Fiscal Policy and Tax, Scottish Economy

An Evaluation of the Small Business Bonus Scheme

The Small Business Bonus Scheme (SBBS) offers a non-domestic rates – or business rates as they are often referred to – relief to businesses in Scotland under a certain size, as measured by their rateable value. In the latest year (2020), £279 million was spent on the provision of this relief for qualifying properties.

The purpose of this report is to present the results of an evaluation of the impact this relief has had on supporting small businesses. This evaluation was commissioned by the Scottish Government in response to recommendation 7 of the 2017 Barclay Review that called for an evaluation of the effectiveness of the SBBS.

Alongside evaluating the impact of the SBBS, a further aim of this evaluation was to understand whether the scheme could be better targeted to support local investment, employment and growth. In summary, the key objectives were to:

  • understand who is getting the relief;
  • assess the impact of the scheme on relief recipients and identify wider benefits and costs; and
  • consider whether the current scheme could be improved.

The research consisted of detailed analysis of available data on Scotland’s small business base, including those businesses that receive SBBS relief as well as those that do not. Our methods included a survey of small businesses in Scotland; and an econometric evaluation to determine the impact of the SBBS on business outcomes.

In summary, our findings are:

  • The coverage of the SBBS is broad and usage has increased over time: businesses are given 100% relief from their non-domestic rates if the cumulative rateable value of all properties in their business is at most £15,000. If their cumulative rateable value is between £15,001 and £35,000, the business receives 25% relief on any property with a rateable value of £18,000 or less. We found that over three-quarters of non-domestic properties in Scotland associated with single-property businesses have a rateable value below the 100% threshold of £15,000, and that take-up of the relief among them is relatively high. Over time the number of non-domestic properties eligible for the SBBS has increased, as has take-up of the SBBS.
  • We find no empirical evidence that identifies the SBBS as supporting enhanced business outcomes, but there is evidence from our survey that businesses perceive there to be benefits from the SBBS: as part of our survey, businesses set out some of the benefits they felt resulted from receiving the SBBS. We undertook an econometric analysis of the data in an attempt to understand whether the SBBS leads to enhanced outcomes for businesses that benefited from it most, in terms of turnover, employment, or gross value added. We found no conclusive evidence that the SBBS does lead to enhanced outcomes, but also document the limitations of this analysis given the limitations of the data made available to us (see 5) below). The limitations we faced mean this should be interpreted as being that there is no evidence of an effect rather than there being evidence of the SBBS having no effect.
  • We find that businesses with similar rateable values – the primary criterion on which SBBS eligibility is determined – vary substantially in size and other attributes: businesses that have similar rateable values vary considerably in terms of outcome measures, e.g. turnover. If business need is related to business size, this finding raises questions about the use of rateable value as the primary determinant of eligibility for the rates relief offered by the SBBS: a policy that focuses on rateable value to determine eligibility may not be effectively targeted.
  • In the Valuation Roll – an administrative record of all non-domestic properties in Scotland – the distribution of the number of properties reveals “bunching” around the eligibility thresholds of the SBBS: this bunching did not exist in the data prior to the introduction of the current thresholds; instead there was bunching at the previous thresholds. This is partly a result of higher rates of appeal against 2017 values among properties assigned an RV above the 100% eligibility threshold than among those below that threshold. It could also be partly explained by the value of new properties being related to SBBS eligibility thresholds in some other way, for example in their construction or in the assessment of their value.
  • We faced numerous data-related challenges during this evaluation, which has limited our ability to draw robust conclusions: the underlying database recording the rateable value of Scottish non-domestic properties (the Valuation Roll) and whether they claim SBBS relief is a database of properties. While the Scottish Government assigns to each property a presumed business name, constructing a database of businesses from this information is done with a high degree of uncertainty. These data issues made formal evaluation of the SBBS challenging and limited our ability to draw robust conclusions.
  • Our experience of undertaking this evaluation allows us to make recommendations to improve data collection to facilitate a future evaluation: what is required to undertake a more conclusive evaluation of the SBBS is an accurate database of businesses (as opposed to a database of properties) and associated business outcomes.

This last finding suggests a number of recommendations for the type of data that could be collected to more robustly evaluate such a policy in future.

For example, each business operating in Scotland should be uniquely identified, and linked to the property/properties that the business operates from. Contact information should also be collected for each business (including an email address). Moreover, the Scottish Government should aim to keep an administrative dataset on the operations of all business activity in Scotland – including micro, small and large businesses – so that business outcomes can be understood (some of which, but by no means all, can be populated from other administrative datasets).

We understand that this is not a small undertaking, and will require investment. However, it is likely that this would represent a small proportion of the money currently spent on the SBBS, and therefore could be viewed as an investment to better target such policies. The creation of this type of resource would also allow for the monitoring and analysis of other polices that might affect business outcomes, as opposed to only those that relate to non-domestic rates.

We conclude our evaluation with a series of recommendations for the Scottish Government to consider. As an independent research institute, we do not advocate specific policy choices, so the recommendations and reflections here are designed to help support a broad conversation on the future direction of the SBBS and non-domestic rates policy more generally.

  1. Firstly, as we highlight throughout this evaluation, it is exceptionally difficult to reach any definitive conclusions about the impact of the SBBS on the business base in Scotland. Challenges around data quality, identification of businesses and policy implementation (the bunching of businesses around policy thresholds) make it almost impossible for any systematic assessment of the impact of the SBBS to be undertaken on key issues such as employment, investment or business growth. Policymakers and the business community will no doubt agree that it is important to be able to draw robust conclusions about the efficacy of policy using the best available research methods to help inform future policy design. This is true for an important policy such as the SBBS, particularly given the level of investment undertaken over the now thirteen years in which it has been in operation – from £93 million in 2008 (in 2020 prices) to £279 million in 2020. We recommend therefore that the Scottish Government reflects upon how it builds in information gathering, data collection and evaluation into its policy development process on all aspects of its business support policy agenda from the outset.
  2. Following on from this, one of our particular recommendations is that the Scottish Government begins to collect new information that will make a more robust assessment of the SBBS (and potentially other reliefs) possible in the future. What is required to undertake an effective evaluation of the SBBS is an accurate database of businesses (as opposed to a database of properties) and associated business outcomes. Our suggestions include:
    • The creation of a digital registry of businesses in Scotland, maintained by the Scottish Government, requiring each business operating in Scotland to maintain a digital registry entry providing its contact details (including email address) and detailing all properties the business owns, rents or has use of (both within and outside Scotland). This would be in essence an investment to create a sub-set of the Inter-Departmental Business Register in Scotland, with links between business level and local unit (or property) level, in order to link properties properly to business units. A separate business register is currently in place for Northern Ireland, but the current Inter-Departmental Business Register is for Great Britain as a whole.
    • Ensuring this digital registry is periodically updated.
    • Ensuring the database of businesses in the digital registry contains the appropriate identifiers so that businesses can be accurately matched to their record in administrative data sets.
    • Maintaining a database of business outcomes of interest (e.g., turnover, employment, investment) for the business base in Scotland (including micro, small and large businesses), updated annually, that can be used to evaluate the efficacy of the SBBS. Ideally this would be statutory reporting of data by the whole population of businesses (some of this data, but by no means all, could be taken from existing government data sources). Failing that, the digital registry can be used as the sampling frame to conduct an annual (statutory) survey of Scottish businesses outcomes in the year. This would replicate both the approach that the Northern Ireland Statistics and Research Agency and the Office for National Statistics take for Northern Ireland and Great Britain respectively. In some cases, such as Scottish single site businesses, the datasets used by the Office for National Statistics can be utilised in the Scottish context (such as the use of HMRC VAT turnover data to update turnover information).
    • Requiring businesses to report appropriate data on other business activity outside Scotland (especially, but not limited to, those receiving non-domestic rates relief) to allow a better assessment of the need for business support within Scotland.
    • Ensuring guidelines for data collection and management are consistent across local authorities and assessors.
  3. Using this data the Scottish Government should undertake regular and comprehensive assessments of the SBBS, alongside other business support policies. This will enable the impact of the SBBS to be reviewed regularly, both against its own objectives and alongside other policy initiatives. Furthermore, robust evaluation of this data will facilitate developing a better understanding of the determinants of the efficacy of the SBBS. To do this will require a step change in the approach to policy design and data collection, but will enable policies like the SBBS to be compared in relation to other government business support schemes to identify the most effective package policy interventions for Scotland.
  4. Fourth, we find ‘bunching’ of non-domestic properties around SBBS eligibility thresholds. The location of this bunching changed over time as the policy thresholds changed, and was partly due to much higher rates of appeals among those valued just above the 100% threshold in the 2016/17 revaluation. We recommend that the Scottish Government explore with the independent Scottish Assessors why this occurred.
  5. Fifth, we find that rateable value is a poor measure by which to classify businesses as ‘small’, and therefore in need of support. Businesses within narrow rateable value bands are substantially different in terms of business outcomes (even when attention is restricted to a particular class of business). For example, our evaluation has found that businesses with large turnovers but operating from low rateable value properties are eligible for SBBS relief. It is not clear that this is the objective of the policy in supporting ‘small businesses’. Once it has implemented an effective data collection programme to allow an effective evaluation of the SBBS, the Scottish Government may wish to reflect upon the aims and objectives of the scheme and how well-targeted to achieving these it has become over the years. Of course, alongside this, the government is likely to consider how large turnover businesses may be better supported or incentivised by means other than the SBBS. As set out above, this would require the development of explicit policy objectives, which would in turn allow for targets against which the policy’s efficacy can be assessed.

You can access the full report here.


Alex Dickson

Alex Dickson is a Reader in the Department of Economics at the University of Strathclyde, where he has been a member of the faculty since 2008. He is a microeconomist, and has research interests in the fields of bilateral oligopoly and contests, where he exploits his understanding of aggregative games; in industrial organisation; and in behavioural economics.

Head of Research at the Fraser of Allander Institute

Picture of Mark Mitchell, assistant at the Fraser of Allander Institute
Mark Mitchell

Mark Mitchell is a former research associate at the FAI. In 2021, Mark moved to a post in the Competition and Markets Authority. His research area is applied labour economics, focussing on the causes and effects of human capital accumulation over the lifecourse.

Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.

Graeme Roy

Graeme is Professor of Economics at the University of Glasgow, and formerly Director of the Fraser of Allander Institute