Scotland’s Budget Report Preview #6: Non-Domestic Rates

Non-domestic rates (also known as business rates) are a form of property tax for non-domestic properties, for example commercial and industrial premises. This is a devolved tax, so the non-domestic rates (NDR) differ between Scotland and the rest of the UK – in fact, there are different regimes for each of the four nations.

The amount of tax that a non-domestic property is liable for is determined by three elements:

• The rateable value of the property – this is an estimate of the market rental value of a property;
• The poundage – this is a tax rate set nationally by the Scottish Government that is applied to the rateable value of the property;
• Any reliefs the property is eligible for – these are tax reliefs for properties of certain characteristics that are deducted from the tax bill.

The NDR liability is then calculated as follows:

The final tax bill is also adjusted for overpayments or underpayments from previous years.

NDR operates differently from other taxes in that all the revenue collected is ultimately paid back to local authorities. This is because all revenues get collected into a central NDR pool, which subsequently gets allocated and distributed back to local authorities as part of the local government finance settlement.

At each Budget, the Scottish Government sets the poundage for the coming year and announces any changes to reliefs. Recent adjustments and changes to these three elements will be discussed in the following sections.

 

NDR revenues

In 2022-23 revenue from NDR totalled £2.8bn. Chart 1 shows that NDR revenue in cash terms has returned to pre-pandemic levels. Revenue dropped during the pandemic in part due to an increase in reliefs, most notably the reliefs for retail, hospitality, leisure and airport properties – which were heavily affected by public health restrictions – and the introduction of the Intermediate Property Rate in 2020-21.

Chart 1: NDR tax revenue and forecasts, 2016-17 – 2028-29, £bn

Source: Scottish Government and Scottish Fiscal Commission
Note: Dashed lines are forecasts.

Chart 1 also shows the forecasts for future tax revenues produced by the Scottish Fiscal Commission in May 2023, based on the poundage and reliefs announcements in last year’s Budget and the updated valuation roll from the revaluation of rateable values in April 2023. NDR revenue is forecast to grow over the next 5 years to £3.4bn in 2028-29.

While NDR revenue in cash terms has returned to pre-pandemic levels, revenue as a proportion of GDP has not returned to its previous levels (Chart 2). In 2022-23 NDR revenue accounted for 1.46% of GDP, down from 1.73% in 2018-19 and its high of 1.78% in 2016-17. The SFC expects some recovery over the forecast period, but the introduction of the intermediate rate in particular means that revenues as a share of GDP are forecast to remain below the levels in the mid-2010s.

Chart 2: NDR tax revenue as proportion of GDP, 2016-17 – 2028-29

Source: Scottish Government
Note: Dashed lines are forecasts.

 

Revaluations happen – and much more frequently than for council tax

A property’s rateable value is an estimate of the market rental value the property could achieve. These valuations were revalued in April 2023, based on property valuations as of 1st April 2022 (the tone date), with 2017 being the previous revaluation. While the poundage and reliefs are set at a national level, valuations are conducted at a local council level. The Scottish Government have committed to moving to a three year revaluation cycle. Therefore, these recent revaluations will remain in place until 2026, with new valuations based on the tone date of 1st April 2025 released in April 2026.

The April 2023 revaluation increased the total rateable value on the valuation roll by £390m, a 5.36% increase. When accounting for revaluation transitional relief and poundage rates and thresholds, gross income following revaluation is expected to have increased by 3.37% (£339m).

 

Evolution of the poundage

The poundage is a tax rate applied to the rateable value of the property. It is set nationally by the Scottish Government and in last year’s budget was set at 49.8p for every £1 of rateable value for 2023-24. Properties with a high rateable value are liable for additional supplements, so face higher tax rates. Properties with a rateable value between £51,000 and £100,000 pay the Intermediate Property Rate – an additional supplement of 1.3p per £1 (51.1p per £1). Properties with a rateable value above £100,000 pay the Higher Property Rate – an additional supplement of 2.6p per £1 (52.4p per £1).

The poundage and additional supplement rates remain frozen from the previous budget (2022-2023). However, the threshold at which properties were liable to pay the Higher Property Rate was risen from £95,000 to £100,000. Chart 3 shows the trend in poundage and additional supplement rates since 2017-18, including the introduction of the intermediate rate in 2020-21. The poundage rate has increased from 46.6p per £1 in 2017-18 to 49.8p in 2022-23, where it has remained frozen.

Chart 3: Trends in the Poundage and Additional Supplement Rates 2017-18 – 2024-25

Source: Scottish Government and FAI calculations.
Note: Dashed lines are forecasts.

Assuming the poundage is unfrozen in the 2024-25 budget and is increased in line with inflation (September 2023 CPI rate), we estimate poundage will increase by 3.3p to 53.1p. Provided the size of the additional supplements remain the same, the intermediate and higher property rates will increase to 54.4p and 55.7p, respectively. We estimate this increase in poundage will increase forecasted NDR revenue in 2024-25 by £0.2 billion to £3.25 billion.

 

There are Barnett consequentials from the UK Government’s RHL relief in the Autumn Statement, but they might not be enough to replicate the measures

In the recent UK Autumn Statement, the Chancellor announced a one-year extension of their retail, hospitality and leisure (RHL) relief introduced in the 2022 Autumn statement. This RHL relief provides a 75% discount to businesses occupying eligible retail, hospitality and leisure properties in England, with a cap of £110,000 per business.

As this area of policy is devolved in Scotland, there is a Barnett consequential for this. The OBR estimates this to be around £230m.

Using the valuation roll for 2023, we have modelled how much this might cost to replicate, and we think it might be as much as £360m, even after accounting for businesses with no liability due to the small business bonus. But it might be slightly lower if some businesses are eligible for other reliefs. We think less than 1% of RHL businesses would get no relief at all if the same cap applied.