Executive Summary

This green paper proposes a fundamental reform of the existing UK business rates system, specifically targeting the taxation framework applied to office buildings. The current system, based on rateable values tied to property size and location, disproportionately burdens companies maintaining office spaces, disadvantaging them compared to businesses adopting extensive home-working policies. This proposal aims to level the competitive landscape, enhance revenue streams for local councils, and incentivize companies to utilize larger office spaces efficiently rather than minimizing occupancy to reduce tax liabilities. It also specifically supports rural and remote areas, redistributing business rate revenues more equitably across all regions.

Background

Business rates in the UK are governed under the Local Government Finance Act 1988 and subsequent amendments. Rates are currently assessed based on the rental value of commercial properties, known as the ‘rateable value,’ determined by the Valuation Office Agency (VOA). This approach has become increasingly misaligned with contemporary workplace dynamics, especially post-pandemic shifts towards remote and hybrid working models, and disproportionately affects less popular, often rural office locations.

Objectives

The objectives of the proposed reform are:

1. Level the playing field: Ensure equitable competition between office-based businesses and those adopting remote working.
2. Revenue Generation: Increase revenue collection for local authorities.
3. Spatial Efficiency: Encourage optimal utilization of office space by businesses, particularly benefiting commercial properties in less desirable or rural locations.
4. Support for Rural and Remote Areas: Redistribute business rate revenues to rural and remote local authorities based on actual workforce residency, enhancing local economic sustainability.

Proposed Framework

1. Basis for Rate Calculation

Under the proposed system, business rates will be calculated based on the number of full-time equivalent (FTE) employees rather than property size or rateable value. This shift emphasizes people occupancy, reflecting actual usage and local economic contribution more accurately and providing a substantial incentive for businesses to occupy offices in locations with lower market demand.

2. Allocation of Business Rates

Rates for employees whose primary workplace is an office will be payable to the local authority where the office is situated. This approach aligns with existing local taxation principles but reflects workforce presence rather than property metrics, significantly reducing rates for offices in less commercially attractive locations.

3. Treatment of Remote Workers

Recognizing varying scales of business operations, the system proposes differentiated treatments for remote employees:

• Businesses with up to 100 employees:
  • Option to either: a. Pay rates for remote workers as if they were located at the registered office address; or b. Pay rates to the local authority corresponding to the registered residential addresses of remote employees.
• Businesses with more than 100 employees:
  • Mandated to pay rates directly to the local authorities corresponding to the registered residential addresses of remote employees, significantly benefiting rural and remote councils that traditionally receive limited business rates revenue.

This approach ensures that revenue is appropriately allocated to the local authorities responsible for providing services to those workers, effectively redistributing income from urban centres to rural and remote areas.

Legislative and Regulatory Alignment

This reform would require amendments to the Local Government Finance Act 1988 and potentially new regulations or secondary legislation. The system would also need integration with HMRC data and reporting frameworks for verification of FTE employee numbers and work locations, aligning with data protection principles outlined in the General Data Protection Regulation (GDPR) and the UK Data Protection Act 2018.

Implementation Considerations

• Data Integration and Compliance: Robust mechanisms must be established for verifying employee numbers and locations without creating undue administrative burdens.
• Transitional Arrangements: Phased implementation and transitional relief arrangements will be essential to minimize disruption.
• Monitoring and Review: Establishing regular reviews by the VOA and local authorities to ensure the system remains responsive and equitable.

Economic and Social Impact Assessment

Preliminary analysis indicates potential increased revenue for councils and equitable redistribution of tax burdens, particularly benefiting rural and remote local authorities. This redistribution would support better local services and economic sustainability in areas that traditionally lack substantial business rate revenues. Additionally, making it cheaper to occupy office spaces in less popular locations may reinvigorate local property markets, encouraging business expansion and new investments in these regions. However, further detailed economic and social impact assessments should be conducted as part of the policy development process.

Conclusion

This reform proposal represents a modern, fair, and economically beneficial transformation of business rates for office spaces in the UK. By aligning taxation closely with contemporary business practices and workforce patterns, the system supports local authorities, businesses, and communities in adapting to evolving workplace dynamics, particularly benefiting rural, remote, and economically disadvantaged areas.