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Evaluation of the Impact and Effectiveness of the Small Business Rates Relief Scheme

EXECUTIVE SUMMARY

Introduction

1. DTZ Pieda Consulting was commissioned by the Scottish Executive to undertake a study into the operation of the Small Business Rates Relief Scheme (SBRRS). The aims of the study were as follows.

• To establish the benefits to ratepayers of receiving SBBR.
• To identify and assess the impact of the Scheme on specific types of business.
• To identify the costs to those ratepayers who fund the Scheme.
• To identify whether businesses have changed their behaviour in response to the Scheme.
• To provide an overall assessment of the economic impact of the Scheme.
• To identify the impact of the Scheme on the property market.

2. The first phase of the study was intended to provide an assessment of these issues on the basis of desk research and limited consultation work and to determine whether there was any need for an in-depth assessment of the Scheme through more detailed primary research.

Background

3. The Report of the Scottish Parliament Local Government Committee on Non-domestic Rates, published in June 2000 ¹, concluded that small ratepayers face a disproportionate rates burden and considered that a permanent small business rates relief scheme, more focussed than the existing 1p discount, should be introduced so long as the scheme could be designed to avoid small changes in rateable values producing large increases in rates bills.

4. As of 1st April 2003, all non-domestic subjects in Scotland with a rateable value of 10,000 or less became eligible for a discount of between 5% and 50% on the poundage rate (47.8p in 2003-04 and 48.8p in 2004-05), although the relief is based on cumulative rateable value of all the subjects occupied by the ratepayer and whether or not the property is eligible for one or more of the existing non-discretionary rate reliefs. Thus ratepayers occupying properties with a total rateable value of less than 3,000 receive 50% relief. Ratepayers occupying a property with a rateable value of more than 10,000 but less than or equal to 25,000, were to pay the standard poundage rate.

5. In 2003-04, the additional costs of the Scheme have been paid for by ratepayers occupying property with a rateable value in excess of 25,000 paying a supplement of 0.6p ² on the poundage rate. For 2004-05, the supplement on the poundage rate has been set at 0.3p ³.

Analysis of Data on Scheme Take Up

6. This section of the report presents analysis of data from Valuation Rolls and records of properties receiving SBRR in eleven local authority areas - Aberdeen City, Argyll and Bute, Scottish Borders, Clackmannanshire, East Lothian, Inverclyde, North Ayrshire, Renfrewshire, South Ayrshire, Stirlingshire and West Dunbartonshire. The analysis was confined to those areas where rates relief data was made available.

7. The analysis of the data from the Valuation Rolls and on take up leads to some important conclusions. The key findings from the analysis are as follows.

• The rates of relief that businesses receive is largely being applied appropriately, but there do appear to be cases in which businesses are not receiving the relief rates to which they are entitled.
• Take up of the higher rates of relief is short of 100% though it is not possible to calculate the precise take up rate.
• With the bulk of the funding going to the smallest properties, the relief is being targeted at helping those companies that may have most to gain from the relief.
• The value of the 5% relief to individual businesses ranges from 30 per annum to 200 while the higher rate relief produces savings of 300 per annum to 650.
• The effect of the Scheme is to transfer resources from urban to rural areas and from public sector organisations to the private (especially retail) sector.
• The Scheme is cost neutral, but is redistributing around 15 million each year. However, it seems to be of most benefit to those companies that are receiving relief at least at the 10% level. It seems to have a very minimal benefit for those companies receiving 5% rates relief.

Company Survey

8. The survey of 30 companies was undertaken in four local authority areas. It had originally been intended that one of the major cities would be included in the survey. However, as data was only received from less urban authorities, Paisley and Inverness were chosen as the two urban areas. The survey concentrated on those ratepayers receiving the higher rates of relief, as these companies were more likely to be aware of the savings they are making and the potential impact. The sample also aimed to cover service and manufacturing companies, although in some areas there were difficulties in identifying sufficient numbers of manufacturing companies from take up records.

9. The main conclusions from the survey of 30 ratepayers are as follows.

• Few companies appeared to know their costs or the amount they paid in rates.
• Only 16 of the companies were aware of the SBRRS.
• Only 13 companies claimed that they were receiving SBRR, when 18 appear to have claimed the higher rate and the other 12 automatically get 5%.
• All those ratepayers that have applied for the higher rate found the application process easy or very easy.
• 8 of the 13 companies that knew they were receiving SBRR claimed this made a significant impact on the company - mainly on profit margins.
• Personal taxes were rated as more important than rates to the ratepayers surveyed.

10. It is difficult to draw definitive conclusions concerning the impact of the Scheme from the survey evidence. Nevertheless, while 8 of 13 companies claimed that the Scheme had a significant impact on the firm, in 8 cases this effect was simply to increase profits - which implies no definite change in activity or employment. It is intuitively difficult to accept that an increase in profit of, at most, 700 per annum can be critical to many ratepayers. The suggestion that some firms would close down on the basis of such an increase in costs is plausible only if these ratepayers were highly marginal.

11. For a very few ratepayers, the support provided by the SBBR may be important - one can imagine this being the case in a small and marginal retail operation - but it is implausible that the scale of support could be regarded as sufficient to affect the viability or growth of whole sectors or groups of firms.

Consultations

12. Consultations were carried out with stakeholder organisations and other business support agencies. Stakeholder organisations made written representations to the Scottish Executive on the expected effect of the Scheme on their members. Stakeholder organisations met with Ministers and Scottish Executive officials both during and after the consultation period (February to May 2001) ended to try and reach a consensus on the way forward.

13. To ensure the smooth implementation of the Scheme, a number of stakeholder organisations were invited to meet with Scottish Executive officials to discuss the implementation process. Comments were also sought from stakeholder organisations on a draft of the small business rate relief scheme information leaflet prior to this being finalised and printed. As the Scheme was implemented on 1st April 2003, it is too early for any of the stakeholder organisations to comment on the impact the Scheme has had on their membership.

14. None of the stakeholders knew if the Scheme is having an impact on small ratepayers. The general opinion was that the rates relief would be very welcome to ratepayers but is unlikely to be significant. The amount saved would enable companies to spend a bit more in other areas, but is unlikely to have any effect on employment as the amounts of money involved are just not large enough. However, it was accepted that it may have a more significant impact on start-up businesses, where relatively small amounts of money can mean the difference between survival or failure.

15. Consultations were also carried out with business support agencies that are in the front line of providing advice to small businesses. A random sample of Business Gateways were telephoned and if there was an advisor there with knowledge of the scheme and had experience of discussing this topic with clients then an interview was undertaken. Two Business Gateways came back with a group response to the questions. Within the Business Gateways, the advisors are aware of the workings of the SBRRS and try to ensure that any of their clients that appear to be eligible for the higher rates have the information necessary.

Conclusions and Recommendations

16. This evaluation of the SBRRS has been undertaken at a relatively early stage as it has only been available to companies since April 2003. It is likely that the full effect on companies will not be felt for another year or two, when the Scheme is embedded and companies have more awareness of their eligibility. However, even at this early stage, some conclusions can be made from the analysis undertaken for this report.

• The rates of relief that businesses receive is largely being applied appropriately, but there do appear to be cases in which businesses are not receiving the relief rates to which they are entitled, possibly because of a lack of awareness.
• The Scheme is appropriately targeted as rates represent a greater burden on small firms than on large firms. With the bulk of the funding going to the smallest properties, the relief is being targeted at helping those companies that may have most to gain from the relief.
• Take up of the higher rates of relief is short of 100%, although it is not possible to calculate the precise take up rate and the level of take up will inevitably increase as the scheme becomes embedded.
• The value of the 5% relief to individual ratepayers ranges from 30 per annum to 200, while the higher rate relief produces savings of 300 per annum to 650.
• The effect of the Scheme is to transfer resources from urban to rural areas and from public sector organisations to the private (especially retail) sector.
• The Scheme is cost neutral, but is redistributing around 15 million each year. However, it seems to be of most benefit to those companies that are receiving relief at least at the 10% level. It seems to have a very minimal benefit for those companies receiving 5% rates relief.

17. The SBBRS provides a small measure of support to ratepayers - amounting to no more than 700 per annum per business - and in, most cases, rather less than this. The existing body of research on the impact of rates, for example DTZ Pieda's work in Northern Ireland, does not suggest that such a financially limited measure will have widespread effects on the behaviour or performance of many ratepayers. Moreover, it is possible in theory that any such effects could be offset by consequent changes in property rents. The limited survey work undertaken suggests that, for most firms, rates relief is just a supplement to profits.

18. It is possible that the rates relief helps maintain the viability of some very small and marginal businesses, but any businesses which survival is dependent upon a few hundred pounds of costs per annum must already be on the margin of viability. The sectoral analysis does, however, suggest that one of the main beneficiary groups is composed of small scale retailers and it is, therefore, possible that the Scheme is of specific benefit in helping maintain marginal retail enterprises, e.g. in rural areas. At any economy-wide level, the effects of the Scheme will be nil or negligible given that it involves some marginal re-allocation of, rather than any increase in, the resources available to business activity.

Recommendations

19. Awareness of the SBRRS is not as high as it should be amongst the target group of companies. The reasons for this are not clear, but it does suggest that a more widespread campaign of awareness raising is required. Companies need information regarding the Scheme, apart from leaflets put in with the rates bills that are clearly not always read. Other literature sent either to companies or business organisations or advertised on local radio stations would raise awareness and reduce the incidence of non-take up of the higher rates of relief.

20. Given that the SBRRS at present is providing only a small level of relief to ratepayers this would suggest that, if the Scheme is to be maintained, that it could be made more effective by targeting support to the smallest ratepayers by lowering the RV threshold for eligibility. Targeting could also be used to replace the "blanket" relief, with incentives or relief targeted at specific groups where the benefits have been shown in this study to be higher. This could include start-ups and small retail businesses in rural areas.

21. There are various specific ways in which targeting could be altered but we may consider the impact of abolishing relief for subjects with an RV of between 6,000 and 10,000. The calculations set out here are based on the data for the 11 authorities analysed in Section 3 and so it is possible that the precise figures would alter if national data were to be used. However, we consider that the broad conclusions are valid. Properties with an RV within the range 7,000 and less than or equal to 10,000 attract 5% relief. We consider that this level of relief has negligible impacts and that its withdrawal would have no consequences of any significance. By withdrawing this relief, we would save 20% of the relief presently granted, so that the funds available to provide relief to firms in more lowly valued properties (which will generally be small firms and start ups) would be increased by approximately 25% ( i.e. 20/80). If this were applied evenly "across the board", the firms in the smallest premises would see the average annual relief rise from 311 to 389 per annum while for slightly larger firms the annual benefit would rise from 640 to nearly 1000.

22. More intensive targeting could be achieved. By confining assistance to the firms in properties with an RV of below 3,000, the relief to those very small firms could be increased by 160% from 311 to an average of over 800 per annum. These figures are indicative and various permutations are possible, but the calculations illustrate that focussing relief could greatly increase the benefit of the scheme to small ratepayers. We may note that an effect of such "reform" would probably be to increase the tendency of the scheme to "shift" resources from urban to rural areas.

23. The desk research has, we consider, cast light on many of the major issues relating to the SBRR scheme and has highlighted its limited significance and impact. That said, in order to more fully understand the business view of factors influencing SBRR take up - and the detailed effects of suggested reforms - it would be necessary to undertake a larger scale survey of ratepayers than was the remit of Phase 1. There are many issues of detail raised by this study that Phase 1 was not designed to answer. A larger survey, of around 1,000 ratepayers, would certainly provide more detailed and more robust results to support and build upon the preliminary recommendations outlined in this report. Such research would also enable the funding and distributional impacts of such changes to be more accurately quantified.

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