Business rate reform: what are the alternatives?
More details are expected in the next Budget on another review of the business rates system.
Business rates have enjoyed a particularly high profile during lockdown which has seen extended relief for tens of thousands of businesses as they struggle to survive. Whilst the calls for reform have never gone away, it has become even more relevant as businesses face up to the reality of surviving post-furlough and existing tax holidays cease.
One option under consideration is to replace the current property-based system with a Land Value Tax (LVT) – something put forward by both Labour and the Lib Dems in the last General Election.
The business rates system has long been considered outdated and unfair, as the tax is imposed whether a business is profitable or not. The burden of business rates has also increased significantly over the last decade with tax rate increases sprinting past any growth in capital gains on property.
So, what is an LVT?
An LVT is a tax charged on the value of the land not the building. So, any buildings or improvements on the land are excluded from the calculation; in theory this removes any tax penalty for improving the value of what is on the land.
This could encourage development and initially give relief to many occupiers being impacted by the current level of business rates, where the “multiplier” (the tax rate imposed on the value of the property at the last valuation date of 2015) now sits comfortably above 50p in the £ for many properties.
However, we can’t under estimate the upheaval of introducing a new tax regime to replace business rates that have been in place for hundreds of years. There would be a long and painful transition period, and we still have no clear understanding of who would be the winners and losers.
The Government has always maintained that any reform would have to be tax neutral – i.e. they still want their financial pound of flesh – so, if they still want the same cash flow in to the Treasury the money has to come from somewhere. If retailers benefit for instance, who picks up their part of the tab?
The other questions would be who administers all this? Would the VOA, currently struggling under the present and established system – have the time, training, staff expertise and budget to deal with a wholesale change? Present observations of the backlog of current appeal cases would suggest no.
Under an LVT system, the tax would move from one being predominately levied on occupiers to one payable by landlords. Again, this sounds fair but commercial landlords are not charities and have mortgages, business loans and other financial vehicles to service. In all likelihood the switch would see costs merely passed back down to the occupier via rent hikes. The machinations of the tax may have changed but the end result and payee possibly would not.
Commercial rents would not change wholesale overnight but there will be a noticeable impact on the investment value of UK real estate. The move in value away from landlords to tenants in the short term would cause seismic changes in the sector and you can be assured the industry lobbyists will not take it lying down.
Also, at the moment, the benefit of business rates today do not lie directly with the Exchequer, but instead with local authorities. The net tax revenue collected from business rates last year was around £26.5bn and a significant chunk of this went to the LAs. As the LVT kicks in then there would be, again, winners and losers. This is at a time when many LAs are walking a fine line between survival and filing a Section 114 Notice – effectively declaring bankruptcy.
When looking at all of the above it is easy to see why previous calls for reform have resulted in kicking the problem down the road, allowing for small time tinkering and reliefs here and there. But this has started to strangle to system with red tape, making it neither fair nor fit for purpose according to it distractors.
Like quantitative easing and the Stock Market, it will be hard to wean any companies off their relief rates and exemptions in favour of a system that levels the playing field for more of the country’s businesses. So, whilst such taxes sound appealing and play into the media narrative of pushing the burden on to greedy landlords there are many drawbacks. There would undoubtedly be more appeals from those hit hardest and mandarins would have to decide at which level of ownership the tax would be levied. Anyone used to scouring the Land Registry for information will know what a minefield that can be when trying to track down true ownership.
Then there are those such as farmers who currently pay no business rates on their land – how will they fare? – and at least rates are based on rental values which can be more responsive to market changes and allowing better evidence on which to base the tax.
Even the Treasury Select Committee, which was very pro-reform, highlighted serious caveats: “A land-based tax is theoretically appealing as it charges landowners rather than tenants — although it cannot be known on whom the final incidence of the tax would fall. However, the practicalities of implementation are very difficult. It is likely that there would be more appeals…. there would be an enhanced level of technical judgement required, particularly in built up areas where there are very few sales to generate a reliable value and it is very difficult to separate the value of land from the value of the buildings that are situated on that land. Land value tax would incentivise high-density usage, and there could be instances where this would not be the desired outcome, such as green spaces.”
If there was an outright winner to replace Business Rates then we would have seen it introduced by now – but there isn’t. Successive government have concluded privately it’s “better the devil you know” and there’s nothing to suggest the present incumbents are any different.
Appeals soared by 690% between April and June, with many citing the pandemic as the reason behind a fall in their property values.
With dwindling options to grow tax revenue in the coming months, Rishi Sunak is reportedly looking at the most valuable properties to aid coronavirus recovery.
As the Government lays the groundwork for its latest business rates review, the idea of an online shopping tax is circulating as a possibility.