Abstract
Business rates, a form of property tax levied on non-domestic properties, have been a cornerstone of the UK’s local government financing system for centuries. This report delves into the historical evolution of business rates, examines their current calculation mechanisms, analyzes their economic impact across various sectors, compares international approaches to commercial property taxation, and presents comprehensive proposals for fundamental reform, including the consideration of an online sales tax to create a more equitable taxation landscape.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
1. Introduction
Business rates, also known as non-domestic rates, are taxes imposed on properties that are not used for residential purposes. In the United Kingdom, these rates have been a primary source of local government revenue since the 16th century. The structure and impact of business rates have evolved significantly over time, reflecting changes in economic conditions, policy priorities, and societal needs. This report aims to provide an in-depth analysis of business rates, exploring their historical development, current mechanisms, economic implications across various sectors, international comparisons, and potential avenues for reform.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
2. Historical Context of Business Rates
2.1 Early Developments
The origins of business rates trace back to the Vagabonds Act of 1572, which established a system of local taxation to fund poor relief. This early form of rates was levied on inhabitants of a parish, laying the groundwork for future property-based taxes. Over the subsequent centuries, the system evolved, incorporating more structured valuation methods and administrative processes. Notably, the General Rate Act of 1967 introduced the general rate, a local tax on both domestic and non-domestic properties based on rental values, marking a significant shift in the taxation landscape.
2.2 The 1990 Reform
A pivotal moment in the history of business rates was the 1990 reform, which replaced the existing system with a uniform business rate (UBR). This reform aimed to standardize tax rates across the country, thereby reducing disparities and enhancing fairness. The UBR was set nationally, with local authorities retaining the ability to set their own rateable values. This change was intended to make business rates more predictable and equitable, addressing previous inconsistencies and inefficiencies.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
3. Current Calculation Mechanisms
3.1 Rateable Value Assessment
The rateable value of a property is an estimate of the annual rent that would be paid for the property at a fixed date, known as the antecedent valuation date. This assessment considers various factors, including the property’s physical characteristics, location, and the economic conditions of the market. The Valuation Office Agency (VOA) is responsible for determining these values, which serve as the basis for calculating business rates.
3.2 The Multiplier System
Once the rateable value is established, it is multiplied by a national multiplier to determine the annual business rates bill. The multiplier is set by the government each financial year and is intended to reflect changes in the economy, such as inflation. This system aims to ensure that business rates contribute a consistent proportion of total tax revenue, maintaining fiscal stability.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
4. Economic Impact Analysis
4.1 Impact on Retail Sector
The retail sector is particularly sensitive to changes in business rates due to its property-intensive nature and typically low profit margins. Increases in business rates can lead to higher operational costs, potentially resulting in store closures and job losses. For instance, the British Retail Consortium has warned that proposed hikes could lead to significant store closures and job losses, adversely affecting local economies and council revenues.
4.2 Impact on Other Sectors
Beyond retail, other sectors such as manufacturing, hospitality, and life sciences also feel the burden of business rates. High rates can deter investment, hinder expansion, and reduce competitiveness. A study by the British Property Federation found that proposed changes to business rates could have a £2.3 billion negative impact on the economy and jeopardize 22,000 jobs, disproportionately affecting high-growth sectors like life sciences and advanced manufacturing.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
5. International Comparisons
5.1 OECD Perspective
The Organisation for Economic Co-operation and Development (OECD) has highlighted that the UK imposes one of the highest levels of property tax among its member countries. This high tax burden can influence business decisions, potentially leading to reduced investment and economic growth. Comparing the UK’s business rates system with those of other OECD countries reveals differences in tax rates, valuation methods, and the extent of property tax reliance in local government financing.
5.2 Case Studies
Examining countries like Germany and the United States provides insights into alternative approaches to commercial property taxation. For example, Germany employs a system where property taxes are shared between federal, state, and local governments, with rates varying by municipality. In contrast, the United States has a more decentralized system, with property taxes primarily levied at the local level, leading to significant variations across different regions.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
6. Proposals for Fundamental Reform
6.1 Online Sales Tax
To address the growing disparity between online and physical retailers, some have proposed implementing an online sales tax. This tax would be levied on revenues generated from online sales to UK customers, particularly those in direct competition with physical stores. The aim is to create a more level playing field, ensuring that online retailers contribute fairly to local economies and public services.
6.2 Land Value Taxation
An alternative proposal is to replace business rates with a system of land value taxation. This approach focuses on taxing the unimproved value of land, irrespective of the buildings or developments on it. Proponents argue that land value taxation is more efficient and equitable, as it encourages the optimal use of land and reduces speculative holding.
6.3 Incremental Reforms
Incremental reforms could include more frequent revaluations to reflect current market conditions, adjustments to the multiplier to account for economic changes, and targeted reliefs for sectors facing disproportionate burdens. The Local Government Association has advocated for such reforms, emphasizing the need for a fairer and more responsive business rates system.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
7. Conclusion
Business rates have a long-standing history in the UK’s fiscal system, evolving from early forms of property taxation to the current uniform business rate system. While they play a crucial role in funding local government services, the economic impact of business rates is significant, particularly for sectors with low profit margins and high property costs. International comparisons suggest that alternative taxation systems, such as land value taxation, may offer more equitable and efficient solutions. Proposals for reform, including the introduction of an online sales tax, aim to address current disparities and create a more balanced taxation environment. A comprehensive approach to reforming business rates is essential to support economic growth, investment, and the sustainability of local economies.
Many thanks to our sponsor Focus 360 Energy who helped us prepare this research report.
References
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Business rates in England. (n.d.). In Wikipedia. Retrieved from https://en.wikipedia.org/wiki/Business_rates_in_England
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BPF – New analysis finds business rates changes could have £2.3bn hit to economy and jeopardise 22,000 jobs. (2025, March 24). British Property Federation. Retrieved from https://bpf.org.uk/media/press-releases/new-analysis-finds-business-rates-changes-could-have-23bn-hit-to-economy-and-jeopardise-22-000-jobs/
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Transforming business rates. (2024, October 30). HM Treasury. Retrieved from https://www.gov.uk/government/publications/transforming-business-rates
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The 1990 Reform of United Kingdom Local Authority Finance. (1990). IMF Working Papers, 1990(058). Retrieved from https://www.elibrary.imf.org/view/journals/001/1990/058/article-A001-en.xml
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An investigation of the impact of 2017 business rates revaluation on independent high street retailers in the north of England. (2019). Journal of Place Management and Development, 12(1), 3-18. Retrieved from https://www.emerald.com/insight/content/doi/10.1108/jpif-01-2019-0008/full/html
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Identifying areas for business rates reform. (n.d.). Confederation of British Industry. Retrieved from https://www.cbi.org.uk/articles/identifying-areas-for-business-rates-reform/
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New analysis finds business rates changes could have £2.3bn hit to economy and jeopardise 22,000 jobs. (2025, March 24). Retail Times. Retrieved from https://retailtimes.co.uk/new-analysis-finds-business-rates-changes-could-have-2-3bn-hit-to-economy-and-jeopardise-22000-jobs/
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The path to business rates reform. (n.d.). Confederation of British Industry. Retrieved from https://www.cbi.org.uk/articles/the-path-to-business-rates-reform/
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Business Rates: The Wider Economic Impact. (2025, March 24). British Property Federation. Retrieved from https://bpf.org.uk/our-work/research-and-briefings/business-rates-the-wider-economic-impact/
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Business Rates Review: technical consultation. (n.d.). GOV.UK. Retrieved from https://www.gov.uk/government/consultations/business-rates-review-technical-consultation/business-rates-review-technical-consultation
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Transforming Business Rates. (2025, February 28). Local Government Association. Retrieved from https://www.local.gov.uk/parliament/briefings-and-responses/transforming-business-rates
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Dealing with the impact of business rates in the UK and globally. (n.d.). Confederation of British Industry. Retrieved from https://www.cbi.org.uk/articles/dealing-with-the-impact-of-business-rates-in-the-uk-and-globally/
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Conclusions and Recommendations for Reform. (n.d.). Institute for Fiscal Studies. Retrieved from https://ifs.org.uk/books/20-conclusions-and-recommendations-reform
The comparison with Germany’s property tax system, shared between levels of government, is interesting. How does this distribution of responsibility affect local autonomy and fiscal stability compared to the UK model?
That’s a great question! The German model, with its shared responsibility, does create a different dynamic. It potentially balances local autonomy with a degree of fiscal stability ensured by federal and state contributions. Investigating the specific impacts on local decision-making and long-term financial planning in both systems would be insightful. Thanks for sparking this important line of thought!
Editor: FocusNews.Uk
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Fascinating read! Given the historical roots going back to the Vagabonds Act, maybe we should consider if business rates are just a sophisticated form of fining businesses for… existing? Perhaps a “Being There” tax? Just a thought!
That’s a very insightful way to look at it! The ‘Being There’ tax idea is a thought-provoking concept. It really highlights the fundamental question of how we value and tax physical presence in an increasingly digital economy. This perspective could reshape the entire debate.
Editor: FocusNews.Uk
Thank you to our Sponsor Focus 360 Energy
So, if the Vagabonds Act was the primordial soup of business rates, are we saying current business rates are just a slightly more evolved way of telling businesses to “move along” if they can’t pay up?
That’s a fantastic way to put it! The connection to the Vagabonds Act really highlights the historical perspective on how we support local areas. Perhaps it’s time to re-evaluate whether this approach still aligns with modern economic realities and the needs of businesses. What are your thoughts on alternative funding models?
Editor: FocusNews.Uk
Thank you to our Sponsor Focus 360 Energy
Given the retail sector’s sensitivity to business rates, as highlighted, could targeted reliefs or tiered rates based on business size offer a more nuanced approach to mitigate disproportionate burdens?
That’s a great point about targeted reliefs! A tiered system could certainly help level the playing field for smaller retailers. It raises the question of how to define ‘business size’ effectively. Would it be based on revenue, number of employees, or property size? The definition is crucial for fair implementation.
Editor: FocusNews.Uk
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The report’s focus on the historical context is valuable. Understanding the evolution from the Vagabonds Act to the current UBR system provides crucial perspective. How might these historical underpinnings inform the debate around modernizing business rates for today’s digital economy?
That’s a great question! Considering the historical underpinnings, perhaps we should explore if the original intent of supporting local areas is still being met effectively by the current system. Are there more innovative ways to achieve that original goal in the digital age? What about models which reward community contribution?
Editor: FocusNews.Uk
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Given the report’s mention of land value taxation as an alternative, what are the potential challenges in accurately and fairly assessing unimproved land value, particularly in densely populated urban areas?
That’s a crucial point. Assessing unimproved land value in dense urban areas presents significant hurdles. The scarcity of vacant land and the influence of surrounding developments make accurate valuation complex. Successfully implementing land value taxation would require innovative assessment techniques and robust data. How might technology assist in achieving this fairly?
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The report mentions the multiplier system. Given the stated aim of reflecting economic changes, how effectively does a single, annually adjusted multiplier capture the diverse economic realities across different regions and sectors?
That’s a really important point about the multiplier system! It’s true that a single, annually adjusted figure may not fully capture the nuances of diverse regional economies. Perhaps a more granular approach, incorporating regional economic indicators, could provide a more accurate and responsive valuation. What are your thoughts on this approach?
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“Being There” tax… I love it! Perhaps we could also consider a “Not Being There” discount to encourage businesses to relocate to, shall we say, more *scenic* locations? Think of the urban planning possibilities!
That’s a fun and insightful perspective! A “Not Being There” discount opens up some interesting possibilities for incentivizing relocation and reshaping urban landscapes. It really does make you think about how business rates can be used strategically for wider urban planning goals and regional development. Thanks for sharing!
Editor: FocusNews.Uk
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The historical overview is fascinating. Examining the Vagabonds Act as a foundation highlights how societal needs shape taxation. Could further analysis of historical rate adjustments provide insights for modernizing the system to better reflect economic fluctuations?
Thank you for your comment! I agree that delving deeper into the historical rate adjustments is key. Understanding how rates reacted to past economic shifts could definitely inform how we modernize the system. Perhaps a comparative study of rate adjustments during different economic cycles would reveal valuable insights.
Editor: FocusNews.Uk
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The proposed online sales tax raises interesting questions about implementation. How can we ensure it doesn’t disproportionately affect smaller online businesses or inadvertently penalize companies with both physical and online presences?
That’s a really important challenge to address. Ensuring fairness for smaller online businesses is crucial. Perhaps a tiered system for the online sales tax, based on revenue, similar to some of the relief schemes for physical retailers, could be part of the solution. Thanks for raising this point!
Editor: FocusNews.Uk
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The proposed shift to land value taxation is intriguing. Has research been done on how this would affect brownfield development versus greenfield development, and what impact could it have on urban sprawl?
That’s a really interesting question! The impact on brownfield versus greenfield development is a key consideration with land value taxation. Some research suggests it could incentivize brownfield redevelopment, but the effects on urban sprawl are debated and likely depend on specific implementation details. Further investigation into those dynamics is definitely warranted!
Editor: FocusNews.Uk
Thank you to our Sponsor Focus 360 Energy
The mention of international comparisons is particularly valuable. Could exploring systems where local authorities have more direct control over setting rates, or where revenues are more directly tied to local spending priorities, offer insights for the UK?