Belfast Telegraph

John Simpson: Prospects of real business rates reform look unlikely

Department of Finance Permanent Secretary Sue Gray and Alan Bronte, Director of Rating Policy leading the Business Rates Review
Department of Finance Permanent Secretary Sue Gray and Alan Bronte, Director of Rating Policy leading the Business Rates Review
John Simpson

By John Simpson

The chance to offer ideas to improve business rates ended yesterday. Hopes for radical reform have been stimulated but the prospects for radical change are less dramatic.

Whatever many retailers argue, business rates are an efficient way of raising revenue from most forms of high street activity in a way that is predictable, largely unavoidable, and varies with one key variable: the value of the property being used by a business.

As a base for taxation, property values are essentially neutral with respect to the activities of the user.

This builds in an incentive to use property efficiently.

The debate about the reform of business rates is highly charged.

Are business rates an unfair tax on city (or urban) centres? No: they reflect property values.

Are business rates levied without taking account of the differing ability to pay by different businesses? Yes: deliberately neutral with respect to profitability.

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Are business rates to be blamed for the large number of vacant business properties? Not necessarily: more a reflection of changes in commercial trends.

Is the range of exemptions or concessions too large or not large enough? Probably too large.

Whilst the Department of Finance has opened the door for suggestions for improvements, this is a constrained consultation.

There is no option to suggest that business rates should be abolished.

The expectation is that if changes are made, the outcome will be that Stormont will continue to raise about 50% of its £1.4bn rates revenue from business rates. If some businesses pay less, others may pay more.

If there was a 'clean sheet' approach then there could be a debate about abolishing business rates against a background of finding alternative revenue raising taxes.

That might be in the form of higher rates of VAT, or higher rates of business taxation of profits through corporation tax changes, or higher levels of personal taxation.

A search for a more acceptable form of business rating might be attracted to the idea that businesses should pay rates according to their ability to their profitability.

That idea translates roughly into a higher rate of corporation tax or a second parallel form of corporation tax, plus a similar addition for unincorporated businesses.

The difficulty is that linking the profitability of a business in a specific location to a form of tax would be asking for a completely new database which would be costly.

It would be difficult to use for up-to-date assessments and would be seen as unfair as business profits went up or down.

Alternatively, there are suggestions that business rates might be based on turnover.

That idea falls when account is taken of the degrees of variance in turnover for different businesses.

High turnover in retail stores set alongside low turnover in businesses based in offices would pose problems of fairness.

Business rates, using an assessed value of property as a baseline, are likely to survive.

The discussion about relief or exemption from business rates will attract serious attention.

In scale, the largest reliefs are for charities (costing nearly £100m pa), 70% industrial derating (costing over £60m) and the partial derating of vacant property (costing over £40m).

The Small Business Rate Relief Scheme is likely to survive and should attract additional support.

Mixing economic and social arguments, the relief that merits reassessment is industrial derating since this combines a selective form of State Aid and also could be challenged as an unfair competition intervention.

The 50% derating of vacant property is more generous than in England.

However, property landlords fear a large fall in property values if this derating is abolished. Permanent Secretary Sue Gray and her policy makers in the Department of Finance are now facing critical social and economic choices.

The timetable for decision making is politically demanding. How far can she go in the present administrative format?

Company report: Danske Bank

Northern Bank now trades as Danske Bank in Northern Ireland.  It is a wholly owned subsidiary of the Danish bank of the same name. 

After the financial crises of the previous decade, the bank has been reporting improved trading results in the more recent decade. In each of the recent years (except 2018) it has been able to reverse impairment charges taken from profits in earlier years. This ended in 2018 with a smaller impairment charge of £2.9m.

The significant fall in pre-tax profits in 2018 is reported to be mainly due to a non-recurring negative past service charge of £40m as Danske has changed its policy to cease defined benefit accruals in its accounting for its defined benefit pension funds.

This change in the accounting arrangements for the defined benefit pension fund also affected operating costs so that the conventional performance ratio of costs to income increased from 49% in 2017 to 60% in 2018. In the last year both the level of customer deposits and the total of loans outstanding continued to increase by 8% and 9% respectively; well ahead of inflation and, against the background of a slow growing economy, may indicate an improved market share.

The report from the bank includes estimates of possible future developments.  Against a classification of a central base case, estimates are made of the impact of an upside outcome and a downside outcome linked to a hard Brexit. For the period 2019-2021, quoting just the forecast growth of GVA, the base case is 1.3% pa, which compares with an upside case of 1.5% pa and a downside possibility of 2.1% pa.

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