Tax whirlpool has minnows in a spin

Firms should get involved in their community. But high business rates are not the way to do it

Everybody complains about their council tax. But Barbara Beale believes she has special reason to feel aggrieved. She says she is paying three times as much in business rates as all but one of her neighbouring shops.

Everybody complains about their council tax. But Barbara Beale believes she has special reason to feel aggrieved. She says she is paying three times as much in business rates as all but one of her neighbouring shops.

Mrs Beale, who took over her ladies fashion shop, Beales, after a long business career, only discovered the discrepancy about a year ago while talking to other traders in Broadway, Worcestershire.

But the problem dates from the early 1990s. To counter the increase in business rates in 1990, the last Conservative government introduced a system of transitional relief. However, the relief was to be "lost" if a business changed hands. When business lobbyists complained that this would restrict their development and mobility when they were already having to cope with a deep recession, an amendment was introduced to allow the relief to continue even if a premises changed hands.

But this change was not made retrospective. Mrs Beale and her neighbour, Graham Smith, whose Old Print Gallery is next door, ended up paying more because they were operating from businesses that had changed hands between 1990 and 1992.

"I thought it was some terrible mistake," said Mrs Beale, who in November will have run her shop for six years. She says the business she started with three other pensioners after retiring to the prosperous area does well enough for her not to qualify for any hardship relief. Even so, she is dismayed that with an annual rates bill of £4,200 she has overheads of £55 a week more than other shops in the same courtyard paying rates bills of about £1,400. And, though the transitional reliefhelps ease the burden, she is sure it will be years before her business is on the same footing as those of her neighbours.

Both Mrs Beale and Mr Smith, who pays £3,900 a year in rates on the business he has been running from the courtyard for nearly four years, have won the support of their local MP, Peter Luff. But it does not seem that the Government will address the anomaly.

A spokesman for the Environment Department said it would be "extremely complex" to reinstate the relief after eight years and claimed the situation would "equalise over time". Mrs Beale should have negotiated a price for the premises based on the full liability at the time, he added.

An oddity it may be, but Mrs Beale's case is just one example of what many see as a failing business rates system. Members of the Forum of Private Business regularly list business rates as top concerns. And that worry is growing with government plans to introduce a supplementary business rate. It's a sign of the importance attached to this matter that recently the Small Business Service met to discuss the new levy. Details about the rate are due in the Local Government Finance Green Paper, published in the next few weeks. Probably local authorities will gain the power to introduce an additional tax of up to 5 per cent of the national business rate, phased in at the rate of 1 per cent a year over five years. The tax will be part of a mechanism for bringing businesses and councils together with a view to developing local projects. At the moment business rates raise about £16bn a year. However, lobbying groups are concerned that the plans would cost firms an extra £2.75bn in the next five years.

There are also fears about how the levy would work. Chris Humphries, director general of the British Chambers of Commerce, has written to Tony Blair arguing that local business communities should be given the right to block the levying of a local rate where they are not satisfied with its purpose. He has also disputed claims that the proposals could help make local authorities more accountable to business.

Mr Humphries said: "We support the Government's wish to see local authorities and business communities working together because we believe local communities gain. However, increasing the tax burden on business will help no one."

The CBI is concerned about likely tax rises. Amanda McIntyre, head of the body's modernising government unit, said UK property taxes were already high and that "increasing the total take from business rates would damage competitiveness".

The CBI and the Chambers of Commerce favour the existing principle of "business improvement districts" whereby councils and businesses agree on projects before extra funds are raised - a move Ms McIntyre believes has been effective in bringing in private sector expertise to help deal with urban renewal.

But if business in general is worried about the rates burden, smaller firms are especially concerned. Margaret de Wolf, of the Forum of Private Business, says the Government's own figures show that small businesses are disadvantaged. While the biggest companies pay rates equivalent to about 3 per cent of their profits, small firms can pay up to 41 per cent. Ever since Labour came to power, there has been talk of introducing a small business relief, but if that is linked to the value of the property, the small business will not really gain.

"All that will happen is that it will benefit the landlords," she said, explaining that then landlords could raise rents.

Because the size of a property bears no relation to the size of a business, the forum has long advocated basing the business rate on something other than property values. It suggests that basing the rate on National Insurance contributions would be a fairer approach - even though, as Ms de Wolf points out, in the new economy the size of a workforce is not always an accurate indicator of business size.