THIS month, the Scottish Government will unveil its draft Budget for 2024/25. There have already been pre-Budget skirmishes around business support, specifically around whether the Scottish Government will mimic the decision of the UK Government to extend its relief scheme for non-domestic rates.
For the uninitiated, non-domestic rates are frequently referred to in a linguistic sleight of hand as “business rates”, as if they are a tax on “doing business”, rather than a property tax used to fund local services.
Across the UK, a range of reliefs from non-domestic rates exists. In its recent Autumn Statement, the UK Government announced that it would provide a discount of 75% on non-domestic rates in England for hospitality businesses. Business lobby groups in Scotland have already demanded parity of treatment for equivalent businesses here.
While it is easy to be critical of the relationship that the Scottish Government has developed with the business community, when it comes to non-domestic rates relief it is time for us all to admit that some of these support schemes are expensive, not well targeted, and ripe for a rethink, not an extension.
The largest of these schemes is the Small Business Bonus Scheme (SBBS), brought in over 15 years ago. Setting aside complications from the treatment of multi-site businesses, it provides a complete exemption from paying non-domestic rates to businesses occupying a single property with a rateable value below £12,001.
For a single property business with a rateable value between £12,001 and £15,000, relief is tapered from 100% to 25%, it is tapered from 25% to 0% where the property has a rateable value between £15,001 and £20,000, and where the rateable value exceeds £20,000, it attracts no discount.
Readers will have noted I’ve referred to this relief being called the “small business” bonus scheme, but that I’ve said nothing about the characteristics of the businesses that are benefiting, only the rateable value of the non-domestic property. That’s because that’s the central element in determining how much relief businesses get.
A highly profitable business occupying a single non-domestic property in Scotland with a rateable value of £12,000 pays nothing in non-domestic rates. Meanwhile, a small startup occupying a property with a rateable value of £20,001 pays the full whack at £9,960 per year.
The effect is that a policy claimed to be about helping small businesses does so only to the extent that small businesses are located in smaller properties.
SBBS has a substantial fiscal cost too. In 2022, it provided some level of relief from non-domestic rates to 123,010 properties, with 93% of these properties receiving 100% relief, at a cost of £274.8 million. The total bill for non-domestic rates relief, including SBBS, charity relief, empty property relief and exemptions, religious exemptions, rural relief, and a range of other reliefs, was £730m.
SBBS has become totemic as a means of providing financial support to businesses in Scotland. But why provide this support through relief from non-domestic rates, which are calculated based on the rateable value of a business’s property?
Partly it’s a product of the way our system of taxation and collection of data in the economy has evolved. Properties are easy to identify, don’t move around, and can have their rateable value easily calculated and a rate of taxation applied.
In contrast, a local tax or subsidy based on the turnover or profitability of a business is more difficult to enact and administratively more complex.
Added to this, powerful business lobby organisations have ramped up the pressure on successive generations of politicians to support them in holding onto this subsidy.
And it’s to their credit that politicians are keen to support small businesses – but it’s hard to see why providing support to businesses based on the rateable value of their property is the best way to target this.
We should support businesses to establish themselves, and to scale up, and we should have a targeted support scheme to assist businesses to innovate and grow. But doing this effectively, has to start with a fundamental rethink of the current approach.
Stuart McIntyre is Professor of Economics at the University of Strathclyde
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