Business rates in England

Based on Wikipedia: Business rates in England

The Tax That Time Forgot

Somewhere in England, a snail farmer is trying to figure out how much tax he owes on his mollusc operation. The answer lies in a byzantine system of property taxation that traces its roots back to 1572, when Queen Elizabeth I was on the throne and the Spanish Armada was still sixteen years in the future.

Business rates are not glamorous. They do not trend on social media. Members of Parliament do not typically rise to deliver impassioned speeches about them. And yet this ancient tax generates nearly twenty-three billion pounds annually for the British government, quietly funding everything from rubbish collection to street lighting across the nation.

To understand business rates, you need to understand one fundamental principle: this is a tax on occupying property, not on owning it, and not on making money from it. If you operate a business from a building, you owe the tax. It does not matter whether your business is profitable. It does not matter whether you own the building or rent it. What matters is that you are there, conducting non-domestic activity.

From Vagabonds to Valuations

The story begins with a social crisis. Tudor England had a vagrancy problem. Displaced agricultural workers wandered the countryside, and the medieval system of church-based charity was collapsing following Henry VIII's dissolution of the monasteries. Parliament's solution, codified in the Vagabonds Act of 1572, was elegant in its simplicity: force local parishes to look after their own poor, and make the inhabitants of those parishes pay for it.

This was revolutionary. For the first time, England had a compulsory local tax based on property values.

The system evolved over the next four centuries. The Poor Relief Act of 1601 refined it. Subsequent legislation added layers of complexity. By the Victorian era, rates funded not just poor relief but an expanding array of local services: schools, roads, police, public health. The system developed its own peculiar vocabulary. The property being taxed became known as a "hereditament," a term still used today. The assessed rental value became the "rateable value."

London, naturally, insisted on being different. From 1869 to 1963, the capital operated under its own separate rating system, because of course it did.

How the Modern System Works

The current incarnation of business rates emerged from the Local Government Finance Act of 1988, the same legislation that introduced the infamous poll tax. While the poll tax crashed and burned spectacularly, replaced within three years by Council Tax, business rates have endured largely unchanged for over three decades.

Here is how it works in practice.

The Valuation Office Agency, a branch of the government, maintains a list of every non-domestic property in England. For each property, they calculate a rateable value. This is meant to represent what the property could rent for on the open market at a specific valuation date. A high street shop might have a rateable value of fifty thousand pounds. A small office above that shop might be valued at eight thousand. A warehouse on the edge of town might come in at a hundred thousand.

Every few years, the Valuation Office Agency conducts a revaluation, adjusting rateable values to reflect current market conditions. The most recent list was published in 2023. Previously, revaluations happened every five years, though gaps have sometimes stretched longer.

To calculate the actual tax bill, you multiply the rateable value by something called the Uniform Business Rate, though everyone calls it the multiplier. For the 2016-17 financial year, the multiplier stood at 49.7 pence. A property with a rateable value of one hundred thousand pounds would therefore face an annual bill of forty-nine thousand seven hundred pounds.

That is a lot of money.

The Multiplier Problem

When business rates launched in 1990, the multiplier was 34.8 pence in the pound. By 2017, it had climbed to 47.9 pence. That represents a real-terms increase of over thirty-seven percent, despite legislation that supposedly caps annual increases at the rate of inflation.

The trick is that while the multiplier rises with inflation each year, revaluations periodically reset it downward to keep overall revenue constant. But "constant" is relative. The baseline keeps growing. The ratchet only turns one way.

Central government sets the multiplier, with one curious exception. The City of London, that ancient square mile of financial institutions at the heart of the capital, retains the power to set its own rate within centrally defined limits. This is a vestige of the City's medieval privileges, which successive governments have found convenient to preserve.

Wales gained the power to set its own multiplier when business rates were devolved in 2015, allowing the Welsh system to diverge from England's.

Where the Money Goes

For most of its modern existence, business rates worked like this: local councils collected the money, sent it all to central government, and central government redistributed it back to councils according to complex formulas meant to account for local needs and resources. A wealthy borough might collect far more than it received back. A deprived area might receive far more than it collected.

This changed in April 2013.

Under the new system, local authorities keep up to half of the business rates they collect. The other half still flows to central government for redistribution. But the theory now is that councils have a financial incentive to encourage local economic growth. More businesses mean more rate income. More rate income means more money to spend on services.

Critics point out that this also means more risk. A major employer closing a factory or relocating headquarters can blow a hole in a council's budget that formula grants would previously have cushioned.

The national pot remains enormous. In the 2014-15 financial year, councils collected 22.9 billion pounds in business rates, representing three and a half percent of total UK tax revenue. Collection rates are impressively high. Over ninety-eight percent of bills were paid within the year they were due.

The Relief System

Not everyone pays the full amount. The business rates system is riddled with reliefs, exemptions, and discounts that can dramatically reduce or eliminate the bill entirely.

Charities receive mandatory relief of eighty percent on properties they use for charitable purposes. Local councils can top this up to one hundred percent at their discretion. Simply being a charity is not enough. The property must actually be used for charitable work. A charity's headquarters qualifies. A charity's investment property does not.

Empty properties present a special case. Leaving a building unoccupied does not mean you escape the tax forever. Non-industrial properties receive full relief for three months, after which the bill kicks in. Industrial properties, like factories and warehouses, get six months. But there are exceptions to the exceptions. Listed buildings get permanent empty relief. Very small properties below a threshold rateable value also escape.

Small businesses have their own relief scheme, introduced in 2005. Properties with rateable values below six thousand pounds receive fifty percent relief. This phases out gradually, disappearing entirely at twelve thousand pounds. To qualify, the business must generally occupy only one property. A chain of shops cannot claim small business relief on each individual outlet.

Rural areas have additional protections. The only general store in a village of three thousand or fewer people receives mandatory fifty percent relief. The same applies to the sole post office, the only food shop, the single pub, or the lone petrol station. Local authorities can extend this to one hundred percent, and can offer discretionary relief to other rural businesses deemed vital to the community.

Hardship relief exists for businesses in financial difficulty, though councils have wide discretion in how and whether to apply it.

The Agricultural Loophole

Agricultural land and buildings enjoy a sweeping exemption from business rates. A working farm pays nothing on its barns, fields, or farmhouse used for agricultural purposes. This exemption exists because agriculture has historically been considered essential to national food security and because farmers successfully lobbied for protection when the modern system was being designed.

This creates interesting boundary questions. What exactly counts as agriculture? If a farmer converts a barn into a farm shop selling their own produce, is that still agricultural? What about a barn converted into a wedding venue? A riding stable? A snail farm?

The authorities have had to draw lines. Non-agricultural businesses operating on agricultural land or in former agricultural buildings lost their automatic relief in August 2006. Each case now turns on its specific facts.

Scotland's Parallel Universe

Scotland developed its own rating system through separate legislation, and while the 1988 Act imposed the centrally set multiplier north of the border, it did not otherwise merge the two systems. Scottish rates operate under different underlying concepts and administrative arrangements.

This matters because the United Kingdom is not a single jurisdiction for property taxation purposes. A business operating on both sides of the border faces two different systems with different rules, different valuations, and different reliefs.

The Politics of Rates

Business rates occupy an unusual position in British political debate. Nobody loves them, but nobody has seriously proposed abolishing them either. The tax is simply too lucrative, raising nearly twenty-three billion pounds annually. Finding alternative revenue sources to replace that sum would be politically treacherous.

Instead, arguments focus on the level of the tax and who should control it.

Business organisations like the Confederation of British Industry and the British Retail Consortium consistently argue that the multiplier is too high and that it penalises property-intensive businesses like retail, hospitality, and manufacturing. A shop on the high street pays business rates regardless of whether anyone walks through the door. An online retailer operating from a warehouse pays rates on a much smaller property footprint relative to its sales. This structural disadvantage, critics argue, accelerates the decline of town centres.

Local authorities, conversely, often argue for higher rates and for the return of local control over the multiplier. Under the current system, councils collect the tax but cannot decide how much to charge. They want the power to vary rates to reflect local circumstances, perhaps offering discounts to attract businesses or imposing higher rates on properties that remain long-term empty.

The Lyons Inquiry, a major review of local government finance conducted in 2007, rejected returning full control to local authorities. Instead, it proposed allowing councils to levy a local supplement on top of the national rate, in consultation with affected businesses. This suggestion pleased nobody. Business groups saw it as a potential tax increase. Councils saw it as insufficient autonomy. The idea has largely languished.

Valuation Controversies

Because the tax bill depends on the rateable value, businesses have strong incentives to argue that their properties are worth less than the Valuation Office Agency believes. This creates a permanent industry of appeals and disputes.

The valuation process involves considerable judgment. What is the hypothetical open-market rental value of a specific property at a specific date? For standard properties like shops and offices, comparable evidence from actual lettings provides guidance. For unusual properties, like theme parks or chemical plants, valuation becomes more art than science.

Businesses can appeal their rateable values, and many do. The appeals process can take years to resolve. During that time, businesses may pay reduced bills on account, with adjustments made once a final decision is reached.

Revaluations cause particular disruption. When the Valuation Office Agency produces a new rating list, some properties see their values rise dramatically while others fall. Transitional relief schemes are meant to smooth these changes, limiting how much bills can increase in a single year. But these schemes have themselves generated controversy, with businesses arguing that protection is inadequate and government arguing that more generous schemes would cost too much.

The Hereditament Question

At the heart of business rates lies a deceptively simple question: what exactly is being taxed?

The answer is the hereditament, a unit of property defined not by legislation but by centuries of case law. A hereditament is a property that can be shown in a rating list. It must be identifiable as a distinct unit, must have a rateable occupier, and must be capable of separate occupation.

This sounds straightforward until you consider edge cases. Is a cash machine in the wall of a building a separate hereditament from the building itself? What about advertising billboards? Parking spaces? Rooftop telecommunications equipment? Courts have wrestled with these questions for generations, producing a body of case law that specialists spend careers mastering.

The 1988 Act deliberately left the hereditament concept untouched, inheriting centuries of precedent. This provides stability and predictability, but it also means that modern business arrangements must be squeezed into legal categories designed for a very different economy.

A Tax for the Ages

Business rates are not going anywhere. They are too embedded in local government finance, too productive as a revenue source, and too difficult to replace. Successive governments have tinkered with the system, adjusting reliefs, changing collection arrangements, and promising reviews that rarely produce fundamental change.

The tax endures because it works, at least by the standards of tax administration. Properties cannot flee the country. They cannot hide their existence. They cannot claim to be resident in a more favorable jurisdiction. The Valuation Office Agency knows where they are. Local councils know how to send bills. Collection rates approach one hundred percent.

Four and a half centuries after Queen Elizabeth's government first ordered parishes to tax their inhabitants for poor relief, the principle remains the same. If you occupy property, you pay. The vagabonds may be long gone, but the tax lives on.