Taxing questions on a flawed system

By Martin Ford | 30 August 2020

Business rates may play a key role in the finances of local authorities, but with a flagging economy, ever-increasing numbers of discounts and exemptions from the chancellor and a Government review of the system under way, does the system have a future?

While no form of tax could claim to be popular, business rates are perhaps one of the most disliked of all – and not just by those paying them.

The attraction of business rates retention to the sector has eroded almost as quickly as the tax base itself in the wake of the economically devastating coronavirus lockdown, even among the leadership of the Local Government Association (LGA).

Chair of the LGA resources board, Richard Watts, warned earlier this year of a need to ‘look at alternatives for our long-term sustainability’, while improvement board chairman Peter Fleming said: ‘If we had got 75% business rates retention we would have been in an awful place now.’

Others see business rates as a whole as something that should be consigned to the past. President of the Society of County Treasurers, Gary Fielding, labelled the system as ‘anachronistic’, adding: ‘I don’t think it’s got a future. It becomes more irrelevant with every passing year.

‘It doesn’t correlate to demand for services. It needs to be decoupled from council funding.’

Localis chief executive, Jonathan Werran agreed: ‘It’s fundamentally flawed, and has been for many years,’ he said. ‘It’s a redundant tax.’

On the other side of the fence, organisations such as the Confederation of British Industry (CBI) are calling for a ‘fundamental rethink’ of the system.

The demand for change from both politicians and the business sector was enough to persuade all of the big three political parties to either pledge a review or to replace it outright, and sure enough the Johnson administration has made a call for evidence.

An interim report focused on the rate multiplier and reliefs will be published in the autumn, with the review’s conclusion due in the spring of 2021.

The stated aim is to ‘reduce the overall burden on businesses’, but also to improve the current system ahead with more fundamental changes possible in the medium-to-long term.

One of the reasons contributing to business rates’ unpopularity is that the system of reliefs, which has seen a raft of additions both before and following the COVID-19 pandemic, is complex to administer.

Furthermore, the Local Government Information Unit (LGiU) has uncovered emerging evidence that reliefs result in higher rents that benefit landlords rather than ratepayers.

Mr Werran has argued for devolution of business rates, giving local authorities powers to raise or lower rates to create a place-based system of funding.

‘Our evidence from Switzerland, the Netherlands, Germany and France shows it doesn’t lead to a race to the bottom – they came up with mutually-beneficial arrangements, Mr Werran said.

Another thorny issue is that of revaluations. So thorny, in fact, that the 2021 revaluation will not come into effect until 2023, due to the economic turmoil of the COVID-19 outbreak.

The call for evidence looks at different approaches, including banding in a manner similar to council tax, and zoning with a fixed price per square metre for different areas or sectors, both of which would theoretically speed up the process – which would prove popular with the CBI.

Alternatively, revaluations could be required when individual properties are sold, when rent changes, or leases are renewed, or take place at a regional rather than national level.

The call for evidence looks at two possible replacements for business rates as a whole. The first is a capital values tax based on the value of both the property and the land, to be paid by the owner rather than the occupier.

It removes the disincentive to improve the property and shifts the burden to the property owner. It proved promising enough to warrant inclusion in the Liberal Democrat manifesto at the last general election.

However, compared to business rates it could be difficult to establish ownership and pursue payments, particularly if owners are based overseas.

The paper also put forward an online sales tax, which would address the disparity between beleaguered rate-paying high street retailers and their online-based rivals.

A report in June by retail expert Bill Grimsey advocated scrapping business rates entirely for the retail sector in favour of a universal 2% sales tax.

However, critics have argued it could increase costs to online consumers.

Joanne Pitt, Chartered Institute of Public Finance and Accountancy local government policy manager, said that while there was a ‘national conversation to be had’ on a digital tax, it would have to be ‘fair, equitable and easy to collect’.

Nevertheless, it lacked a link to ‘local priorities and accountability’.

She added: ‘Business rates are a key funding stream for local authorities and it’s important that remains a focus and some form of business tax like this is a part of local authority funding.’

The arguments put forward in favour of business rates in the document is that it is efficient to collect, with low levels of avoidance and evasion, stable and predictable, providing certainty for businesses and governments.

It is also described as ‘less distortive’ than other forms of taxation and ‘less harmful to economic growth’, while being based on physical property makes it ‘more easily localised’.

If appetite for change is strong, hope that it will take place is in short supply in local government circles.

LGiU Associate Mike Woods admitted to ‘being assailed by a depressing sense of déjà vu’ at the call for evidence.

‘We have been here before. Almost all of these questions have been asked in previous reviews,’ he said.

‘The best approach may be to dust off previous responses and resubmit them with very little revision.

‘Looking at the suggestions of alternatives to business rates, the treatment is so perfunctory and the questions so wide-ranging that one wonders how serious the Government is being.’

Mr Werran added: ‘There are people looking at this seriously in the Treasury and the Ministry of Housing, Communities and Local Government. The difficulty is a tendency to hang on to something bad for fear of something worse.’

Similarly, Mr Fielding spoke of his fear of the Government’s ‘habit to revert to what you know’.

On the other hand, Ms Pitt pointed out that the crises represented by Brexit and the coronavirus outbreak were likely to limit opportunities to enact drastic change.

‘While the business rates consultation is important, is must be seen in the context of the sustainability of local government funding as a whole,’ she added.

‘The current model is not sustainable for local government, reform of business rates alone is not a panacea for that.’

Mr Werran agreed: ‘We can’t take it individually, we have got to look at it on the whole with a royal charter.’

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