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

6 Conclusions and Recommendations

Introduction

6.1 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 lack of awareness.
• The Scheme is appropriately targeted as rates represent a greater burden on small firms than on large firms and is evidently redistributing some 15 million from large to small ratepayers and from urban to rural areas
• 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.

Economic Impact of the SBRRS

6.2 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 businesses. 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 the rates relief is just a supplement to profits.

6.3 It is possible that the rates relief helps maintain the viability of some very small and marginal businesses but any businesses whose survival depended upon a few hundred pounds on 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. The effects of the Scheme in 2002-03 have been to redistribute around 15 million from large to small ratepayers and from urban to rural areas.

6.4 However, at an economy-wide level, the effects of the Scheme are likely to be nil or negligible given that it involves a marginal reallocation of, rather than an increase in, the resources available to support business activity.

6.5 In 2004-05 the reduction in the levy on higher rate properties along with an expected higher take up of the higher rates of relief should be cost neutral if the calculation for the reduction of the supplement has been calculated accurately.

Recommendations

6.6 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.

6.7 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. These types of business are particularly vulnerable as costs tend to be a greater burden. However, the impact of any changes to give targeted support to specific sectors or groups would have to be reviewed to ensure that State Aid regulations are not being contravened.

6.8 Although the level of relief is fairly small it is a useful instrument within the context of the policy of assisting the business growth rate and small business survival. In particular, the SBRRS is complementary to, and supportive of, the "Growing Business" theme in "Smart, Successful Scotland." ¹⁴ For example, Scottish Enterprise has introduced an "Evaluation Indicator" that at least 70% of its assisted start-up businesses survive to three years. ¹⁵ Rates relief for start-ups and micro businesses will improve cash flow and profitability, albeit at a fairly modest level, which should contribute to their long-term sustainability.

6.9 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 between 6,000 and 7,000 attract relief at no more than 10% (and many at only 5%). 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.

6.10 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. The effect of such "reform" would probably be to increase the tendency of the scheme to "shift" resources from urban to rural areas.

6.11 As noted above, it would also be possible - at the cost of greater administrative complexity - to focus the scheme on particular types of firm such as start ups or firms in particular areas or sectors.

6.12 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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