whammy of a rates rise and further punitive taxes that impact on the consumers’ spending power.

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