Small firms have written to the Government warning that the business rates system is a disincentive to invest in net zero and employee wellbeing measures.

In a letter to ministers, sent ahead of the forthcoming business rates review, the national chair of the Federation of Small Businesses (FSB), Mike Cherry, describes the tax as ‘regressive and outdated’.

Mr Cherry warns that small businesses are penalised for measures aimed at improving sustainability and working conditions for employees, such as solar panels, insulation, ventilation, recycling facilities and bike sheds. Such measures cause a property’s value to increase, which means a higher rates bill.

He also called for an acceleration of reforms that have seen some of the smallest businesses removed from the rates system by increasing the threshold for 100% small business rates relief to £25,000.

Mr Cherry also called for all childcare providers to be exempt from business rates, a move that would bring England in line with Wales and Scotland.

‘The Government is absolutely right to overhaul a business rates system which often lets online retailers operating from remote warehouses off the hook whilst punishing small businesses that serve as community hubs,’ he said.

‘This is a levy that hurts small firms trying to do the right thing: if you put solar panels on the roof to aid your transition to net zero, or install ventilation to support the wellbeing of your staff, the Valuation Office Agency will advise your local authority that you should be paying more in business rates.

‘As we look to aid the small business community’s transition to net zero, and employee safety and wellbeing as we come out from the pandemic, this simply cannot be the right approach to taxation.

‘Instead, we should be aiming to take more small firms out of the system altogether, not least our childcare providers, who have done so much to support families throughout an incredibly tough 18 months and are finding that making ends meet is an increasingly precarious business.

‘Renewed efforts to ensure that rates bills are based on fair valuations are welcome and much needed – the more we can move to rolling up-to-date valuations, the more we can ensure this is a fair system fit for the digital age.’