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The business rates system in Scotland should aim to reflect economic reality and maximise investment, according to CBI Scotland's response to the Independent Review of Scottish Business Rates. 

Given recent weaker growth in Scotland and what is likely to be a period of economic adjustment following the vote to leave the EU, the CBI is calling on the Scottish Government to use business rates reform as a tool to propel investment and employment in Scotland, enabling businesses to remain competitive. The recommendations involve a modest cost relative to potential benefits from a more competitive commercial property system.

CBI Scotland has warned that failure to take action now ultimately risks diminishing tax revenues as a result of firms changing business models to reduce their commercial property footprint, or moving their operations to lower tax locations elsewhere in the UK or Europe. 

The CBI’s submission recommends:

1. Continuing to align the Scottish business rates multiplier with other parts of the UKto avoid a deterioration in Scottish business competitiveness 
2. Indexing business rates by CPI from 2017/18 to avoid unsustainable increases in the business rates multiplier for property based businesses
3. Exempting new investments in plant and machinery and environmental efficiencyfrom business rates to encourage productive investment
4. Valuing Scottish business properties every three years to make business rates more responsive to economic conditions and reduce tax barriers to redevelopment
5. Modernising billing and collection of business rates to reduce administrative and compliance costs.

Hugh Aitken, CBI Scotland Director, said:

“Businesses are vital to driving economic growth and raising living standards in Scotland through investment and job creation. Ensuring a competitive tax environment will encourage companies of all sizes to grow and prosper.

“Non-domestic rates on commercial property are one of many ways companies rightly contribute to the public purse and to local services, but the system must reflect current economic realities facing the country and businesses.

“Scotland has been going through a period of slower growth and is facing an economic adjustment, following the vote to leave the EU, so more than ever business rates must promote and safeguard investment in the country.

“Scotland is competing on the global stage and if the Scottish Government fails to act now it risks losing tax revenue in the long-term. Companies may choose to adapt their business models to reduce their commercial property footprint here, or simply move their operations to more competitive locations elsewhere.” 

The CBI submission stresses that challenging economic conditions need to be factored into the rates review.  It points out that the Scottish economy has grown at an average of less than 0.9 per cent per year since the last revaluation of business rates in 2008. This growth has been significantly weaker than average economic growth rates recorded during previous business rates revaluation cycles.

More recently, Scottish growth has been slowing sharply since 2015 Q1. In the latest available data, growth was 0.6 per cent compared to a year ago – partly reflecting the fall in crude oil prices, which has begun to affect activity beyond the production sector – meaning slower momentum going into a challenging period of economic adjustment following the EU referendum result.   

Under the current system of business rates, the Government targets a tax revenue that grows in line with the Retail Price Index (RPI). CBI Scotland points out that RPI as a measure of inflation overestimates the official measure of inflation, the Consumer Price Index (CPI), by around 0.8 per cent per year. Slower economic growth in Scotland makes for a more challenging business environment and means Scottish businesses will generally find the rising tax burden more difficult to absorb without an adverse impact on investment or jobs than counterparts in the rest of the UK.

Accordingly, CBI Scotland has recommended that business rates should be indexed by CPI rather than RPI from 2017/18 to avoid unsustainable increases.

The Independent Review of Scottish Business Rates was led by Ken Barclay and closed on Friday 7 October - the full CBI Scotland submission can be read here.