With a new government in power, the appointment of a new Prime Minister and Chancellor ushered in significant changes, including a highly anticipated Autumn Budget delivered on 30th October, alongside the Transforming Business Rates Paper. This document laid out key policy proposals for reforming, rather than replacing, the current business rates system. Given the complexity and far-reaching implications of these changes, it is crucial to examine some of the main challenges and takeaways from the consultation.
The central focus of the policy paper is on reforming the business rates multiplier system and creating a more transparent, streamlined process. The idea of digitalising business rates has been discussed for several years, and this consultation acknowledges that while such digitalisation is a step toward greater efficiency, it cannot be taken lightly. The project has already faced delays due to “system complexities,” meaning that transitioning to a more user-friendly digital system will require significant time and resources to implement properly.
Key Changes to the Multiplier
One of the most prominent proposals is a significant overhaul of the business rates multiplier. The multiplier is used to calculate a property’s business rates bill, which is derived by multiplying the ratable value (RV) of a property by the multiplier. Currently, there are two main multipliers: the standard multiplier, set at 54.6p, and the small multiplier, set at 49.9p. The consultation proposes introducing up to five multipliers by 2026, including sector-specific multipliers. This is an important development, as it reflects an attempt to tailor the business rates system to the needs of different industries.
In particular, the government plans to implement a permanent reduction in rates for the Retail, Hospitality, and Leisure (RHL) sector, which has been severely impacted by changing consumer habits and the aftershocks of the pandemic. Starting in 2026/27, the government will introduce these sectoral multipliers, with the reduction funded by applying a higher multiplier to properties with an RV exceeding £500,000, particularly in the industrial sector, such as distribution warehouses. Additionally, the small business multiplier has been frozen for the fifth consecutive year. This freeze could reduce the financial flexibility of local governments, given the increasing demands on public services and the pressure to balance local budgets.
Retail, Hospitality, and Leisure Relief
The retail, hospitality, and leisure (RHL) sector continues to face financial difficulties, especially as the 75% RHL relief is set to end in April 2025. In an effort to support this sector for an additional year, the Chancellor announced a reduction in the relief to 40%, with a cash cap of £110,000. While the extension is welcome, the ongoing uncertainty over whether these relief measures will continue year after year has put additional strain on local governments, both in terms of budgeting and administrative resources. Local authorities must juggle the complexities of these relief schemes while managing public expectations and funding gaps.
The consultation also highlights that the business rates system places a disproportionate burden on the RHL sector, which is a significant source of revenue. However, it’s crucial to account for the long-term sustainability of these tax changes, particularly as the retail sector struggles to adapt to the growing influence of e-commerce and changing consumer behaviours.
Impact on Local Government and Funding
One of the most pressing concerns regarding these changes is their potential impact on local government funding. Business rates are a vital source of revenue for local authorities, estimated to generate £26 billion in 2024/25. However, the proposed sectoral multiplier changes and the freeze on small business rates are likely to create new financial challenges for local governments, especially as they contend with increased demand for services. Moreover, the eventual shift in the tax burden towards high-rateable value properties, particularly in the industrial sector, could significantly alter the landscape of local government financing. Authorities will need to carefully forecast how these changes will affect their budgets in the coming years.
Charitable Rate Relief Changes
As previously confirmed, the government announced that mandatory charitable rate relief for private schools will be removed from 1st April 2025. To offset the impact on students requiring special educational needs (SEN) support, local authorities and devolved governments will receive VAT compensation on these placement fees. However, further clarification on the definition of “wholly or mainly” will be needed to ensure that these changes are implemented fairly and transparently.
More Frequent Revaluations and System Transparency
A major part of the consultation is the push for more frequent revaluations of business properties, with stakeholders being asked to assess the potential impact of shorter revaluation cycles. While more frequent revaluations would help make the system more responsive to economic shifts, the proposal comes with significant challenges. For example, implementing these changes across approximately 2 million UK non-domestic properties would require substantial infrastructure upgrades. The Valuation Office Agency (VOA) is already enhancing its technology under the Non-Domestic Rating Act 2023 to improve transparency and efficiency. Phased access to valuation data is expected by 2029, with a streamlined appeals process replacing the current ‘check’ process. The complexities involved in such a significant overhaul should not be underestimated.
Tackling Business Rates Avoidance
The consultation also highlights efforts to tackle business rates avoidance and evasion. Empty Property Relief in particular remains a key issue, with the government extending the reset period to three months in an effort to reduce avoidance. However, local authorities must balance the need for rigorous enforcement with the reality of limited administrative resources.
Looking Ahead
While the proposals outlined in the consultation hold promise, they also introduce new challenges. The introduction of new multipliers, changes to relief schemes, and the push for digitalisation will require careful planning and execution to avoid creating additional burdens on already stretched local governments. The timeline for implementing these changes seems ambitious, and it remains to be seen how effective the reforms will be in the long run.
As always, the team at Analyse Local is here to support clients navigating these complexities through our rates retention, forecasting, and advisory services.