Business rates under fire but no agreement on alternatives

7 Jun 2019

Business rates came in for plenty of criticism from expert witnesses during the Treasury Committee's ongoing inquiry into business rates.

The House of Commons Treasury Committee is continuing its inquiry into the impact of business rates on business. Following its 7 May hearing with representatives from ICAEW, the Rating Surveyors Association and others (reported here) they have held hearings with representatives of business and local government, and these are reported below.

These brief reports focus primarily on discussion about reforming or replacing business rates, rather than the impact and fairness of business rates.

Oral evidence session two – Representatives from Business (22 May)

Evidence was given by Meryl Halls, Managing Director, Booksellers Association; Chris Harris, Group Property & Development Director, John Lewis Partnership; Sebastian James, Chief Executive, Boots UK; Catherine Gras, Spokesperson for Gas Storage Operators Group and Chief Executive, Storengy UK; Adam Blaskey, Founder, The Clubhouse; Seamus Nevin, Chief Economist, Make UK; Eleanor Griggs, Land Management Adviser, National Farmers Union. Full transcript here.

Chris Harris said online and high street are intertwined for John Lewis. “It is not that we have an online business and a stores business; they are together… A customer will typically come into a store, look at a sofa, look at the colour of the sofa, choose the fabrics and so on, may then go home, measure it up, order it online and then it gets delivered to the store. You end up with this completely omni-channel—as we describe it—process. Then, of course, there is click and collect, and more than half of our online orders are click and collect.” Sebastian James said that Boots operate a similar model. “The press like to have a lot of fun with this and say that online and offline are enemies. We are not enemies. It is very much a complementary activity. We think that the best model for customers is a combination of the two.” Asked later why John Lewis oppose an online sales tax, Harris referred back to this model, adding: “Taking one element of our business and saying, “Let’s apply a tax over there” seems like not the right way forward.”

Steve Baker asked Harris how complex it was for a large multisite retailer like John Lewis to navigate the revaluation system. Harris replied: “It is extremely difficult… We still have 110 appeals outstanding from the 2010 list, so that is nine years and we are still fighting some of those. We have 200 MCC (material change of circumstances) appeals outstanding, yet we have not even been able to get into the process of appealing the 2017 list yet because it takes so long to get yourself set up, registered and organised to be able to go through that process.” James said that Boots have not had one appeal (out of the ‘low dozens’) resolved from the 2010 listing.

Harris argued for more frequent valuations: “We think that it should be annual and in many respects in going to an annual valuation we will remove this need for continually appealing rateable values because it would be reassessed on an annual basis. We would probably go further than that and say some sort of self-assessment around the rateable value by the occupier would be a more material way of making that change.” Asked how her smaller members would cope with self-assessment, Meryl Halls from the Booksellers Association said: “If it was clear, trusted and easily navigable, they would probably prefer it.”

“Boots advocate a business rates levy. Is this not simply an additional sales tax,” asked Colin Clark MP. James replied that Boots took the view that, “while 20 years ago property was a pretty good proxy for the extent to which a retailer could bear the burden of the taxes that they ought to be paying to pay for the infrastructure that they used, today that is no longer true.” Boots had applied four guiding principles: it should be equitable, covering online and offline; it should be non-inflationary; it needed to be revenue neutral to the Treasury; and it should be relatively easy to implement. “We settled on using the existing VAT collection mechanism because it exists and it is relatively straightforward and businesses understand it, but anything that worked and successfully followed those four principles we would support.”

Halls said the Booksellers “are not necessarily over keen on a sales tax because we don’t think that retail should be taxed any more. We are more interested in fundamental reform of the whole business taxation system.” She added: “We are quite keen on the digital services tax that has been floated by the Treasury in terms of it being something that is for services operated by online players… [But] we have not come out with a particular recommendation. We would be interested in looking at sales tax or other things suggested by brighter minds.”

Seamus Nevin of Make UK (which represents manufacturers) was asked about a statement in the organisation’s written submission that 42% of their members would invest in plant and machinery if it was not included in the business rate calculation. He said in practice this means “that our firms are essentially paying a tax on the physical building that they own and the land that their business is based on, but also if they need to invest in new machinery to develop a new product or because the machinery is out of date, that is an extra cost in tax terms.” It is not just machinery and plant, he said. “It can also be things like high-speed broadband or if you want solar panels to make your energy more environmentally friendly, you build in extra costs that will be subject to business rates taxation and again you are blocked or impeded from investing in these things”. He suggested taking plant and machinery out of business rates as part of a wider review of business taxation generally. “Whether you decide to exclude particular types of technology, for example IT equipment… or high-speed broadband… is open to discussion.”

Catherine Gras of the Gas Storage Operators Group said that, in Germany, there are similar property taxes on industrial assets but they are very minimal. “We are not talking about millions per year paid for that. We are mostly talking about 10,000 or something like that. When it is so minimal it is not a problem.” The rates are calculated mostly on the value of the land “but because the percentage that you will be paying in tax is so low, the question is not how you calculate it. The question is how much you are paying at the end.”

Nevin said the UK has the highest property-based business taxes in the G7. “The US and Japan in particular have significantly reduced theirs. The French Government removed plant and machinery from their equivalent of business rates because they recognised the effect that it was having on business investment.”

Some witnesses advocated annual revaluations, but Adam Blaskey, whose company provides flexible meeting and work spaces for small businesses, said he thought there had been “far too much talk about revaluation periods, about the appeals process, and whether it is a property tax or a land tax, and much more of the debate should be given up to looking at alternatives, whether it is a simple, consolidated tax, or others. My silver bullet would be to say that if business rates raise about £30 billion a year, if we were to just look at corporation tax and VAT as a starting point, while you can commend the Government in trying to reduce corporation tax, as I mentioned, I do not think many people mind paying tax when they are profitable. I would suggest freezing the 2% reduction. Looking at VAT, we remember when VAT was down at 17%; it is back up to 20%. Corporation tax and VAT, if I am correct, add up to about £194 billion a year. If you took the average rate of 20%, put that up 10% to 22%, and you got £20 billion in tax more, you have solved the problem to a degree.” Charlie Elphicke MP suggested he was “basically saying: axe business rates and simply have VAT at the rate of 35%”. Blaskey concurred, adding: “I think we should be taxed on what we produce from a location, not from the property itself.”

Rushanara Ali asked Eleanor Griggs what the NFU thought about radical changes like these. “We did not agree particularly or see how any of the suggested alternatives could really work,” said Griggs. “A property-based tax that has that link to the local element is something that we still do agree with, and I think that is important.”

Nevin advocated the use of a land value tax system: “We think it is probably the fairest in the sense that it also increases the likelihood that you are using your land efficiently. If you shift to something like a sales tax or a production tax, you are possibly incentivising businesses to become inefficient in terms of using large amounts of space for low-level production. The other advantage of a land value tax as we see it is that it could incentivise investment in parts of the country that typically do not have huge amounts of business investment already. You are looking at areas where land is cheaper and, therefore, more affordable to invest in terms of opening up a new factory and creating jobs and wealth in regions of the country that are behind.” But Blaskey and Griggs both expressed scepticism about this option.

On an online sales tax Blaskey noted the earlier comments that a lot of retailing is ‘omni-channel’. “I do not think an online sales tax really helps. I would advocate a simplification of tax, much less tax, which is much clearer for everyone to understand, whether that is a simple, consolidated tax, or just an increase in VAT, for example.”

Oral evidence session three – Representatives from Local Government (4 Jun)

Evidence given by Andy Street CBE, Mayor, West Midlands Combined Authority; Cllr Richard Watts, Islington Council Leader and chair of the Local Government Association resources board; Prof. Chris Turner, CEO, British BIDs (Business Improvement Districts); Ojay McDonald, CEO, Association of Town and City Management. Full transcript here.

Two members of the Housing, Communities and Local Government Committee were also present for this session.

Asked if online retailers should be penalised for operating a non-traditional business model, Professor Turner said no. “A lot of small businesses in the middle of towns, which are bricks and mortar and do traditional retail, are also heavily involved with online… The issue with out-of-town online is that those businesses are able to get hugely reduced costs to their delivery, and therefore they compete on a platform that does not feel fair… I have no solution to the online, except that we must not just assume that it is an online problem. It is about large suppliers that are very cheap and cost-effective, with huge delivery models, that exist out of town and may not be paying the sorts of taxes that we expect them to pay at a national level either.”

Ojay McDonald said his members (town centre managers and similar) felt a sense of unfairness, but “it is probably more than just the competitive element. Whether there is a level of competition or not, ultimately I think rates bills are just too high.” He later added that “the fact that we have so many ad hoc reliefs is symptomatic of the issues we have with the structure of the business rates system. If the business rates system worked and was fair, we probably would not need so many reliefs piled on to each other.”

Asked how easy it is to operate the business rates billing system, Councillor Watts said that, before the 2017 reliefs came in he would give it eight or nine out of ten. “The nice thing about property-based taxes is that it is really hard to hide property, which is why there is a core argument for retaining property-based taxation in this area… [But] the more recent reliefs have made it more complicated. For example, many local authorities had to invest heavily in changes to software to implement those. Had we been consulted before they had been brought in we could have highlighted some of that, and it would have made their lives easier. So I think it has gone from an eight or a nine to a seven.”

Asked about moving away from a tax based on rentable value Turner said he was not arguing for this: “I’m just arguing that a 50% property tax is a very high taxation rate when it is not under the control of the person who is paying it. You and I pay tax. If we don’t want to pay too much tax, we just work a bit less and we pay less income tax. If you are paying property taxes, you have to pay that, however much your business does. Therefore, I am looking to a model whereby a local authority can be much more innovative and creative on what it does in terms of those demands. It seems to me that 50% is very high at the moment, when corporation tax is, what, 20%? It’s something of that order.”

Andy Street described the digital sales tax as a good start “but it is really only the beginning of a much bigger issue. With the sales tax and the tax on digital advertising that there could be, there is still a huge well of untapped potential. My own view is that to do some of the things that we have talked about this afternoon, we will need to go back to that… The current business rates are taxing a particular way in which businesses make profit, and it does not reflect how modern businesses trade.”

Watts agreed. “A property tax is right because of just how difficult it is to find anything else to tax in the business world… [However] there are profound implications for the national taxation system for personal as well as business taxes about a shift to a more virtual world. We welcome the digital sales tax as the Government putting their toe in the water on this stuff, but if we are to have any sensible projection of how our economy and society develops over the next two generations, getting to grips with taxation around the digital world feels fundamental to the maintenance of public services, and not just local government.”

Turner was more cautious, saying “a lot of bricks and mortar businesses are getting very involved with digital, and I don’t want them to be clobbered twice. A slightly bigger issue for me is about how big transnational conglomerates get taxed in general. They need to start paying their dues. A lot of small businesses that are paying their dues because they do not have the money to escape them feel very angry about people not paying their dues.”

McDonald said that “to ensure that we have a sustainable system, I am happy to retain a property tax... but I don’t think it is sustainable for it to be at the levels it is at… Ultimately, some of those new revenue streams such as a digital services tax—that is just the start and probably doesn’t do enough, and we need to think of other things—must find their way into local government coffers, as well as other public services, so that we can fund them properly.”

Finally Street was asked about his proposal for “a kind of flat tax for businesses to include business rates”. Street said the proposal in the “Think Small” report, which was led by Nick King. “It was all driven by simplification and by the clarion call that I get in my ear from local businesses, which are dealing with five or six different ways of paying tax and would like to pay just one. That was a different thing, but it is an important spirit of showing entrepreneurial simplicity.”

By George Crozier