Small Business Bonus Scheme: evaluation

1. Introduction and policy context

1.1 Project overview

In the summer of 2019, the Fraser of Allander Institute at the University of Strathclyde was commissioned by the Scottish Government to undertake an evaluation of the Small Business Bonus Scheme (SBBS) in Scotland.^[1] The SBBS was introduced in 2008, and "provides non-domestic rates relief for small premises in Scotland. It offers a relief of up to 100% on non-domestic rates bills for eligible properties. Whether a property is eligible for SBBS

relief and what level of relief it is eligible for depends on the cumulative rateable value of all the properties in Scotland of which a person is in rateable occupation."^[2] The focus of the commissioned research was an evaluation of the SBBS in 'business as usual' times; the purpose of this report is not to understand how the SBBS or other business support should be targeted during the Covid-19 pandemic, nor is it to analyse the impact of such policies on businesses during the same period.

Alongside an evaluation of the impact of the SBBS, a further aim of this evaluation was to understand whether there is evidence that could help the scheme be better targeted to support local investment, employment and growth. In summary, the key objectives of this research 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.

This is the final report of that research study. It outlines our approach to the evaluation, the methods we used and our findings.

Consistent with the research brief, the report first outlines some 'core facts' on the distribution of non-domestic properties in Scotland and the operation of the SBBS using data provided to us by the Scottish Government. This includes summarising the type of properties that receive SBBS relief, how much relief was received over the period of time covered in this evaluation, and where they are located within Scotland.

Our approach to the evaluation of the SBBS then comprises two elements designed to allow us to undertake as robust and objective an evaluation of the policy as possible. To this end, we identified the econometric techniques best suited to the features of the policy to test for, in a statistical sense, whether there is any evidence that businesses who received the largest benefit from the policy achieved better outcomes than those that benefited less. We undertook this analysis using administrative data provided to us by the Office for National Statistics (ONS) and linked by them to the Scottish Government's non-domestic rates data. The overarching aim of this exercise was to evaluate the efficacy of the policy in terms of measurable business outcomes, as robustly as possible.

While this econometric analysis aims to assess the economic impact of the policy rigorously, it is unsuited to addressing a broader suite of research questions related to the operation of the SBBS and individuals' experience of the policy. To address these research questions, we also undertook a survey of small businesses, seeking information on the operation and outcomes of business activity, as well as on business operators' assessment of the value of the SBBS to their own business.

Together, these three elements of our analysis aimed to provide a broad understanding of how SBBS relief is spread across Scotland. At the same time, we sought to answer specific questions regarding the impact of SBBS on businesses' experiences and outcomes, using the most robust methodology available given the nature of the research questions, the data available and the design of the policy.

While the most robust research method can be selected to address a research question, in practice there are often limitations in the application of the methodology. In this study, there was one fundamental barrier to implementing our chosen methodology stemming from the fact that only a database on properties as opposed to businesses was available. While a database of businesses in Scotland had been constructed from this database of properties by the Scottish Government in advance of our study, there was considerable uncertainty around the accuracy of the resulting database (there is no way to assign all properties to their corresponding business with high precision). We carefully document the data we used and the limitations we faced, as well as where these have impacted the extent to which we can draw robust conclusions. It should be noted that these data issues are not unique to the methods that we have chosen or our approach to the research – they pose a more fundamental challenge to any empirical analysis of non-domestic rates policy in Scotland. As part of this report therefore, we also offer some recommendations on where data collection and reporting could be improved in the future to enable more effective evaluation of Scottish Government non-domestic rates policies, as well as other business-related policies.

Unfortunately, the onset of Covid-19 also had an impact upon the evaluation. This affected our survey, which was underway as the effects of the pandemic began to take hold; and subsequently our access to secure data services which delayed the econometric analysis. We document the impact of Covid-19 on our analysis in Section 2.

Our key findings can be summarised as follows:

1) The coverage of the SBBS is broad and usage has increased over time.

We found that over three-quarters of non-domestic properties in Scotland associated with single-property businesses have a rateable value below the 100% SBBS threshold of £15,000, and that take-up of this relief among them is relatively high. Whilst two of Scotland's major cities – Edinburgh and Glasgow – and its largest Local Authority by land mass – Highland – account for over one-quarter of all non-domestic properties, on a per capita basis, rural (including Highland) and island communities have the most properties eligible for SBBS. The most common types of properties to receive SBBS relief are shops, industrial properties, offices and those used for leisure and entertainment. Over time, the number of non-domestic properties has increased, the number of vacant properties has decreased, and take-up of the SBBS has increased.

2) 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.

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). There is evidence from our survey that those in receipt of SBBS relief report to benefit from the cost savings, and some of the information provided is suggestive of the SBBS supporting some aspects of business activity.

3) We find that businesses with similar rateable values – the primary criterion on which SBBS eligibility is determined – vary substantially in size and other attributes.

The data from respondents to our survey, as well as our analysis of the administrative data used, reveals that businesses vary substantially within narrow rateable value bands: there is considerably more variation in, for example, turnover within these narrow rateable value bands than there is between them. This suggests that rateable value is a poor measure of business size. 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 seeking to reward 'small businesses' that focuses on rateable value to determine eligibility might not be best targeted.

4) The distribution of the number of properties reveals "bunching" around the eligibility thresholds of the SBBS.

The rateable value thresholds that determine eligibility for the SBBS have varied over time. When looking at the current distribution of properties we found a spike in the number of properties just below the eligibility thresholds: there are substantially more non-domestic properties within a narrow range of rateable values just below the thresholds for eligibility than there are above. This bunching at these thresholds did not exist in the data prior to the introduction of the current thresholds; instead there was bunching at the previous thresholds, suggesting that property values appear to be in some way influenced by the SBBS eligibility thresholds. We show that a large proportion of this bunching is attributable to appeals against the assignment of rateable values just above the 100% SBBS threshold following the 2017 revaluation. This suggests that many appeals were launched in order to gain eligibility for the maximum amount of relief. Some remaining bunching could be attributable to the construction, pricing or valuation of new properties entering the database after 2017 being related to SBBS eligibility thresholds.

5) We have faced numerous data-related challenges during the course of undertaking this evaluation, which has limited our ability to draw robust conclusions.

The data we were given access to is a database of properties, not businesses. While, in theory, a database of businesses can be constructed from the available data, there is a high degree of uncertainty concerning the accuracy of identifying businesses from properties. In the Scottish Government-supplied data, the operator of the business is not easy to deduce from the data, making it difficult to contact businesses. There is also no information on business outcomes linked to this property data. The identified businesses were linked by the Office for National Statistics to administrative data to obtain some information on business outcomes, but there is again uncertainty over this matching process, and businesses need to meet certain criteria to be included in the administrative data. These data issues made evaluating the SBBS challenging. As a result of these shortcomings in the quality of the data, it is important to note that the findings from our econometric work – in particular that there is no robust evidence that the SBBS has an effect on business outcomes – should be interpreted as being that there is no evidence of an effect rather than there being evidence of the SBBS having no effect.

6) Our experience of undertaking this evaluation allows us to make recommendations to improve data collection to facilitate a future evaluation.

To undertake a more conclusive evaluation of the SBBS would require an accurate database of businesses (as opposed to a database of properties). Each business operating in Scotland would need to be uniquely identified, and linked to the property or properties that the business operates from. Each business would also need to provide contact information (including an email address). 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).

1.2 Policy context

The Scottish Government's aim is to deliver sustainable, inclusive economic growth – "growth that combines increased prosperity with greater equality, creates opportunities for all, and distributes the benefits of increased prosperity fairly".^[3]

Taxation plays an important role in any government's approach to achieving its economic and social objectives. On the one hand, it collects revenues which funds vital public services. On the other hand, the tax system can incentivise behaviours and can therefore have implications for business growth, investment and employment.^[4]

In Scotland, non-domestic rates are a key part of this policy discussion. Not only do they raise significant amounts of revenue for local public services, but by directly impacting upon business decisions, they have the potential to influence investment and employment.

Non-domestic rates are a tax levied on the rateable value of a non-domestic property.^[5] The proceeds of non-domestic rates income are paid into a national pool and then redistributed to local authorities. In 2019-20, the latest year for which the relevant statistics are available, the non-domestic rates distributable amount to local authorities was £2,853 million, or around 23% of general funding for local authorities.^[6]

Non-domestic rates are based on the rateable value of a property, which is determined by the Scottish Assessors.^[7] The amount paid is calculated by multiplying the property's rateable value by a pence in the pound tax rate known as the poundage or Basic Property Rate. For 2020-21, the poundage was set at 49.8p. There are Intermediate and Higher Rates for properties with a rateable value from £51,001 to £95,000 and £95,001 and above respectively. Rateable values are independently updated at intervals, with the last revaluation in 2017 and the next one scheduled for 2023.

Offsetting the liability on each property are a number of reliefs.^[8] Some of these – e.g. transitional relief for hospitality in Scotland; and offices in Aberdeen or Aberdeenshire – are temporary; others are not time-limited. Current reliefs include Empty Property Relief, Fresh Start, and Business Growth Accelerator Relief (in addition to a package of support for businesses as a result of the Covid-19 pandemic). In 2019/20, total reliefs were worth around £763 million with 170,000 beneficiaries.^[9]

In 2017, the Scottish Government commissioned an independent review of how non-domestic rates – and the accompanying suite of reliefs – could better reflect economic conditions and support local investment and growth.^[10] Kenneth Barclay chaired the review, a key recommendation of which was to undertake an evaluation of the SBBS. Whilst noting that there is widespread support for the assistance that the SBBS provides, the Barclay Review also acknowledged that a number of criticisms have been levied against the scheme in its current form, including: its cost; the limited evaluation of its effectiveness; the imperfect correlation between small properties and small businesses; the risk of unintended consequences (e.g. reduced incentives for development) and the risk of capitalisation by landlords, that is where landlords of SBBS eligible properties benefit from the savings incurred via higher rent as opposed to the business operating from the property.

The Small Business Bonus Scheme (SBBS)

Non-domestic rates relief from the SBBS is the most significant relief available for private sector businesses in Scotland, and is also available to public sector organisations. The SBBS evolved from the Small Business Rates Relief Scheme which was launched in 2003-04. First introduced in 2008-09, it has since gone through a number of reforms, typically to extend the coverage of eligible properties. These are shown in Table 1.1.

Today, the SBBS relief is available on non-domestic properties (excluding those used for payday lending) according to the following criteria. Firstly, it is possible to obtain SBBS relief if:

• the combined rateable value of all non-domestic properties within a business is £35,000 or less; and
• the rateable value of individual premises is £18,000 or less.

Secondly, the following levels of relief are available for these non-domestic properties:

• total rateable value up to £15,000 – 100% relief (no rates payable) on each individual property.
• total rateable value of £15,001 to £35,000 – 25% relief on each individual property with a rateable value of £18,000 or less.

The maximum that can be saved by a business in 2020-21 is £7,470. As Table 1.1 shows, however, the eligibility criteria and the levels of relief available have changed over time. In addition, there was a revaluation of non-domestic properties in 2017.

Note: Lower, middle and upper rateable value bands also apply to businesses with a single property. Source: Non-Domestic Rates Relief Statistics 2020.

Overall, spending on the SBBS has increased substantially over the past twelve years. Figure 1.1 shows the total foregone tax revenue arising from non-domestic rates relief in each year from 2008 to 2020 resulting from the SBBS. According to Figure 1.1, the total non-domestic rates relief awarded as part of the SBBS amounted to over £2.8 billion (in 2020 prices) of foregone tax revenue between 2008 and 2020, with the explicit aim of promoting small businesses to start and grow.^[11]

Note: Values are in 2020 prices. Inflators were accessed from the Bank of England inflation calculator. Totals represent estimated expenditure based on the total relief recorded in snapshots of billing data at a given point in a year, as opposed to estimates of actual spending over an entire calendar or financial year. The SBBS snapshot was based on summary returns from local authorities, and was used to produce annual statistics on SBBS expenditure until 2018. The Billing Snapshot is derived from snapshots of local authorities' billing systems and the Valuation Roll, and so is more accurate. This was used to produce the same statistics from 2018 onwards. The SBBS snapshot dates were September in each year, and Billing snapshot dates were 1 June 2018, 31 May 2019 and 1 July 2020. Source: Non-Domestic Rates Relief Statistics 2020.

The Barclay Review proposed that a formal evaluation of the policy be carried out. Evaluation of targeted public spending, such as that of the SBBS, is a crucial aspect of policy development. The present evaluation was commissioned for this reason, and to inform two broad areas of understanding: how the policy has affected recipients; and how, if at all, it could be designed more effectively.

The structure of the remainder of this report is as follows. In Section 2 we outline our methodology for undertaking this evaluation. Section 3 then describes the data that were made available to us and Section 4 provides a descriptive analysis of non-domestic properties and SBBS relief in Scotland. Sections 5 and 6 outline the design and analysis of our survey respectively, and Section 7 presents our econometric analysis. We then conclude in Section 8 with a discussion of the findings and recommendations.