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1.1 There is evidence that rates account for a larger proportion of the costs and turnover of smaller businesses than they do of larger businesses ("The Impact of Rates and Businesses", IFF Research Ltd for Department of the Environment, 1995). In general, as rates are a fixed cost, larger businesses have the scope to achieve economies of scale which are not often available to smaller businesses.
1.2 The Scottish Parliament Local Government Committee issued a report in June 2000 (SP Paper 140 published on 21 June 2000) following an Inquiry into the balance of the burden of business rates between small and large businesses. The Committee’s conclusions were that:-
1.3 The Scottish Valuation and Rating Council also considered the issue. They concluded that relief should be linked to the value of a property rather than an evaluation of the size of a business and have recommended that relief from rating liability should be more explicitly stated as relating to small properties rather than small businesses.
A basic property based scheme
1.4 The Scottish Executive proposes the introduction of a tapered rate relief scheme with the following features:
Costs of the scheme
1.5 Setting the parameters of a small business rates relief scheme as proposed above, with no other conditions, would cost an estimated £59 million a year. The intention is that the additional cost of a small business scheme should be self-financing. This would result in an additional 1.3p on the non-domestic rate poundage for businesses with a rateable value in excess of above £10,000.
Concentrating the relief on businesses most in need
1.6 Not all small properties are occupied by small businesses. To better target relief to where it is most needed, businesses could be asked to apply for relief instead of it being automatically given. A business certifying that it met given criteria would then receive the relief.
Grounds for qualifying for relief
1.7 We propose that a valid application could only be made if the property had a rateable value less than or equal to the upper threshold of £10,000.
1.8 There is a wide range of criteria that could be used to test if a business should receive relief. Any such test used should be simple to administer, for both businesses and councils, to avoid placing unnecessary administrative burdens on either. Examples suggested are that the business must certify:
Renewal of relief
1.9 After relief has been granted, changes in circumstances might mean that the property no longer meets the tests for receiving relief. For example, the business occupying the property might be taken over by a larger business.
1.10 It would be difficult for the rating authority to ensure that the property continued to qualify for relief that had been granted some time in the past. For this reason applications for relief would need to be renewed each year. Once granted, relief would not be removed in-year regardless of any changes in circumstances.
Exclusion of certain types of property and business
1.11 There are some types of property that might be ruled out of the scheme from the start, such as an advertising hoarding or a telecommunications mast.
1.12 As the scheme would be a response to the fact that rates amount to a higher proportion of the profits of small businesses, there is a case for excluding non-profit making bodies. Charities are already entitled to 80 per cent mandatory rate relief on property used wholly or mainly for charitable purposes. Local authorities also have the discretion to grant relief to other properties used by charities or by other non-profit making bodies for recreational, philanthropic or educational purposes or for social welfare, science, literature or the fine arts.
Interaction with other rate reliefs
1.13 There will be circumstances where properties eligible for the relief for small businesses would also be receiving other forms of rate relief, which may be at a higher or lower level. For example, the village shop rate relief scheme provides mandatory relief of 50 per cent, for the sole shop or post office in a designated rural settlement, with a rateable value less than £6,000. This is a higher level than the proposed relief for small businesses for properties between £3,000 and £6,000 rateable value. (Proposals to extend the terms of the rural rates relief scheme are contained in Part 3 of this paper).
1.14 The Scottish Executive proposes that where properties are eligible for other reliefs, they should be able to receive relief up to whichever the level of whichever is the higher. To do otherwise would be unfair to the ratepayers concerned. However, bBecause the relief for small businesses would be structured differently from other rate reliefs, the y reliefs would still need to be calculated separately. Where other mandatory reliefs apply, the relief for small businesses would apply first, then any other reliefs which brought the total amount of relief to a higher level. So, for example, a qualifying village shop with a £6,000 rateable value could receive 20 per cent relief for small businesses, and in addition village shop relief bringing the total relief to 50 per cent.
1.15 As with other existing reliefs, the relief for small businesses would apply to the rates bill after any adjustments for transitional relief under the scheme introduced for the revaluation on 1 April 2000.
Funding the scheme
1.16 As indicated at 1.3 above, the scheme would be funded by a modest increase in the rate poundage for those subjects which do not qualify as small businesses. If the scheme cost the full £59 million as suggested, the additional poundage would be 1.3p. If the scheme was more closely targeted, then the increase in the poundage would be less.
Monitoring effectiveness
1.17 Whatever type of rate relief scheme for small businesses is introduced, the Scottish Executive will ensure that its effectiveness is monitored once it is in operation. We will want to be sure that it is correctly targeted on those who need it, bringing real benefits to those who receive it without placing undue burdens on those who pay for it. The effectiveness of the scheme will be reviewed in the light of experience.
Legislative position and timing
1.18 A general rate relief scheme for small businesses can be prescribed by Scottish Ministers by regulations under the terms of section 153 of the Local Government etc (Scotland) Act 1994. Following consultation the intention would be to establish a general rate relief scheme for small businesses with effect from 1 April 2002.
RATE RELIEF FOR SMALL BUSINESSES: POINTS FOR CONSIDERATION
The Scottish Executive seeks views on:
2.1 The Scottish Executive has a policy of encouraging farm diversification and rural entrepreneurship. For farmers and their immediate families diversification offers the means to supplement their income and thus help ensure a sustainable future for themselves and for the rural communities in which they live.
2.2 While farmers and their families are increasingly exploring opportunities to diversify into other businesses, the current rating arrangements can act as a disincentive. Agriculture is exempt from non-domestic rates, but non-agricultural activities are rateable. Farm businesses therefore face a new rate liability when moving any of their property from agriculture to non-agriculture use. The Scottish Executive believes that it would be helpful to farm businesses if rate relief were allowed for all new non-agricultural activities on farms. This would also be in the interests of cross-border harmonisation of rating and valuation practice as a similar relief scheme for all new small-scale farm diversification enterprises is to be introduced in England and Wales.
2.3 We propose that rate relief should be available for all small properties (with a rateable value of £6,000 or less) on farms used for new non-agricultural enterprises. This would help farm businesses in Scotland to diversify into a much wider range of activities.
2.4 There are many non-agricultural enterprises already in place on some farms, which suggest the kind of properties that would be eligible for the new rate relief. These enterprises include farm shops, mail order businesses, offices, craft shops or workshops, storage, caravan parking, light industry and leisure activities. There are a number of factors involved in establishing any new enterprise on a farm, such as financing, market conditions and planning consent, which will first need to be taken into account by the farm business. Once a new enterprise is established on a farm, it would be eligible for the new rate relief, provided the property it occupies has a rateable value of no more than £6,000.
Terms of the rate relief scheme
2.5 The Scottish Executive proposes that there should be mandatory 50% rate relief for eligible properties. Local authorities would have the discretion to provide top-up relief of up to 100% of the rate bill, provided they funded the usual 25% of the cost of the top-up, the balance being met centrally. Relief would be available to properties with rateable values of no more than £6,000.
2.6 The mandatory relief provides guaranteed support to all eligible properties. Discretionary relief allows local authorities to provide extra help to those businesses that they consider need it, in order to benefit the local community.
2.7 The rateable value threshold is based on research carried out for the Department of the Environment in 1995, which showed that rates were generally a much greater proportion of costs for businesses with rateable values below £5,000 than for those in larger properties. The level of the threshold has been raised to £6,000 to reflect the overall increase in rateable values at Revaluation 2000.
Time period for relief
2.8 The relief is intended to be a transitional measure, to help farmers to move into new areas of business, rather than to provide long term subsidy. We are proposing that relief should be available for a fixed five-year period running from the day the legislation comes into force. At the end of this period, the legislation should allow the Scottish Parliament to decide whether to continue the scheme for a further period.
Eligibility for relief
2.9 The proposed relief is aimed at helping farm businesses to establish new non-agricultural activities using land and buildings that were previously agricultural. It should be precisely targeted on the new diversification activities it is intended to encourage. We therefore propose that the relief should only be available to the farmer, his immediate family or the farm business occupying the holding, for newly established enterprises.
2.10 Relief should not be available to any other business that occupies land or buildings which had previously been in agricultural use, for example, if someone purchased or rented property on agricultural land for the purpose of establishing a new business, or transferring an existing one. In such cases the occupier would be liable to pay the rates. Farm businesses who rented or sold property to other occupiers would not themselves pay rates, so would not be eligible for relief, but the farm business would instead have the benefit of the rent or sale proceeds.
2.11 The relief could be targeted by allowing it only for a property:
2.12 In order to ensure that relief is given only to new enterprises and not to an existing enterprise that had been transferred from another property, we would also have to include a test to verify that recipients were genuinely new enterprises.
2.13 In some cases a farm business may wish to establish more than one different diversification enterprise on their farm. In such cases we could allow relief to each of these new enterprises, provided each occupied property with rateable values no more than £6,000. Alternatively, we could limit the relief to one enterprise on each farm, since the main purpose of the scheme is to encourage small-scale activity.
Stud Farms
2.14 Under long-standing legislation, properties used for the breeding and rearing of horses and ponies which are linked to agricultural land and buildings (stud farms), already receive rate relief. This is a reduction of £2,500 in their rateable value. New stud farms will continue to be eligible for mandatory relief under existing legislation. In most cases that will be worth more than the level of mandatory relief available under the proposal set out at item 2. We suggest therefore that new stud farm enterprises should not be eligible for the mandatory element of the latter.
2.15 The main reasons are that all stud farms whose unadjusted rateable values exceed £6,000 — shown as £3,500 or more in the valuation roll after the adjustment — would receive no relief under the scheme proposed under item 2. Also the existing stud farms relief will continue to be available beyond the five-year life of the proposed new relief.
2.16 However, stud farms do not benefit from the discretionary top-up relief that is proposed for other enterprises on farms. We therefore propose that stud farms which benefit from the existing reduction in their rateable value should also be eligible for the discretionary element of the relief proposals for non-agricultural enterprises on farms as set out at item 2. As with other recipients of the new relief, the discretionary top-up relief would only be available to stud farms newly established on agricultural property, with unadjusted rateable values no more than £6,000 (shown as no more than £3,500 in the rating lists). This would put them on the same footing as all other businesses and give farm businesses an equal incentive to diversify into this activity as is proposed for any other.
Costs
2.17 Since relief would only apply to new ventures established after the scheme is in operation, it is difficult to estimate with any accuracy what the actual take up of new ventures would be, but any new ventures established would result in an increase in total rates revenue, albeit abated by levels of relief awarded.
Legislative position and timing
2.18 These proposals will require new Primary legislation in Scotland. Following consultation the intention would be to include suitable legislative provisions in a future Local Government Bill.
RATE RELIEF FOR FARM DIVERSIFICATION: POINTS FOR CONSIDERATION
The Scottish Executive seeks views on:
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