Darling retreats on business rate rise after CBI pressure rates increase

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In a surprise move that will save firms more than £600million this year, the Chancellor will amend the rate to two per cent next month.

A further three per cent increase will be spread across the next two years. Some 1.6million properties will be spared the rise, according to government sources.

It is highly unusual for a Chancellor to make a tax change in the weeks before a Budget, but the Government wanted to ensure the move was implemented for the beginning of the financial year.

The decision, which Mr Darling announced in Parliament during a debate on the economy this afternoon, follows heavy lobbying by the CBI and other business groups that were furious at the inflation-busting rates increase.

Many firms feared the rise would tip them over the edge into bankruptcy, but Business Secretary Lord Mandelson appears to have persuaded the Treasury that the five per cent rise should be deferred and spread over time.

Ministers insisted the five per cent rise was forced on them by the Local Government Finance Act 1988, under which the business rate is linked directly to the RPI rate of inflation in September and implemented the following April.

But because the RPI was at five per cent last year, businesses feared they were going to be hit hard. Inflation has plummeted to zero this month and is expected to go negative next month.

Businesses will be able to spread payment of this year's inflation uprating over three years under legislation announced by the Government today.

Treasury sources said the move was aimed at underlining the Prime Minister's strategy of giving "real help" to those coping with the recession.

The change is expected to help ease the cash flow for firms during the current credit restrictions.