The problems with the business rates system cannot be solved by just having more regular revaluations or just copying Scotland's example, the Treasury Committee’s latest evidence session on business rates heard today (7).
The Treasury Committee has launched an inquiry into Business Rates to scrutinise how Government policy has impacted business. The Committee will 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.
The inquiry will look at how changes in Central Government policy have changed the business rates system. In turn, this inquiry will also look at how the current business rates system is operating and the associated impact on business.
Nicky Morgan, Conservative, is the Chair.
Witnesses for today’s session were John Boulton, Technical Strategy Department Manager, Institute of Chartered Accountants in England and Wales and Tom Emlyn Jones, President, Rating Surveyors Association.
The session started at 1.20pm with the witnesses introducing themselves to the committee.
Boulton said the ICAEW has set out ten tenets for a fair and stable tax system, such as tax being certain, being simple and easy to both collect and calculate for the taxpayer - business rates are failing on all three of those, he said.
Boulton said reliefs are welcomed by those it helps but reliefs are a symptom of a system that has flaws. ICAEW members have given examples of where they cannot make a business decision because of uncertainty that comes with business rates, which are more unpredictable than people think.
Jones criticised delaying the revaluation of business rates, especially as the high street is already struggling. If you get a bill, it is often difficult to understand because of all the reliefs, he added.
Jones said the level of rates has now risen to such a height that that is a problem in itself. This means where there is a delay in the system adjusting to the 'auto-correct mechanism' has caused problems. He favours movement to three-yearly evaluations because the smaller the trend line will be, Business also have to contend with rent and lease unpredictability. Rates should react to the rent, ideally.
Conservative Charlie Elphicke asked why business rates on pubs are different to other businesses. Jones said this is because pubs used to be mainly owned by brewers, so there were no rents, so then the practice came to look at 'fair and maintainable' trade; this measure is not as simple as profit and loss calculations, he added.
On rating evaluation, Jones said if you apply all the methods properly, you will come to the right answer. The Valuation Office (VO) is under resourced he added, which does not help. VO needs to be empowered with more expertise and resources to help the rating system.
Elphicke then asked about high street valuation Vs out of town valuations. Jones said the analysis of the rents and application of valuation skills is within the ambit of VO. Boulton said this shows up the complexity of the system and what you expect you will pay is not what you end up paying - and that is unnecessary.
A valuation by contractors method is different as it looks at capital costs of the building and land and decapiitalises that with a statutory rate, said Jones. Jones went on to say that sometimes at revaluation the statutory capitalisation rate has a significant impact on outcomes.
On airport shops Vs high street, Jones said airport businesses are probably paying a high rate of business rates. He offered to write to Elphicke with a more thorough answer.
Labour's Rushanara Ali asked about awareness of reliefs.
Boulton talked about the leisure industry which is able to develop sites and create business spaces, but they do not benefit from reliefs. ICAEW has not surveyed its members about awareness of reliefs. Boulton likes the Dutch system which has transparency where rate payers have a much larger influence on communicating information to authorities and challenge decisions.
Jones said some reliefs are so complicated that business people do not fully understand them but generally people are aware of reliefs and ask 'what can I get?' The challenge and appeal system has been very disappointing in the UK. Bills are rather overcomplicated and businesses ask agents to deal with reliefs for them. The numbers are quite big, after all.
Jones said it is unfair that when a revaluation indicates that a businesses rates should go down, it does not go down because he is paying to stop someone else's rates going up.
Boulton said that a business in a marginal location in terms of profitability, they have a delay in receiving a reduction in rates, parly because of transitional relief.
Asked for other recommendations, Jones said corpoation tax has come down and business rates have gone up. If you are looking at fiscal neutality is that something you can sustain, with rates at the level they are. VO is important to get valuations right and needs to be resourced better? He suggests rolling back on reliefs as they are sticking plasters because the rates are high; one person's relief is fair for them but unfair for everyone else. If you open the door to reliefs, everyone wants a bit of that - reliefs should be phased out and replaced with a better system, he added.
Boulton says greater certainty and transparency over information for taxpayers is needed and improvements to the ability to challenge decisions.
A MP asked if reliefs for busines rates are shifting the burden on to less people?
Jones agreed that if you give a relief to someone, someone else is paying.
Conservative Steve Baker asked if a property tax is the right approach. Boulton said the fundamental problems with the business rates system can be solved by making the system more certain and transparent. It would be difficult to replace business rates, given the significant contribution to the tax take.
Asked about a turnover tax instead, the ICAEW spokesman said that needs a lot of thought before such a change happens. The distributional impact of the tax needs to be looked at beforehand, he added.
Should there be a generalised land value tax? asked Baker. Jones said he is not calling for that. If you made the business rates cake bigger, that may help reduce the poundage but this is a political question and not one for surveyors.
Baker than asked about the importance of the frequency of revaluations in ensuring a fair business rates system.
Boulton said it is not the only factor but it does lead to the problem of companies thinking they will pay X amount but actually pay Y. On annual revaluations, he said in Holland there is better use of data and transparency where taxpayers are an integral piece of the system. Asked if an annual revaluation will have a positive impact on transitional reliefs, he said the key thing is that if you are in a diffcult economic situation and in an area where you will be paying less rent there is a delay at the moment to recieving that. If that can be transmitted in a clearer way it would be helpful.
Jones said the five-year system was working reasonably well because rent reviews are every five years but the market may have sped up now and three year valuations are pleasing.
On desktop valuations, Jones said they are helpful tools for valuers but prone to make mistakes if left to their own devices.
On annual valuations and the impact on appeals, Boulton said annual revaluations are not the only factor that needs to be considered, others being transparency and probabaly only worth doing as part of a basket of changes to the system. Jones said we are 'so stuck in the glue that is CCA [Check Challenge Appeal]', that envisaging the VO will react to any request for a change if you do it annually, he does not see that happening.
A property based tax means the tax base is easy to identify, which needs to be considered before any move to a turnover tax, said Boulton.
On appeals, the witneses were asked if the system is getting any better, Jones said the IT is almost there and the system has shifted the burden from VO to the rate payer to make their case, but how that works in practice gets mixed reviews.
Boulton made the point that agriculture benefits from considerable subsidy from the Government and exceptions from busines rates. Jones said if agriculture becomes rateable that would not have the impact of a land tax because land tax works in a different way.
Labour's Catherine McKinnell pointed out there is no transitional relief in Scotland, Wales or Northern Ireland. Jones suggests the swings in value are not as significant as elsewhere. However, business want consistent systems across all Home Nations, he added. What about Scotland's six month time limit for revaluations - what about this in England? Jones said it is a terrible idea. Anything that stops altering it so it is correct is unfair, he said. He praised the Business Growth Accelerator, however, because it encourages investment.
McKinnell asked about the 100 per cent business rate relief for nurseries in Scotland. Boulton said that relief would be welcomed by the sector, especially those who want to expand the nursery or open a new nursery. Jones said if the Government wants to help nurseries, then help nurseries, 'don't sugar around with the rating system'.
On Smal Business Rate Relief, Boulton said alignment with Scotland would be popular with very small businesses. Business rates can be an impediment to start-ups, he added.
Jones, however, said the rents for small properties available for small business rate relief, are going up to eat up that relief because businesses look at rates and reliefs as one. This 'sticking plaster' relief should be eased back.
Morgan closed this session at 2.18pm.