Time to retain, reform or replace business rates?

2 Jul 2019

A CIOT/IFS debate on taxing commercial property asked whether it was time to retain, reform or replace business rates.

Stuart Adam, Senior Research Economist at the Institute for Fiscal Studies (IFS), said that business rates are not killing the high street. Adam said that in the long run, because there is only a limited amount of land for shops, especially in places such as central London where rents and business rates are highest, cutting business rates will simply lead to higher rents. Replacing business rates with a land value tax would be economically efficient and would redistribute from owners of less developed land in prime locations to owners of highly developed properties in remote locations. A key practical challenge is valuing land separately from buildings on it, which will need careful study of possible methodologies and other countries’ experiences, he said. On reforming business rates, the economist said some improvements are happening already and there is scope for further improvements.

Peter Wyatt, Professor of Real Estate Appraisal, University of Reading, said there is an undeniable economic case for a land value tax; it only taxes the unearned value, for example. He said it would incentivise development or improvement of land and there is no vacancy issue (because you are just going to tax it whether it is being used or not). Taxing property taxes improvements, he noted.

On the other hand, property taxation is robust, better understood and combines a wealth tax (on land) with a service tax (on properties), said Wyatt, adding that few countries have just land taxes.

While property tax is unpopular most people recognise the equity of taxing property, he acknowledged; current problems are the result of years of making property the heart of social and economic aspiration. Transaction and revenue taxes are widespread and easy, whereas wealth taxes and development taxes are more difficult and contentious, he added. Land value tax is supported by economists but difficult to implement.

The debate was held before an audience at the British Academy in London, on 18 June 2019. CIOT President Glyn Fullelove was the Chair. The speakers used slides to present their arguments, which can be viewed at the bottom of this page.

Rachel Kelly is Senior Policy Officer (Finance) at the British Property Federation. The property industry wants an agile and responsive tax system, said Kelly, adding the total business rates burden should be reduced, the total tax yield should fluctuate in line with the economy, there should be annual revaluations and empty rates relief should be reinstated to a certain extent. Successive increases in business rates have led to a burden that is unsustainably high and out of kilter with the true value of the premises that a business is occupying, and is well above OECD average.

On an alternative online sales tax, Kelly has doubts saying this is not just a retail problem with business rates and that the future of retail is ‘Omni channel’ (property and online) in any case so it does not make sense to tax a different part of the same sector. Her instinct is to look at OECD’s work on taxation of the digital economy, as opposed to coming up with anything too radical.

On land value tax, she said conceptually it is appealing, as it incentivises use of space in the most optimal way and improvement to land. Her concerns are that she is not sure what optimal use of space means and there will be big winners and losers such as charities and organisations that get reliefs at the moment, planning considerations – and valuations will become more contentious.

Business rates is a key contributing reason for the decline of the high street, said Jerry Schurder, Head of Business Rates at property consultants Gerald Eve. He said a property based tax should continue within the basket of corporate taxes, and a property based tax should be based on annual rental values. It is wrong that rates are based on assessments done two years earlier. He is very keen for the property taxes regime to be transparent. Schurder complained that the whole burden of proof is on the rate payer when appealing; annual revaluations may take the need for appeals out of the picture, he suggested. Vauxhall UK did research in relation to all the local property taxes it pays across Europe, said Schurder. The UK occupies eight per cent of its total floor space in Europe, but accounts for 67 per cent of the property taxes that it pays across Europe. That is the extent to which the UK’s system overtaxes all businesses, he stressed. He urged the Government to review all rates, reliefs and exemptions to ensure those that remain are ‘fit for purpose’.

During a Q&A session, when asked if a land value tax may be more environmentally sound, Adam said carefully targeted instruments may be better. The panel was asked if they agree that business rates in the long run are borne by the landlord. Schurder thought this would be the case if we immediately abolished business rates, but he is asking for a modest reduction only. Former OTS Director John Whiting said land value tax will lead to more subjectivity, more scope for argument, and be less easy to administer whereas rates are at least a little more objective.

Panel: (left to right) Jerry Schurder, Head of Business Rates at Gerald Eve; Peter Wyatt, Professor of Real Estate Appraisal, University of Reading; CIOT President Glyn Fullelove (chair); Stuart Adam, Senior Research Economist at IFS; and Rachel Kelly Senior Policy Officer at British Property Federation.

  • A video of the 18 June 2019 debate can be found on our 'videos and audio' page.

By Hamant Verma