Alistair Darling bowed to pressure last night and cut the planned 5 per cent rise in business rates that was threatening to cripple many small firms.

In a last-minute reprieve, the Chancellor said that the rate rise, which applies only in England at present, would be scaled back to 2 per cent this year, and that businesses could spread payments of the remaining 3 per cent increase between 2010 and 2012.

The Conservatives claimed victory over the climbdown by Alistair Darling. Caroline Spelman, the shadow Local Government & Communities Secretary, said: “We welcome this U-turn because in large part it follows the campaign we have mounted asking the Government to look again at the impact business rate increases will have at this time of recession.”

The scheme will now allow business owners to defer about £600 million relating to 1.6 million properties, the Department for Communities and Local Government (DCLG) said. More than half of all councils have reported that businesses in their area are having difficulty meeting their business rate bills, and about 85 small businesses are failing every day as they grapple with slumping consumer demand and tighter credit conditions.

Kevin Hoctor, the head of policy for the British Chambers of Commerce, said: “We asked the Government to freeze the business rate increase because RPI inflation is at zero per cent. Staggering the cost is still an increase and it will be complex. Businesses will still be hit at a time when they have restricted cashflow and growth.”

Jerry Schurder, rating expert for the Royal Institution of Chartered Surveyors and head of rating at the specialist surveyor Gerald Eve LLP, whose clients include 40 per cent of the FTSE 100, said: “The deferral of part of the business rate increase is terrific news. But why, oh why, could this decision not have been made a few weeks ago before all the rates bills were issued? It is absurd that the deferral will not be granted automatically but that 1.6 million ratepayers will need to apply to their council to agree a revised payment plan — red tape madness.”

Under the scheme, businesses will have to pay the 5 per cent higher bills until the end of June, at which point they can apply to their local authority to defer 60 per cent of the increase over the next two years. Businesses hit by the end of the 2005 transitional relief scheme will also be allowed to spread their payments.

Business leaders and local councils had been calling on the Government to back down on the rate rise given that RPI inflation, which reached 5 per cent last September, the month that business rate increases are set, has now tumbled to 0 per cent.

Clinton Cards, the struggling retailer which has a multimillion-pound rates bill on its 1,000 stores, said that the move was a step in the right direction. Barry Hartog, its commercial director, said: “A 5 per cent increase in rates while your revenue isn’t increasing seemed perverse to us.”

Ian Cheshire, the chief executive of Kingfisher, which owns B&Q, said: “Ideally, we would have liked to see a reduction rather than a deferral, but this is still a welcome change.”

Richard Lambert, the Director-General of the CBI, said: “We have been campaigning for a two-year freeze on business rates, instead of the 5 per cent rise that is still being applied over time.”

Councillor Margaret Eaton, chairman of the Local Government Association, said: “This will help a large number of businesses struggling in the bleak economic climate.”

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