Clash looms over rise in rate bills: Revaluations will benefit southern businesses but hit hard in North

THE GOVERNMENT faces a damaging row with the business community over the likely doubling of some companies' bills that is set to follow next year's business rate revaluation.

The Department of the Environment, which is responsible for the tax, is also heading for a clash with the Treasury unless it can devise a politically acceptable way of funding the cost of transitional relief for the hardest-hit businesses.

One firm of property consultants thinks the bill involved could be up to pounds 1.3bn.

The political headache caused by the new rating regime, the costs of which will begin to bite shortly before the next general election, is considerable. The revaluation will split the country along North/ South lines, with big London companies enjoying much lower occupation costs while companies in the Midlands, North and Scotland face sharply higher bills.

Business rates are calculated by reference to the rent that a property would attract if offered on the open market at the time of the valuation, rather than the actual rent paid by the occupier. This market rental is periodically reassessed by the Valuation Office. The last revaluation was based on 1988 rents; the next will be based on 1993 figures.

Because open-market rents in the south of England have collapsed since 1988 there will be a significant redistribution in the rate burden placed on different parts of the country, given that the aim is to raise the same total sum from the tax. Rates are a significant cost for businesses. In the current financial year they have to pay rates assessed at 42.5p for every pound of rent.

Informal discussions are under way with the property industry to work out how to phase in the introduction of sharply higher business rates outside London while allowing companies in the capital to benefit from potential reductions.

After the introduction of the uniform business rate in 1990, increases were restricted to 20 per cent a year plus an element of inflation.

Grimley JR Eve, the property agent, believes that without phasing the impact on companies could be dramatic. Estimates that it drew up recently for a computer industry client suggested that its London office could see a fall in its rates bill from pounds 190,000 a year to pounds 60,000. By contrast, its Birmingham office faces a rise from pounds 127,000 this year to pounds 220,000 unless a system of transitional relief is introduced.

Companies in the capital have for the past five years been paying rates pegged to the high rents charged in 1988. Because market rents fell by as much as 60 per cent over the following five years, London rate bills are expected to fall by a similar amount.

But outside London rents have risen sharply over the same period. Figures from Grimley Eve suggest that office rents in Manchester have risen 58 per cent over the period. In Edinburgh there has been a 70 per cent rise.

Hillier Parker, another property consultant, is leading a campaign to persuade the Government to devise a compromise that will reduce the pain for provincial companies while passing on the full benefit to London's businesses.

Don Newell, senior partner, said: 'The Government, and indeed the Treasury, have often let it be known that it is small businesses who will lead us out of recession. As rate bills are critical to the survival of small businesses, we must use the 1995 revaluation to introduce rebates effectively and increases carefully.'

According to Hillier Parker, the Government has three options:

It can implement reductions immediately and phase in increases over the next five years. If it limits rises to 10 per cent a year it faces a pounds 1.3bn shortfall in the first year, which the Treasury would fund from other budgets.

It can finance the shortfall by increasing the uniform business rate. Limiting increases for the hardest-hit to 10 per cent would mean a 12 per cent increase in the rate charged to all companies.

It can make southern companies subsidise those in the North by phasing in both increases and decreases. While this is likely to be the most popular option it will face intense opposition in the City.