_The real cost of business rates to the public purse

Last week, the High Court issued their judgment on whether NHS Foundation Trusts are charities for the purpose of business rates.  

With charities benefiting from an 80% exemption to business rates, the amount of money at stake was staggering. Seventeen Trusts were party to the appeal with Derby Teaching Hospitals NHS Foundation Trust being the lead claimant. 

In addition to achieving 80% relief going forward, the Trust was seeking the exemption to be backdated six years, which would have resulted in a £17m refund. It's been reported that the total refunds across the country would have amounted to £1.5bn. This money would have been refunded by Local Authorities, with 45 of them represented in the High Court case.

Ultimately, the High Court decided that NHS Foundation Trusts are not charities for the purpose of business rates and the exemption should not apply. However, the case raises wider questions about the business rates system and how it is funded.

Refunds of £1.5bn would have gone directly into funding frontline NHS services, whilst coming out of the pockets of Local Authorities and their own budgets to provide essential services within their local area including the vital social care.

If anything, the High Court judgement highlights the idiosyncrasy of having one part of the public sector pay a tax from their budget into the budget of another part of the public sector.  

The primary purpose is to ensure the public sector is subject to the same occupational costs as the wider market, ensuring the public sector holds no advantage in an open market. However, the Private Sector has already restructured itself to secure this mandatory relief with organisations like the Nuffield Trust being granted this relief for their Private Hospitals. Whilst this aim is to be applauded, this particular case highlights the high cost of business rates to all ratepayers and the lengths they will go to in order to minimise their exposure. 

It's also questionable whether some of these Local Authorities could even afford such a refund. Whilst each Local Authority is required to budget for business rates refunds, quantifying how much should be held back each year is a challenge.

This quagmire has been made more difficult with the delays to the rating appeals system, particularly now with the introduction of the much maligned Check, Challenge, Appeal in 2017. The IT problems coupled with the bureaucracy involved in the initial registration has caused many ratepayers to delay lodging appeals with record lows in appeal rates. In the first two years, 82,400 Checks had been submitted, a fall of 80% when compared to the first two years of the 2010 rating list. However, Checks are only the first loophole to jump through, with formal proposals now only being considered from the Challenge stage. In the first two years, only 12,930 Challenges were submitted, representing a 97% fall in formal proposals.

With appeal numbers now on the increase, the CCA system could delay appeals by 38 months before they reach a conclusion. It's nigh on impossible for Local Authorities to budget for these appeals and the refunds they could generate.  With Local Authority funding already at crisis point, it would only take a particularly large refund on a single appeal to result in another bankruptcy such as that experienced by Northamptonshire council in 2018.

Previously, Local Authorities simply collected business rates and passed them on to central government. Localism has changed this dynamic with Local Authorities now actively incentivised to maximise the collection of business rates within their area, whilst also suffering directly from reductions. With this in mind, it is not surprising they fought this claim in the High Court given the amount of money at stake. Whilst localism was introduced to provide Local Authorities with more autonomy, the thorny issue of business rates complicates matters greatly with the tax generating around £25bn in income each year.

The Conservative manifesto promised a review of business rates and, crucially, this time the review will not necessarily be revenue neutral. This case highlights many of the issues with the current system and the sooner the new government launches their review and implements its findings, the better.

For more information about Business Rates, please contact our Business Rates Team who will be able to advise on all matters on 0207 861 1247 or email the team.