Hansard

I am accompanied by Nick Goulding, who is our UK head of policy, and who has come up from England to be here today.The Forum of Private Business Scotland represents 2,200 small and medium enterprises in Scotland. Eighty-five per cent of those employ fewer than 15 people, and the average turnover is £450,000 per annum. We will be delighted to answer any questions on the forum or on the relief scheme.We have two objectives today. We want to present the case for transitional rates relief in the April 2000 revaluation. We also want to present the case for a suitable small business rates relief scheme to reduce the overall burden on SMEs. Those issues are separate in terms of their impacts on SMEs. At the end of the presentation we would like to propose priorities in those separate issues.On the impact of business rates on SMEs, our data show that business rates are the second biggest overhead after payroll. That is not the case for public limited companies. I noticed that the committee endeavoured to find out what percentage of profits—or turnover or costs—rates represent for plcs.Our data show that SMEs pay 25 per cent of their gross profits on rates, compared to 5 per cent for plcs. The Department of the Environment, Transport and the Regions statistics, to which Patrick Browne of the Scottish Retail Consortium referred, say virtually the same as that.Rates have an impact on the attitudes of our members. In our quarterly surveys, business rates have been the No 1 concern, out of 26 choices, since the fourth quarter of 1997. Since we started conducting quarterly surveys in 1977, business rates have never been out of the top three concerns. It is a perennial problem rather than one that has suddenly been manifested. In April, we conducted a survey of our members' priorities for the Scottish Parliament. In breadth and depth, rates were No 1 and outweighed other issues by a factor of three.There is no doubt that there is an issue to be addressed. That is why we are grateful to the committee for the opportunity to present our case.I will give the case for revaluation relief. It is clear from the consultation document, which you will now have seen, although you had not last Wednesday, that the Scottish Executive recommends a scheme for transitional relief similar to those in 1990 and 1995.There will be immediate large increases in what is the second biggest overhead. Fergus Ewing talked about average increases. The rateable value will increase by 13 per cent. We know that the uniform business rate poundage will come down to reflect that increase, so that the average increase will be at, or just below, the rate of inflation. However, the example of the average masks the fact that many extreme cases of increases and decreases will result from the revaluation. That is true for properties of all types, in all regions of Scotland.The principle of revaluation relief is well established and appreciated by the business community. Last week, one witness, the Federation of Small Businesses, said that the business community does not value it, but we disagree. The business community applauded the revaluation relief, in 1990 and 1995, in both England and Scotland.There is a final point to be made in the case for revaluation relief. The federation's paper points out that a merging of revaluation relief and small business relief has been sought. That does not address the problem, for two fundamental reasons.A business with a rateable value of £3,000—which, after April 2000, rises to £9,000—would not apply for small business relief funding under the federation's scheme. Worse, it would experience a hike in its rates and, if the Scottish Government did not fund its scheme, it would be expected to pay even more to subsidise businesses that had received a reduction because they fell below the £7,500 rateable value threshold.What of a business with a rateable value of £4,000, which experienced a reduction in rateable value? Not only would it experience a reduction in its rates bill as a result of the revaluation next year, but the federation scheme would allow it a further 50 per cent off that new bill. For those two reasons, such a scheme would not be fair to the rest of the small or medium business community.I turn to the case for a small firms relief scheme. On average, small or medium firms are paying five times more, as a percentage of their profits, on rates. We also know that smaller firms pay much higher rates than larger firms per square foot. That is a more complex argument that concerns the zoning principle and other technical aspects, such as the way in which the Scottish assessors value properties. The front of a property may be deemed to be of a higher value than the property at the back of the store. A newsagent's may have a depth of 50 feet. The vast bulk of that property might be valued at a far higher rate than the back end of Marks and Spencer, which would attract a much lower assessment from the Scottish assessors. On the basis of size, there are technical reasons why the cost of occupancy is higher for smaller firms than for larger ones.If occupancy presents a higher cost, which it does, any tax that is based on rental value is bound to bear disproportionately on the smaller business sector. Small businesses, not unsurprisingly, favour a small business relief scheme. In a poll that was conducted in April 1998, 91 per cent of our members favoured a small business relief scheme that would be paid for by larger firms. That is no surprise, given the constituency that we represent.We think that there are principles that the committee should consider before it considers solutions. We believe that they are worthwhile principles, against which any scheme should be judged. The chap from Boots, to whom Nick and I were listening this morning, made some fundamental commonsense points. That was refreshing. Some of those are reflected on this slide. First, relief should be targeted on the size of business, taking account of the close relationship between the impact of rates and the size of a business. We know that smaller businesses pick up a bigger tab in proportion to their profits.Secondly, size should be measured on current information. Rateable value is dated. A relief scheme should reflect the current business circumstances, if that is possible. Thirdly, relief should be aimed at businesses, not premises. That point was made strongly by the SRC, and I thought that that Boots chap hit it absolutely bang on the head. If we aim relief at premises, it will be given to bigger businesses as well as to smaller ones. That is not discretionary.Fourthly, thresholds should be avoided, for two reasons. The first is that they tend to limit growth aspirations. They might not have a major impact on the growth of businesses, but they may delay or defer it, or encourage businesses to work around them. The second is that thresholds are notorious for causing unfair competition around the margin: "How do I get my business below this threshold to reduce my second biggest overhead by 50 per cent?" As we have already said, in our view, they would lead to a large increase in appeals for chartered surveyors.Simplicity is important, so the system must be simple for businesses and local authorities to apply and administer. We would want disruption to the current system to be minimised. A relief scheme should not be funded by the taxpayer but by shifting the burden, because there is a disproportionate cost burden on small businesses compared with large ones.We felt that it would help committee members if we passed on our members' views of relief schemes. We conducted a survey in May 1998 and asked our members, "What preference do you have, in terms of the measurement of smallness, if a small business relief scheme is in the offing?" The first preference was for a scheme based on last year's profit, which 36 per cent voted for, followed by current employment at 28 per cent. Last year's turnover was the next most popular option. Notice that only 11 per cent supported a scheme based on rateable value: 89 per cent of our membership, which is representative of the SME community, do not favour a relief scheme bases on rateable value.The Forum of Private Business would be happy with a scheme based on profit or employment but, for technical reasons, national insurance is a good proxy for either of those. We would be glad to expand on that during questioning. There are difficulties with profit and with turnover. You only have to look at the different sectoral turnovers to see that a scheme based on turnovers would be difficult to implement. As we shall suggest in a moment, a scheme based on national insurance is the way forward. A relief scheme based on rateable value would be as bad as the poll tax in terms of its application to smaller businesses.There are some advantages with our preferred option of an NI-based scheme. We know that the necessary figures are already available. Indeed, they are used for statutory sick pay. An FPB amendment in the House of Lords three years ago encouraged the Government to introduce a reimbursement scheme for statutory sick pay for small businesses, so there is a precedent for schemes based on national insurance. An NI-based scheme would be much more up to date than rateable value, and it would measure the size and the resources of a business in terms of the number of employees and the salary levels that are being paid.The scheme would provide tapered relief, which would not encourage distortions in business decision making. In our suggestion for a taper you will see that we have tried to present a case for a taper that is sufficiently flat that at any point along the curve the decision-making process of a business is not influenced significantly by a single factor such as a relief scheme on business rates. The scheme would be delivered through the current pay-as-you-earn system, which would avoid any changes for local authorities, and it would not be subject to complications caused by changes in the rateable value following an appeal, which can bring firms below a threshold.How would the system operate? We suggest that to maintain a flat taper the system should not just use national insurance, but should have a dual taper based on property and on national insurance. We will provide an example of such a scheme in a moment. The relief would be claimed monthly as a simple deduction from the business's taxation and national insurance liability. It would be fully administered through PAYE; in other words, businesses would operate the scheme for themselves. There would be a need for a supplementary table for those businesses that operate a manual system. Of course, we do not want to get ourselves into a repayment exercise so there would be a need for a ceiling on relief set at the gross tax and national insurance that would be due in the period of any claim to prevent any reimbursement.In the following table we have given an indication—and I stress that it is an indication—of the percentage reduction of rate liability. Across the top of the table we have the gross annual rate liability on all premises occupied by the business going up in £5,000 bands, but different bands could be chosen. Down the left of the table we have gross monthly—not annual—employers' class 1 national insurance liability, as well as class 2 and 3 NI contributions. That shows that the relief would be spread much further than just a £5,000 rateable value, both in terms of national insurance contributions and rateable value.The next slide shows what that means to the average business in terms of pound notes. The figures show the indicative monthly rebate figure as a result of applying that dual taper. The figures are purely for illustrative purposes. Ensuring that the right scheme had the right balance would involve much more analysis.At this meeting, we wanted to argue the case for a transitional relief scheme and for a separate small business relief scheme. We think that those schemes are necessary for the Scottish economy. The priority for the committee should be the transitional relief scheme to take account of the revaluation exercise next year. We will submit our views on that before the deadline.We encourage the committee not to make a decision on any small business relief scheme until further investigation has taken place. We believe that if the principle is right, we should not rush the solution but should take our time to get it absolutely right. It is better to get the right solution than a quick fix.