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Private schools may suffer £5m hit

Barclay proposes simplified business rates system

Ken BarclayKen Barclay: year-long review (photo by Terry Murden)


Ken Barclay’s review of business rates calls for less red tape and greater fairness, but has rejected an alternative to the current property-based system.

Fee-paying schools and some local authority-owned facilities may be forced to pay rates for the first time.

A 130-page report proposes a range of reliefs on new property and for those who improve their property and thereby stimulates growth.

It calls for more frequent revaluations “to prevent shocks” and a reduction in the controversial tax levied on large buildings. It says nurseries should be exempt from rates.

However, it says leisure centres, some golf clubs, private schools and universities could be included, noting that some of these, particularly those run by the public sector, compete with private sector companies which pay rates.

It recommends help for shops in town centres which are suffering from gap sites and a loss of revenue.

Independent schools which currently pay no rates because of their charitable status may also have to pay in future to bring them into line with council-run schools.

It was estimated that this could affect 60 fee-paying schools, costing some £500,000 and bringing in £5m.

Former RBS executive Mr Barclay, chairman of the review group, said: “We received input from hundreds of stakeholders across Scotland and further afield and are grateful for their invaluable insight.

“Although the feedback indicated a number of common themes and concerns, there was no strong appetite for a significant overhaul of the current property-based tax system.

“Many wished to remove barriers to investment and our Business Growth Accelerator would do just that. By removing the burden of rates for 13 months for anyone who improves their property, we hope to stimulate growth and bring forward investment that may have otherwise been marginal.

“New build property will also benefit from a tax break of one year, creating some breathing space for both developers and occupiers and providing a better environment for new ventures to get off the ground.

“More frequent revaluations will help reduce shocks to the system and we also believe that the large business supplement should be reduced.

“A workforce must be inclusive and diverse: childcare provision is crucial to that. So we recommend that nurseries no longer pay rates.

“It is also important to recognise that – alongside the ‘headline measures’ to incentivise investment – administrative improvements can have a hugely positive effect. A better system will reduce the burden for business and allow them to focus on growing their business rather than navigating the rates system.

“Crucially, any well-functioning tax needs to rely on principles of fairness.

shop closure

More help proposed for shops in town centres (photo by Terry Murden)


“Increasing fairness and transparency will increase credibility from ratepayers.

“Ratepayers providing the same goods or services should not be treated any differently because of their location, or by virtue of them operating in the public or private sector.

“We have also highlighted unfair advantages gained by anomalies within the system, and of those who deliberately avoid payment of tax. Neither is fair.

“These measures are essential for the rates system to remain credible for ratepayers and to ensure revenues are not undermined by avoidance tactics.

“We are clear, this is not about penalising certain sectors, it is about compliance, fairness and transparency.

“Our review group has used all the information and expertise available to us to produce this report, and are confident that the measures proposed can create tangible improvements.Small companies in particular feel the current system is too much of a burden and too complex to understand.”

The government gave the group a “blank canvas” but demanded that any proposed changes are revenue neutral.

The five members included former Scottish Enterprise veteran  Prof Russel Griggs and public relations executive Nora Senior. The others were former senior civil servant David Henderson, and the senior tax partner at Brodies, Isobel d’Inverno.

The business rates system is the biggest single devolved tax, raising £2.8 billion.

Key recommendations:

Cut the large business supplement paid by firms with properties with a rateable value of more than £51,000, from 2.6% to 1.3%, to bring it into line with England.

A new relief for nurseries

Close tax avoidance loopholes on second and empty properties – calculated to bring in around £21m a year.

Remove eligibility for charity relief from all independent schools and some university operations

End rates relief for some leisure facilities, including some golf clubs and arts venues

Support for shops in town centres

An increase in the frequency of revaluations, to every three years from 2022

Extend relief for businesses investing in expansion

Review Small Business Bonus Scheme which exempts 100,000 properties

Reaction

Finance Secretary Derek Mackay (right) said: “This report offers recommendations for reform of the system to make it work better for ratepayers across Scotland while ensuring that the contribution they make to important local services is maintained.

Having now received the Barclay Review, the Scottish Government will respond swiftly to its recommendations.”

Paul Curran, chairman of the Scottish Property Federation, said: “With the supply of new offices and industrial stock at very low levels, the SPF has strongly argued that the sector needed a positive signal to boost investment and the jobs brought by new commercial developments.  The Barclay proposals are hugely welcome and we encourage the Scottish Government to adopt them as soon as possible.

“We very much welcome the review’s recommendations to reduce Scottish large business supplement to the same level as its English equivalent in 2020/21 – therefore bringing about a level playing field across the UK and ensuring that the Scottish real estate market remains competitive with our neighbours south of the border. 

“Amongst some of the good news we are concerned about the recommendation on rates relief for listed buildings which often provide complex redevelopment challenges.  The loss of this relief after two years may make investors think twice about re-developing such buildings to bring them back into use and we will continue working with Government to make them aware of these challenges.”

David Lonsdale, director of the Scottish Retail Consortium, (right) said: “Barclay has identified a path towards a better rates system, with a number of solid recommendations which if implemented will ensure rates better reflect economic and trading conditions and would begin to deliver on Ministerial promises of a more competitive rates regime.

“Far more frequent revaluations and reducing from two years to one the period between the valuation and implementation of the new valuation roll is what we have been calling for and is encouraging.

“The Scottish Government’s decision last year to double the Large Business Rates Supplement epitomised many of the problems with the rates system, and left 5,000 Scottish retailers (and many other medium-sized and larger businesses) stumping up £12 million more in rates each year than competitors or counterparts down south. Barclay’s recommendation that this “damaging” Scotland-only surcharge end is most welcome.

“Barclay is right to have knocked on the head suggestions about allowing councils to control business rates in their entirety, and notions about replacing business rates in whole or part with local sales or turnover taxes.

“However the idea mooted in the report of allowing councils to levy rates supplements on ‘out of town’ or ‘online’ businesses as a means of helping town centres is simply wrong-headed.

“Conjuring up a new online-only or out-of-town-only levy isn’t the answer to the exorbitant cost of business rates faced by shopkeepers or other firms located on our high streets. Public policy itself is directly contributing to the rising cost of maintaining an extensive store footprint, and in turn is making online investment more attractive as the cost and capability of technology improves and as customers’ shopping habits evolve.

We remain concerned that the overall rates burden will remain onerous, at a time when Scottish firms are already having to grapple with a growing cumulative burden of government-imposed costs including the new apprenticeship levy and higher statutory employer’ pension contributions.” 

Hugh AitkenHugh Aitken (right), CBI Scotland Director, said:  “We are heartened to see recognition of the need to make business rates in Scotland simpler, fairer and more competitive. A business rates regime which better reflects economic reality and can maximise business investment in Scotland is urgently needed. 

“We’re pleased that many of the key issues highlighted by businesses have been addressed in the recommendations. In particular, bringing the large business supplement into line with the rest of the UK would be a major boon for competitiveness.

“CBI Scotland called for more regular revaluations of properties and we therefore welcome the recommendation for three yearly revaluations, in conjunction with the Business Growth Accelerator. This will make rates more responsive to economic conditions and help reduce tax barriers to redevelopment.

“A separate review of plant and machinery valuations would also be welcome – exempting new investments in plant and machinery has the potential to not only boost productivity but to give greater certainty to businesses as they look to make crucial investment decisions.

“The report also notes that consideration should be given to linking inflation increases to CPI and business will now be looking for the Scottish government to take this into account as they consider the review.

“Business rates should be a tool to propel investment and employment in Scotland, enabling businesses to remain competitive. We want to avoid a situation where we are faced with diminishing tax revenues as a result of firms changing business models to reduce their commercial property footprint, or moving their operations to lower tax locations elsewhere in the UK or Europe.”

Niall Rankin, lead director for rating in Scotland at JLL said: “The headline recommendation to adopt a three year rating cycle has been eagerly anticipated and has widespread support from the Scottish Assessors and ratepayers’ advisers. If the antecedent valuation date was to move to one year prior to the valuations coming into effect it could make the whole system much more responsive to what is an ever-changing property market in Scotland.

“The very purpose of a revaluation is to fairly distribute the rates burden and the extension of the 2010 revaluation to a seven-year cycle has been felt by significant shifts in rates liabilities. The current rating system in Scotland is notoriously unresponsive to change; appeals on the grounds of material change of circumstances are only granted in the most extreme circumstances. With this in mind, we fully welcome the recommendation to move to a three year cycle. 

“The decision to use a multiplier based on CPI rather than RPI will make Scotland a more attractive place to do business and drive economic growth, by better reflecting the economic reality in the rates system.

“Over the last 20 years statistics show that a multiplier based on CPI would have provided a far more stable multiplier as opposed to RPI which has been subject to more extreme fluctuations. In addition, it will align proposed change of policy with England. We hope that The Scottish Government will implement these recommendations in order to promote business growth and investment in Scotland.”

Tony Rosenthal, partner at Cushman & Wakefield, said: “The recommendations of the report are well thought out and will, if implemented, lead to a fairer and more transparent ratings systems in Scotland.

“I am particularly pleased that they suggest a comprehensive review of the plant and machinery order which is long overdue. Current valuations are based on the recommendations of the Wood Committee in 1993 and 1999 and there have been huge technological advances since then not just in traditional heavy industry but in emerging industries such as renewable energy generation.”

Niall StuartNiall Stuart, CEO, Scottish Renewables (right) said: “We are…pleased to see the Barclay review recommend significant reform, including a change to conduct revaluations every three years and a separate review of plant and machinery regulations which can capture the changes which have taken place in renewables since the last revaluation a decade ago.

“These changes will help future-proof the rates system to allow for further technological development in future.”

The Federation of Small Businesses (FSB) said the report “outlines practical recommendations to fix an outdated tax system.”

Andy Willox, FSB’s Scottish policy convener, said: “The proposals to introduce an investment relief will prevent firms from being penalised for investing in their premises. This will allow firms to see a return from their investment before being hit by a larger bill.

“The current revaluation period has highlighted how valuations have often become out-of-sync with the economic climate and we have long called for more frequent valuation as a solution.

“For too long, small businesses have been faced with a bureaucratic, confusing and clumsy rates system.”

Brian Rogan, chairman of the Scottish Chambers of Commerce business rates advisory group and head of rating in Scotland for CBRE, said: “The ‘Business Growth Accelerator’ which will provide a ‘one-year holiday’ on investment in new machinery or business expansion, is good for Scottish business.

“We are disappointed that there was no mention of reviewing the legislation around material change of circumstance appeal rights which are more restrictive in Scotland than south of the border.

“Business wants to see the rating system changed and one that responds effectively to economic conditions but at least the move to more frequent revaluations as recommended in the Barclay Report will help somewhat to achieve this.” 

Moira Kelly, chairman of the Chartered Institute of Taxation in Scotland’s technical committee, said:The Scottish Government must…. focus on creating legislation that results in an enduring system of business taxation commanding widespread public support which is convenient, efficient and easy to administer. 

“It must ensure that taxpayers are able to understand how these changes will impact them and to commit to helping them navigate the inevitable period of transition that will follow.  Failure to simplify and streamline the current system runs the risk that we will fail to capitalise on the opportunity for reform that now exists.”

Scottish Conservative finance spokesman Murdo Fraser said: “There are many welcome proposals within this report.

“But many firms will feel this is tinkering round the edges of a broken system, rather than the fundamental overhaul that’s required.

“The hospitality sector, whose safeguard of a 14.9% cap runs out in March, will be worried that history will repeat itself next year.

“If that industry is hit with the kind of increases suggested last time around, it would almost certainly mean the closure of businesses and job losses.

“Proposals around independent schools and sports clubs will also have alarm bells ringing in those sectors.

“But there are also many welcome additions, and I hope the Scottish Government prioritises recommendations to bring the large business supplement in line with the rest of the UK, and the measures to boost town centres and business growth more generally.”

Jackie Baillie

Scottish Labour’s economy spokesperson Jackie Baillie (right), said: “We have always said that the business rates system needs to be more transparent, predictable and streamlined and this report contains some welcome recommendations, including proposed relief for children’s nurseries and more frequent re-evaluations.

“However the report also recommends that certain public buildings, such as leisure centres which are operated at arms’ length by local authorities, should pay business rates which is another burden on public services which are already dealing with budget cuts made by the SNP government.”

Scottish Liberal Democrat economy spokesperson Councillor Carolyn Caddick said: “The review misses the opportunity for radical changes that would benefit Scottish business. We could have moved to a system of land value taxation which would have avoided the big rate increases that Scottish businesses face when they improve their property with renewable energy or sprinkler systems. All Barclay does is ask for a further review. Land value tax would also provide an automatic incentive to redevelop brown-field sites.

“It is a good idea to exempt new buildings from rates for a year to give a new business the chance to get established. This will encourage enterprise and innovation.

“However, it is disappointing that the Barclay Review does not recommend giving businesses protection from the gigantic rate increases that some of them have faced this year. Hotels and pubs have been hammered by the last two reviews.

“Ministers will have to explain clearly if they are going to adopt the recommendation to transfer money away from local authority sports’ bodies and towards big business. These are the big headline cash transfers in the report and will concern people worried about local council services.”

Craig Vickery, head of ACCA (Association of Chartered Certified Accountants) Scotland, said: “The Scottish Government must not lose sight of the original aim of the Barclay Review to support business growth and attract long-term investment. The current rate rises businesses are facing can present a short-term boost for local government coffers, reducing reliance on funding from Holyrood. However, this risks the knock-on effect of rising vacancies among the small and medium commercial occupiers which form the bulk of the tax base and can mean a loss of revenue over the long-term.

“Inward investment favours stability and as such, postponed revaluations, caps on rate rises lasting for one year and a myriad of hard-to-navigate reliefs have not fostered an atmosphere of financial certainty. While optional powers for local authorities to reduce rates in their area may help, the Scottish Government has the real power to enact change centrally and ultimately, improve the proposition for occupiers to drive up occupancy rates and increase the tax take over the long-term.”

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