Rachel Reeves’s punishing rise in business rates will crush the British economy

It took a couple of months for the amount of damage it would do to become painfully clear. In her first Budget, chancellor Rachel Reeves pushed up the national insurance (NI) charges that companies have to pay on every person they employ. Over the following months, vacancies started to fall dramatically, and unemployment rose. Something similar is about to happen after Reeves’s most recent Budget. This time, it is the punishing rise in business rates that will crush the British economy.

After all the speculation, the Budget was a damp squib. The basic rates of income tax were not in fact increased for the first time since the 1970s, and there was no sign of a wealth tax – although the levy on “mansions” comes very close – or an exit tax on the entrepreneurs fleeing for Italy and Dubai. Instead, there was a big increase in welfare spending, paid for with lots of fiddly stealth taxes to raise the money needed to pay for it all. Now, however, the implications of the small print is starting to become clear – Reeves has hiked business rates on companies that are already struggling to make a profit in the UK.

With a series of reforms of the way that rates are calculated, and the way that various reliefs are set, plenty of horror stories are starting to emerge. According to UKHospitality, the average pub is expected to see a £1,400 increase in its rates bill over the next year, and that will be hitting a sector where businesses are already closing at a rate of eight a week.

Property tax consultancy Ryan calculates that music venues such as London’s O2 and Co-Op Live in Manchester face rises of up to £1.8 million in their annual property tax bills. British music studios face punishing increases of £20,000 a year or more.

Eurotunnel, which operates the Channel Tunnel, has said it may have to pull out of any further investment in the UK over fears that its rates bill could rise from £22 million a year to £65 million. The list goes on and on. Right across the UK, firms are facing punishing increases in the amount they have to pay in tax on their premises. It now looks as if many businesses will be facing rises in their rates bills of 50% or more over the coming year.

There are three problems with that. To start with, business rates have to be paid regardless of whether a company makes any money or not. There is “financial hardship relief”, but that is very hard to apply for and there are lots of conditions attached. In effect, it is just a huge fixed cost, much like rent, or staff or raw materials. At least corporation tax is only due on any surplus you manage to generate. A rise in the rates bill will mean that lots of companies, and small companies in particular, are no longer viable, and will have to close down simply because they can’t afford the extra tax.

Higher business rates will force companies to close

Next, they penalise a company for investing and expanding. It is already expensive for a shop to open a new store in the next town, or for a cafe to open up an extra outlet. There is rent to be settled in advance, and stock to be paid for. It might be a year or more before the owner starts to make even a modest profit. But extra business rates will make it even harder to break even. At the margin, it will stop companies from attempting to grow their business.

Finally, rates make it harder for physical businesses to compete against virtual ones. The latest round of reforms might have been designed to level the playing field, but have ended up simply imposing higher bills on traditional businesses. An online shop pays far lower rates than one on the high street, and a food-delivery app pays far less than a gastro pub in the same village. It punishes the businesses that are already having a very hard time staying afloat.

Rachel Reeves came into office promising to prioritise growth. But you can’t do that while at the same time piling more and more stealth taxes onto businesses. The lesson from the NI debacle was that extra employment costs for businesses simply meant they ended up hiring fewer people. Likewise, extra property costs will mean they close down branches and, in some cases, give up completely. The government is repeating exactly the same mistake of its first Budget.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.