How to speed and afford life-saving business rates relief

The last few years of turmoil have been tough for hospitality, but with changes to business rates on the horizon given next year’s revaluation, many are looking forward to a reduction in taxes, which could prove a lifeline. However, transitional relief, a process by which changes in business rates are introduced gradually, may mean that many businesses will not see the full benefit of this for several years. Rather than transitional relief, they effectively face a transitional penalty.

We estimate that a transitional scheme, if applied in a similar way to that adopted in 2017, will mean the hotel sector could lose out on around £250m in 2023 alone. But business rate payers will not know the precise cost until the revaluation is completed this autumn. With several organisations lobbying the government to rethink the approach to a transitional scheme in a recently closed consultation, what options are there to get the hotel sector paying fair business rates as quickly as possible without reducing the government’s income, and what are the consequences if new options aren’t considered?

The transitional relief scheme is a mechanism designed to protect businesses from substantial and unpredictable increases in business rates caused by a revaluation of commercial rateable values. Now every three years the rateable values of properties will be reassessed to reflect changes in the rental values on which business rate liability is based. The next revaluation is from April 2023. Some businesses will suffer dramatic increases in their rateable values, while others, particularly those in the hospitality and retail sectors where rents have generally fallen in recent years, should benefit from a reduction, unless their current rateable value is too low. 

However, a transitional scheme effectively means that those whose bills should fall following revaluation, continue to pay more to supplement those whose bills should rise. This is because legislation requires that the transitional scheme must be self-financing over the revaluation period, and this has been achieved by limiting the speed of business rate decreases by phasing in downward changes in rates bills. 

All previous transitional schemes in England have applied to all sectors and property types.

Such downward transitional schemes are deeply unfair because they force businesses to pay more tax than the value of their property should require them to pay. They negate the purpose of revaluing, which is to redistribute liability to reflect changes in property values between revaluations, but here’s the rub: if the exchequer is not allowed to support businesses in urgent need of rates relief, how do we enable this to be financed within the business rates regime?

One popular proposal the government could adopt is adding a small supplement to the uniform business rate paid by all properties to fund relief. This would likely only be a modest supplement if applied over the three-year revaluation period. This would achieve the objective of businesses from all sectors paying a fairer level of rates as quickly as possible.  

Over the last few years many in the hotel sector have been paying business rates that do not reflect the reduced values of their properties. The 2023 revaluation should address this, with rateable values in the hotel sector expected to decrease in general by at least 30%. 

Different types of hotels and locations will fall by different amounts, but unless the transitional relief scheme combined with the business rate regime is reformed, many hotels will be forced to continue unfairly overpaying business rates. Already, many hotels are carrying debt built up during the pandemic, and against a background of the looming cost of living crisis and dire economic forecasts for 2023, it is imperative they see the full benefit in their rates bills as quickly as possible.  Otherwise, there is a risk of some hotel businesses unnecessarily going bust, adding further to our economic woes, increasing the stock of unoccupied buildings, and ultimately undermining the whole principle of business rates. The government needs to act decisively to avoid a potential catastrophe.