Business rates unsustainable at present, say experts
The Treasury Committee this week continued its inquiry into business rates to scrutinise how government policy has impacted business.
The committee is examine how business rates policy has changed, including business rates retention, alternatives to property-based taxes, such as the proposed digital services tax, and how changes to business rates could impact businesses.
Conservative Nicky Morgan is chair of the committee.
Previous hearings featured representatives from ICAEW, the Rating Surveyors Association and others (May 7; reported here), and representatives of business and local government (May 22 and Jun 4; reported here).
The fourth oral evidence session, held on Wednesday 19 June, took evidence from Jerry Schurder, Head of Business Rates, Gerald Eve LLP; Rachel Kelly, Senior Policy Officer, British Property Federation (BPF); Kevin Muldoon-Smith, Lecturer, Northumbria University; Tej Parikh, Chief Economist, Institute of Directors (IoD); and Steve Rigby, Group Property Director, Tesco.
Nicky Morgan asked about wholesale reform of the business rates system
Tej Parikh (IoD) said the primary reason why the present situation is unsustainable is the increase in business rates and the cumulative burden that businesses now face. The amount being charged is the problem, he added. He went on to say some of his members might be put off from opening another property because they might lose small business rates relief.
Steve Rigby (Tesco) said the system can be repaired, but it actually needs fundamental rebalancing, because in the retail industry now, 20 per cent of the sales are online. “We believe there needs to be a rebalancing. Our proposal is twofold. In reality, it is a 20 per cent reduction in the UBR (Uniform Business Rate), back to a level seen in 2010, to 40p for the bricks and mortar retailers. To create a level playing field, it is a two per cent online sales levy, which will broadly have a tax position for the online retailers similar to the tax paid as a percentage of sales for those in bricks and mortar. Broadly, they should be fiscally neutral for the Government.” He accepts that Tesco would have to pay both.
Kevin Muldoon-Smith (Northumbria University) agrees with the property tax basis but with more frequent valuations. The check, challenge, appeal needs to be improved, though it is getting better, he added. We need a hybrid system in which digital, online forms of tax would be included, he suggests.
Morgan then asked whether the market rental system is working. Morgan suggested that people involved in the property market want there to be high asset valuations. She said: “They want there to be high rents, and it does not matter if properties are sitting empty as long as the rental value is high people—property businesses—can then borrow more money, regardless of what is going on on the ground.”
Jerry Schurder (Gerald Eve LLP) believes business rates should continue to be based on property rental values. Schurder said one of the fundamental fixes that is required to make business rates fair again is far more frequent revaluations—far more frequent than even the three-yearly revaluations that the Government intend to introduce. He added that businesses do not realise that if they pay a high rent, the chances are that they will end up with a high rateable value and therefore a high rates bill. That is because the relationship has been broken by the infrequent revaluations and the transitional arrangements, which prevent the largest increases and deny the largest decreases.
BPF’s Rachel Kelly agreed with Schurder, saying a rational investor is not going to purposefully keep a property empty.
Conservative Kevin Hollinrake asked about business rates’ disproportionate burden.
Steve Rigby explained that retail pays 25 per cent of the rates bill yet represents around five per cent of GDP. Looking at the example of Tesco, its rates bill is around £700 million, but corporation tax is about half of that, so the fixed costs in retail have become completely disproportionate, he said.
Schurder said the total take from business rates has increased at a gross level from £10.4 billion in 1990 to well over £30 billion, well outstripping the rate of inflation, whichever measure one uses. The amount that businesses pay here by way of local property tax far exceeds what is paid in most other countries in the EU and the OECD. The UK should reduce the rate back down to 34.8p or thereabouts—a third of current market rental value, he suggested, saying: “I believe that business would accept that a tax at about that level would be a fair contribution towards local services.”
Labour’s Catherine McKinnell asked about a possible business growth accelerator in England. She added separately that the idea of local authorities being able to competitively lower their business rates does not seem very realistic.
Although supportive of the accelerator, Rachel Kelly urges caution not to ‘over-incentivise’ new development. On the question of locally set business rates, she does not necessarily think that it would be the best thing for the Exchequer if local authorities could undercut their neighbours. It would just add complexity to the system, she added.
Kevin Muldoon-Smith agreed with the accelerator, ‘but it is a more progressive type of relief, so if we were to go down that route, it would need to be in the context of evaluating all the other reliefs as well’. On McKinnell’s second point, he said it could be very difficult to lower the multiplier in local areas and, in business rate retention, an awful lot of the growth from economic development that local areas might do over time is stripped out of the system, so you can only really reward new property development.
Jerry Schurder has no doubt that business remains vehemently against the idea of local rate setting. “They have very long memories, going back to the 1980s, when they were treated as the cash cows to fund profligate spending, with massive increases year on year in some local authority areas.” He went on to say it becomes almost impossible for a multi-site occupier to manage its rates liabilities when there are 317 different calculations of rates at a local level. We would still have to have a redistribution system behind the scenes; otherwise, half of councils would go completely bust overnight, he added.
Kevin Hollinrake asked about the check, challenge and appeal system.
Kevin Muldoon-Smith said it has got better over time but it was introduced too early, and the portal did not work particularly efficiently. It is quite complicated even for rating professionals to use; when you have businesses trying to do it themselves, it is very complex, and that is just getting through the checkpoint. You then get the challenge, and you face a problem at the VOA, which is quite under-resourced, he said. It is also still dealing with appeals from the last set of appeals on the last rating list.
Jerry Schurder said it is the most preposterous, manifestly unfair system of challenging or objecting to rates assessments that anyone could ever possibly devise. They have devised a system in which the entire burden of proof is on the business to prove the assessment to be wrong, he complained. In relation to the 2010 appeals, as at 31 March this year, the official statistics were that there were 66,000 appeals still outstanding, and 45,000 of those are related to the ATM case.
Steve Rigby said his company has thousands of outstanding appeals but this is mainly around the ATM inquiry.
Self-assessment creates some efficiencies, in theory, but you need to offset that against the fact that a number of SMEs might not have the expertise in-house to deal with the self-assessment process, he said.
Labour's Alison McGovern asked about a single consolidated tax for small businesses
Steve Rigby prefers the current model of a mixed system, but it needs rebalancing. Rigby believes business rates is an effective tax because it is easy to collect and difficult to avoid, and he does not see a clear case for abolishing a property tax.
Tej Parikh said we need to capture different forms of economic activity, it will be difficult to do that through a single, one-size-fits-all tax. Parikh went on to say the difficulty with things such as basing tax on turnover is that businesses have different models. Some might operate with a higher turnover and lower profit margin, and some with lower turnover.
Jerry Schurder said he is concerned about the overall burden of business rates and not the overall tax burden.
Conservative MP Steve Baker wondered why, despite so much wide support for land value tax, it is used so rarely internationally. He has misgivings about land value tax.
Kevin Muldoon-Smith said the structural change that would need to be in place to move to a land value tax would be huge. It has the potential to increase the density of development, promote investment and deal with things like land banking and that type of stuff, but that is very much in the abstract sense, he said.
Jerry Schurder said the biggest challenge, though, is where the evidence is going to come from to establish the value of unencumbered land—land without buildings—because, particularly in urban locations, there is as good as no evidence of clear land sales on which to form the basis of the valuation. You would need a planning inquiry to determine the highest and best use that could be made of each parcel of land. Then you have an argument, potentially, about what the value is of the individual parcel of land: “I think there would be a 100 per cent appeal rate against land value taxes,” he suggested.
Steve Rigby said if the tax rate for the UBR were lower, investment would be encouraged. The issue is not how we come to it; the total burden is a more important part of it, he added. Tej Parikh opined that land value tax might fit well with some businesses because it is not necessarily a tax on the property.
Rachel Kelly has doubts, saying: “There are going to be uses that are not profitable—parks, schools, museums—things that we want in our communities, and would a land value tax detract from being able to create that kind of mix in our communities?
Labour’s Rushanara Ali said one way of filling the gap in the public purse would be through a digital or an internet sales tax.
Steve Rigby talked about Tesco’s proposal for an online sales levy, which is effectively a sales tax, but is actually a tax on the operator and not on the consumer. “At the moment, the retail bricks and mortar retailers are paying at least two per cent of their sales base on rates—it is two per cent plus—so that tax is already in existence in physical bricks and mortar retailing. Our proposal is to level the playing field on that.”
Rachel Kelly said if we are looking to the business rates system to address some of those global challenges with international and digital businesses, she thinks we are trying to do too much. The OECD has done a lot of work in the areas around profit shifting and taxation of digital businesses, and we would be better placed to support that work alongside this.
SNP MP Alison Thewliss asked some more about online sales tax for physical goods.
Steve Rigby said the burden has become too much for the physical retailer. Tesco thinks that because it is two per cent, it broadly raises the same in revenue as the reduction for the physical estate retailers would be—about £1.5 billion a year. Exceptions from the online sales levy would be orders effectively done in a store—for bulky goods, and so on, that might be delivered at home—and, conversely, things that are ordered online and actually delivered in store (click and collect). “Clearly the losers today are all the retailers operating in physical estates that pay a higher tax burden than online retailers.” In terms of sales on marketplaces, the marketplace would pay the tax; that gets over some of the points that there may have been around retailers not being properly registered, and paying VAT and all other things, he said. Tesco would be looking for the online sales levy to be, in reality, a UK-wide tax, which hopefully could be achieved, so customers in England Scotland would not be treated any differently.
Rachel Kelly said the crux of the issue comes down to the business rates system not accurately valuing property in real time.
So long as we are properly capturing the value of property in real time, through rental valuations, we should be picking up the changes as the economy moves and markets increase or decrease in value, said Jerry Schurder.
On empty property relief, Kevin Muldoon-Smith said the way it is designed, it almost rewards local authorities and the public purse to perversely go for empty property rates, because the multiplier is so high. He wants to see the business rate accelerator in Scotland, ‘where you can almost incentivise occupation’ extended across the UK. He said: “It is such an avoidable tax [empty property rate] because it is such a bad tax that it would be mad not to try to avoid it. There are lots of businesses out there whose business model is helping landlords to avoid tax. There are these fake companies that are set up just to trigger rate reliefs over a time, and then they will be extinguished straight away. You will have just a modem in an office that is masquerading as a business. There are many ways of avoiding empty property rates.”
In general comments, Tej Parikh said there is also a case for looking at the role of reliefs and what role they can play in regional growth, such as enterprise zones. Awareness of reliefs available is certainly a challenge as well. Kevin Muldoon-Smith added that some businesses have the reliefs but did not realise that they had them, because they were automatically sent over.
The full session can be read here.
By Hamant Verma