Business Rates Review

Submission of the School of Economic Science

HM Treasury has initiated a wide-ranging review of the business rates system with several key aims in view:

  • Ensure the best possible conditions for business prosperity by reducing unnecessary financial burdens; this is seen to be particularly relevant for small and retail businesses.
  • Reduce administrative burdens related to the excessive rate of appeals, supported in part through improved billing and information sharing.
  • Provide a stable and sustainable revenue, with minimal distortionary effects on the economy and equitable sharing of burden.
  • Encourage business confidence to invest and grow, bringing more prosperity to both the local and wider communities.
  • Establish a system that responds appropriately throughout the economic cycle and to evolutionary changes in property use.
  • Maintain fiscal neutrality with any reform.

This submission addresses all of these aims, refers to several key research studies in support of the argument, and illustrates the practicalities of reform through examples of established systems in the world today. It points primarily towards shifting the current business rates base on to site value, shifting the incidence onto property owners and introducing more frequent valuations.


This submission firstly clarifies some general principles of property taxation. This is followed by five sections which address the fifteen questions raised in the Business Rates review. It is arranged as follows:

  • Introduction
  • Principles of Property Taxes
  • Is property-based taxation fit for purpose? [Covering Q1-4]
  • Learning from other countries. [Covering Q5]
  • Using business rates to incentivise growth. [Covering Q6-8]
  • Aligning the system with wider economic conditions. [Covering Q9]
  • Linking business rates with prosperity [Covering Q10-15]
  • Conclusion

Principles of Property Taxes

Two general aspects of business rates are highlighted before addressing the detailed questions of the review.

A. Disaggregation of property taxes

As a “property tax” business rates fall collectively on two distinct economic entities, the building with its fittings and the land on which the building is sited. Although it has long been the tradition to combine these two components, going back to the establishment of the rating system at the beginning of the seventeenth century, any serious review should recognize these two components are very different and the effects of levying taxes on them have very different economic outcomes.

Business rate = site value rate + rate on buildings and fittings

This point is clearly set out in chapter 16 of the Mirrlees Review referred to in the terms of reference. That review points out distinctly that: “the property tax is, economically speaking, a combination of one of the worst taxes – the part that is assessed on real estate improvements … – and one of the best taxes – the tax on land site values.”

Any property rent can be divided into two components, one for the occupation of the buildings and use of other constructed entities and the other for occupation of the site. Consequently the value of a property for economic purposes needs to be regarded as a composite of the capitalized values of the two components of the rent.

In section 2.1 of the discussion paper, HM Treasury states its preference for property taxes. However it should be noted that some of the reasons given apply only to the land component and not to the buildings component of this form of revenue. For example when it is claimed that property taxes are least distortionary it is only the tax on the rent of land that is non-distortionary. As the Mirrlees Review points out, land rents are pure economic rents. Land is not a produced input. Taxing it would not discourage any desirable input. It would merely divert a revenue stream from the private owner to the public purse. Conversely a tax on buildings is highly distortionary; building development is discouraged because a significant portion of the return on the investment is lost in taxation. A second example is the suggestion that property taxes are efficient to collect. This again applies particularly to the site component because of it permanence and immovability which make the taxes difficult to avoid and evade; taxable changes made to buildings are not always so obvious. The third example is the link to local authorities; this link is established directly by the land component through its location. The site value component of rents relates directly to location. Efficient services and effective investment by, or encouraged by local authorities will increase land values and hence increase land rents. Conversely neglect or lack of investment will reduce land rents and hence income. The rental value of a particular building will be the same everywhere; the rental value of its location will be very different indeed.

The arguments for shifting the incidence of business rates onto the land-based component of the rent were fully and authoritatively made in chapter 16 of the Mirrlees Review.

B. Effective Incidence of business rates

Recently there has been some significant research on the effective incidence of business rates based on empirical investigations into the relationship between business rates and rents, particularly in relations to enterprise zones. These include a study by the IFS[1], a Government White Paper[2] and reports to HM Treasury.[3]

The results of these studies can be represented in a simple way by the equation

Total occupancy cost (TOC) = rent + property tax

The implication of this for business rates is that, in the long run, any increase in this form of taxation for rented properties will bring about a reduction in rent and vice versa. The timescale for the adjustment depends on the elasticity in the market but empirical evidence now supports this theoretical consideration. Upward only rent review clauses may be thought to interfere with this tendency, but the market counters this through shorter lease agreements.

The implication of this equation is that the ultimate incidence of the tax falls on the property owner even though for rented property it is the occupant that is initially required to pay. Business rates can therefore be regarded as a component of the tenant’s rent, which if not handed over to the local authority would fall to the landlord. The market sets the rent; whatever is not collected through business rates will be collected by the landlord.

The relationship between rent and business rates has two important consequences. Firstly it means that the medium-to-long term effect of reduced business rates to tenants is simply to raise rents with the property owner being the ultimate beneficiary.

Secondly, there is considerable scope for simplification, and hence bringing about a reduction of the administrative burden of the property tax system, through shifting the responsibility for paying the tax in all cases onto the owner of property. There would of course be corresponding adjustments of rents.

For examples, at present rates fall on owners when there is an owner-occupier and where the premises are unoccupied and on tenants when properties are rented (56% of commercial properties). Potentially useful land without buildings is not subject to business rates. Transferring the responsibility to the owner would provide simplicity and uniformity.

Is property-based taxation fit for purpose?

Does taxation based on property makes sense in the 21st century when significant technology change affects property usage and work patterns, and separation between winners and losers?

1 What evidence and data can you provide to inform the government’s assessment of the trends in use and occupation of non-domestic property?

The VOA data related to business rates over the past decade provides useful evidence of potential trends in business property use. This period:

  • spanned the 2007 financial crisis
  • saw continuing internet inroads into traditional retail models
  • saw an increase in flexible working, both as self-employed and in work-time patterns

Nevertheless, the overall picture is of not much change except in the shift from London-centred industrial to general increases in office. Typically, industrial hereditaments feature large areas and low rateable value per area reflecting the low rental values at their locations.

In the VOA discussion that follows, data is for England only.

The number of hereditaments increased by 8.3%; this comprised substantially office and excluded categories alongside moderate reductions in retail. The mid-period drop in retail appears to be recovering.

There was a more modest increase in rateable floor area (3.5%) reflecting a 4.4% reduction in average area of hereditament. The small (2.8%) reduction in the large industrial floorspace was offset by increases in all other categories. In terms of area per hereditament, industrial reduced by 12.5% alongside increases for retail (10.7%) and excluded (10.4%).

This can be placed in the context of GDP and rateable value. Over the decade GDP increased by 61.7% (ONS, current prices) and rateable value increased by 50.9%. These figures suggest firstly that property is being used more effectively to generate GDP and secondly that rateable value is failing to track GDP by a significant margin.

VOA usefully indicates the regional aspects of the overall picture; this is a key aspect of the business rating system reflecting rent values of each location across the nation.

The largest regional shift in hereditaments was a 20% industrial exodus from London to East, South-east and South-west; this represented a large (19.1%) drop in rateable floor area in London but this was not matched by significant changes on rateable floor area elsewhere. It suggests industrial business units moving out of London as well as a general reduction of industrial hereditament areas in the East, South-east and South-west.

The shifts in retail appear to reflect the crisis, with a dip followed by partial recovery everywhere except the North-east. This suggests the importance of maintaining a regional aspect to business taxation as exemplified in property-based taxes.

Office space exhibits a general increase everywhere, although some areas especially North-east showed a slow start during the period.

Excluded properties have remained a relatively constant proportion of the total hereditaments in all regions; there was a small increase (16.6% to 18.5%) overall in this period.

ONS data on self-employment provides some indication of changing work patterns. In brief, these show a significant rise in absolute terms, as well as relative to the total workforce. Although there is a significant flow between employment and self-employment, this increase has been shown to be mainly due to a fall-off in moving from self-employment to employed status. Two factors may help explain this; a large increase in over-65 self-employed and wider economic conditions since the economic downturn of 2008; both could reduce opportunities for employment.

Many of the self-employed are skilled workers or taxi drivers; these are likely to be using home as a base rather than the principle workplace. However, there has been a significant increase in management, senior officials and directors; these are more likely to have a significant presence in the home office.

ONS data on home-working also gives some indication of changing work patterns. Today some 4.2 million of the 30.2 million workforce are home-based; there has been an increase of about 1 million over the period of VOA data and appears to be accelerating. 1.5 million today are using home as the principle workplace, the others using home only as a base. Over the past 5 years, there has been a greater increase in homeworking over the home-as-base category.

From the available ONS self-employed and homeworking data, it is difficult to draw any firm conclusions for the impact on property-based taxation. The possibility of significant moves from business premises to home-offices will be referred to later in this proposal.

The evidence considered here can make no clear argument to support a move towards non-property taxation. Reasons for such a change are usually related to:

  • Small firms with large footprints disadvantaged over larger companies with small footprints
  • Including turnover or value added could equalise ability to pay
  • Including business size e.g. number of employees could equalise ability to pay

All of these are considered to be lacking in terms of arguments to move away from property-based taxation.

Rates are based on rateable value, which is a reflection of rental values. Rental values are a reflection of the business’s ability to pay for exclusive access to a particular location. All business sectors will locate their operations according to the potential advantage of being in a location, offset by the costs of being there such as rent, rates etc. Hence industrial hereditaments, which typically need large floor areas but not access to city centres, are generally located in low rent areas and yield correspondingly low rates income per unit area. This explains their displacement from London to elsewhere.

Turnover is not in itself a reflection of ability to pay. Nor is the number of employees, as some sectors are much more labour-dependent and less capital intensive. Value-added could be a helpful indicator, but would require some astute formulation of tax rules to avoid the all-too-easy avoidance, especially with large many-sited or international corporations.

Rental value is a very real and accessible measure of general business assessment of their ability to pay, and it is established by the marketplace rather than teams of officials.

As will be seen later in this report, property-based taxation offers a different-in-kind means of raising revenue than most other forms of taxation.

Finally, several international studies in recent years have been advocating a shift towards more property-based taxation rather than less, and this is alongside a reduction in other forms of taxation. It is becoming generally recognised that property-based taxation can provide a useful platform for a more equitable society.

2 Is there evidence to suggest that changing patterns in property usage are affecting some sectors more than others?

Based on our analysis of VOA data, there are obvious downward trends for London industrial hereditaments and associated floor areas; in this sector, there is a corresponding increase in hereditaments in surrounding areas but with smaller floor areas. There is a significant and general increase in office hereditaments. There is little change in the proportion of excluded hereditaments over the period. Retail area has increased but there has been a slight drop in the number of hereditaments.

3 What, in your view, does this evidence suggest about the fairness and sustainability of business rates as a tax based on property values?

There is little in this data to suggest property based taxation is anything other than sustainable, but also little to suggest anything about fairness.

The arguments that claim property taxation is unsustainable are based on:

  • Changing work patterns due to internet, flexible work patterns, as well as the continuing shift from industrial to service-based activity.
  • Changing property usage such as the VOA trends, shared office facilities.
  • Changing retailing patterns.

There is little evidence that property-based taxation is unsustainable. In the evidence considered so far, there is nothing to indicate unfairness, although this topic is considered later in the proposal. There may be some concern about an increase in home-working and thus avoiding business rates; this is considered later in the report.

4 What evidence is there in favour of the government considering a move away from a property based business tax towards alternative tax bases? What are the potential drawbacks of such a move?

We argue that there is very little evidence to support any move away from property-based business tax. Each of the main claims for such a move has little substance. Property-based taxation offers a unique means of taxation and as international studies are showing can support a more equitable society.

However, as we note in point A made above the arguments in support of retaining the site component of business rates are much stronger that those in favour than the buildings and fitting component. We note in point B that there is considerable scope for simplification by shifting the incidence of the business rates onto property owners in all cases.

Learning from other countries

5 What examples from other jurisdictions and tax systems should the government consider as part of this review? What do you think are the main lessons for the business rates system in England?

It had already been argued that a taxation based on property is a useful and effective means of taxation but as suggested by the briefing paper, there are variations in property-based taxation in other countries. A study by Gurjiev[4] in Ireland gives a useful comparison of the relative effectiveness of these different variants.

The most interesting European example of different type of recurrent property-based taxation is Denmark.[5]

The key difference from the present British system that warrants serious investigation is their Land Tax, based on market values of land used in conjunction with separate building taxes and service taxes. The tax is subject to an annual revaluation with trend-based analysis. Valuation is based on best use of land value (i.e. no buildings etc.), property values (land + buildings etc) and usage code.

The single most relevant aspect of the Danish system is its separate valuation and taxation of the land value as distinct from the value of property which also includes buildings amd other improvements. This provides a practical example of the disaggregation of property taxes given in our Point A above.

An additional useful point to be learnt from Denmark is the effect of the frequency of valuation on the rate of appeals. Whilst on a 4-year revaluation process, the Danish rate of appeals ran at over 5%. Since annual valuations, appeals have fallen to about 1.5%. The local valuation committees deal with most of these leaving 0.6% to go further in the appeal process. By comparison, the Valuation Office Agency in England has received 674,000 appeals over the past five years and around 30% resulted in a change to rateable value. This is equivalent to 7.7% pa appeals and 2.3% being taken further. This suggests two lessons; firstly there is something in the design of the Danish system that avoids the huge level of appeals experienced in the UK. Secondly, more frequent revaluation reduces the rate of appeals even further.

Effective property taxation does require an effective cadastral. The use of modern technology including GIS systems means that very accurate records can now be kept with regular updates. For example the ARIES online (Auditors Real Estate Information System) of Lucas County Ohio USA[6] shows how it is possible to maintain accurate records of the values of all hereditaments in a very transparent way since all data is open for public inspection.

In relation to point B made above the Hong Kong rates system[7] gives a useful example of a business rates system where the incidence falls on the owner rather than the occupier.

In the case of Hong Kong, there are three forms of property tax, all paid by the owners not the tenants. If the owner tries to pass these taxes on to the tenant, the tenant has the right to deduct the amount of tax paid from the rent he pays to the owner. The rateable values are assessed on an annual basis, and follow the economic cycle so there is evidence of rateable values having gone down in 2009, only to rebound in 2011.

  1. General Rates – at 16% of rateable value. The rateable value is assessed on market rental value of each building.
  2. Government Rent – either a fixed amount per annum, as specified on older leases, or at 3% of the rateable value in the newer leases, and leases renewed/transformed into perpetual leases.
  3. Tax on rental income (strictly a schedular tax on personal income derived from property rents) – taxed at 15% of 80% of the rental income received. The 20% allowance is to exclude annual maintenance on the property.

Using business rates to incentivise growth

6 How can government use business rates to improve the incentive for local authorities to drive local growth?

Real local growth comes from flourishing local enterprise. This is supported by suitable infrastructure such as transport networks and good provision of local services. If the effect of local authority expenditure on the provision of services and longer term investment fed back in a direct way to increased revenue from business rates then this would provide a mechanism to incentivize local authorities to drive growth as set out in in section 1.6 of the terms of reference.

The reform of April 2013 allowing local authorities to keep 50% of all business rates growth provided a basis for this.

The disaggregation of business rates into land and improvements offers a basis for seeing how the incentives could be improved and the connection between business rate and local authority expenditure strengthened.

The most tangible consequence of an improved business environment is the uplift in land values. If business rates were determined more directly by site rental values than by the overall property values then local growth would feed back more directly into increased local authority revenue.

This would be further assisted by more frequent revaluations, following the Danish example would give annual revaluations.

Conversely capital investment by business is hindered by the property component of business rates. Hence relief of the capital component of business rates would also be a driver to growth.

As mentioned above on our point B, under the present conditions relief of business rates for rented property in the long run just leads to rent increases so should not be regarded as an effective driver of growth.

Another use of business rates as a driver to local growth would be to extend them to unused land, particularly land with planning permission for domestic housing. As described in the Mirrlees review not taxing unused land provides a perverse incentive not to use it. Having to pay an annual rate on this land would provide a strong incentive to bring it into use.

It also needs to be pointed out that the level of taxation on commercial property is many times higher than that on domestic property. This differential provides another perverse incentive for conversion of business premises to domestic properties and for a move to run businesses from domestic properties.

7 What impact would increased local retention of business rate revenue have on business growth? What would the impacts be on local authorities?

The briefing notes indicate that the experiment with increased retention of business rates has already been successful. If a significant component of the retained business rate revenue were required to be used for effective capital investment and improved services then that will lead to further uplifts in property values and hence further increases in revenue producing a virtuous circle. As described previously the sensitivity of revenue to the effects of local authority investment would be enhanced if the incidence of business rates fell on site values rather than on the property value as a whole.

The situation would be assisted by the introduction of modern methods of GIS for land mapping so that the effects of local authority development initiatives on land values and hence on business rate revenues could be followed over short time scales.

In the proposed revision of business rates, retention of a reasonable portion of the revenue by the local authorities and an annual review will significantly tighten the relationship between local public investment and increases in rateable value on one hand, and between the level of rates paid and the benefits enjoyed in the locality on the other hand.

8 What other local incentives should the government consider to further incentivise business growth?

Upward only rent reviews (UORR) have been removed in nearly all countries, the UK being an exception. Although the subject of several attempts using codes of conduct, the realities of the market place have ensured their retention.[8] This has an onerous effect on businesses throughout the business cycle where rents would naturally rise and fall. Part of the reluctance to prohibit UORR in all future rent agreements has been the perceived adverse effect on institutional investment in the property markets. This suggests that such institutional investment is getting improved returns at the expense of local enterprise, and hence needs serious questioning. The recommendation is that any reform of the business rates is accompanied by legislation to prohibit such restrictions on rents so that market forces are able to work naturally. This cannot be retrospective, and so all existing rental agreements with UORR clauses could be subjected to a special rates levy on the landlord.

Outside business rates a further incentive to growth would be local banks (e.g. Hampshire Community Bank)[9]. The effectiveness of a local bank would be enhanced if local authorities could use it to finance capital projects by borrowing against future increases in revenue due to uplifts in land values.

One of the main disincentives to creating jobs in our current environment is the high non-wage costs of employing labour. The briefing notes pointed out the way that property taxes are the least distortive and the Mirrlees review clarified that it is the location component of these taxes that is the non-distortional part. It would follow that an overall tax neutral reduction of employers national insurance contributions combined with a corresponding increase in the site-value component of business rates would provide an incentive to increase employment.

Aligning the system with wider economic conditions

9 Should business rates be reformed to make them more closely reflective of wider economic conditions and if so, how?

In today’s interconnected marketplace, wider economic conditions have an effect on local economies. This is reflected in business profitability, which also determines how much can be afforded for the combined rates and rent before the business fails. If rates and rents are free to rise and fall with the general economic condition, there is more likelihood of the business surviving through both good times and bad.

Wider economic conditions affect business in general. Market forces also operate to ensure that within the general conditions more profitable businesses will displace others. A well designed rating system will ensure that market forces are free to operate whilst there is enough flexibility to ensure wider economic conditions are faced in the best possible way.

The proposed changes to the rating system place more emphasis on the land value element of property; in the rising and falling tides of economic conditions, it is mainly land value that rises and falls rather than the relatively fixed value of buildings and improvements. If coupled with discouragement of UORR and annual reviews, this will give greatest support to business in their efforts to keep afloat.

The briefing paper raises some concerns about frequency of revaluation, quoting 3 disparate views:

  • Most ratepayers want more frequent revaluations, perceiving greater fairness
  • VOA analysis model indicated more frequent revaluations do not necessarily improve volatility or responsiveness
  • Some ratepayers and many local authorities want the 5-year reviews for predictability

As a general principle, more frequent revaluations will keep rates and current market rents closer together. Business cycles are not predictable and rent-reviews are not synchronised to rate revaluations. The best match between economic conditions and non-property-based business is where both rent reviews and rate revaluations occur at a higher rate than the typical business cycle. It is argued that such a scheme offers the best platform for wealth-creating enterprise.

The VOA analysis (annex A to Administration of Business Rates Review: Interim Findings, December 2014) is singled out for particular attention. Its aim was to investigate revaluation frequency on rates responsiveness to rents and also on rates volatility. Its first conclusion was that revaluations could come at different points in the business cycle and hence could lead to larger changes in rates bills. Its second conclusion was that as the non-domestic rates multiplier was adjusted to set a total rates revenue, more frequent revaluations would merely shift the burden according to relative changes in rent. These conclusions warrant further consideration.

The jumps in rates for a business are clearly shown to be smaller in the VOA analysis for a steady and continued uplift in rents. The analysis then considers business cycles but makes the mistake of considering regular business cycles of 5 years alongside revaluation periods of either 3 or 5 years. As stated above, business cycles are unpredictable; the only way of establishing a closer correspondence between rates and rents is to revalue several times over the typical business cycle. The VOA analysis leading to conclusion A17 is completely misleading!

The second point made in the VOA analysis is more relevant. As discussed above, if rates were allowed to move with rents, there is the potential for lessening the burden on business throughout the economic cycle. However, this would only be true if the rates revenue was allowed to also move with the economic cycle. Business prosperity throughout the economic cycle would be at the expense of the local authority purse. The present arrangement is to fix the budget for rates revenue and adjust the multiplier accordingly. We argue strongly that wider consideration is given to maintaining prosperity throughout the cycle, allowing the total rates revenue to move at least in part with the cycle. The public purse (local and central working together) is more able to withstand economic cycles than individual businesses, especially SMEs.

Linking business rates with prosperity.

10 If business rates remain a property tax, how do you suggest business rates could take into account the individual circumstances of businesses such as their size or ability to pay rates?

There is clearly concern about how to support small businesses in the rating system and questions about ability to pay. Given that most small businesses are tenants, one way to deal with this is to shift the incidence of rates from the occupier to the owner following the argument set out in point B above. Given that the owner is in receipt of rent and has possession of the asset their ability to pay will in general be much stronger than small individual businesses.

11 How does the proportion of total operating costs accounted for by business rates vary by the sector and size of a business?

Data on the proportion of total operating costs accounted for by business rates can be found in the BPF-PIA Property Data Report 2014.[10] This report notes that for offices business rates are a very low proportion of operating costs as under 3%, whereas for retail premises they are higher at around 9%.

12 What is the impact of the business rates system on the competitiveness of UK businesses? Are there any particular impacts on SMEs?

To understand the impact of business rates on the competitiveness of UK business it is important to recognize point B on the incidence of business rates given above. The key variable for tenants is total occupancy cost (TOC). The empirical evidence is that if business rates were reduced then rents would rise to compensate so the effect of business rates by themselves is insignificant. For owner-occupiers reduction of business rates would effectively lead to an increase in imputed rent.

The competitiveness of UK businesses varies considerably from region to region. The productivity of both labour and capital varies with location. With the present business rates system based on both site and capital rental values those occupying low value sites are disadvantaged in the use of capital (including buildings) as they pay a higher proportion of rates on capital compared with location. Shifting the incidence of rates onto site values only would produce relief for those making good use of low value sites at the expense of those making poor use of high value sites.

13 How could the government better target support for SMEs given that the size of a company may not be reflected in the rateable value of a property it uses?

To better target support for SMEs the two points given above could be implemented. Firstly shift the basis of valuation from the capital improvements to the site only component. As stated repeatedly above this is the non-distortionary component of business rates so will not disincentivise business. It simply takes for public purposes what would other wise go to a private property owner. Secondly shift the incidence from occupiers to owners. As the literature shows, the effect in the medium to long term of simply providing business rate relief to small businesses is to increase rents so the benefits is passed on from the wealth creating businesses to the rent collecting property owners

14 Should investment in plant and machinery, energy efficiency improvements or other similar property improvements, be treated differently by the business rates system? If so what changes could be made?

If the intention is to encourage capital investment then the simplest way to do this in fiscal terms is not to tax it. This is the point behind the Vickery quotation in the Mirrlees review referred to above. Property taxes assessed on real estate improvements are in economic terms one of the worst taxes since they disincentivise investment in real capital. This issue could be dealt with by shifting the overall incidence of business rates off the total value of property and onto site value only. The mandate of the review is that this needs to be done in a way that is overall tax neutral. The consequence of this would have to be that there would be winners and losers. Generally those that would be better off are owners of highly developed sites or those making good use of low value sites.[11] Owners of underdeveloped sites would be given a fiscal incentive to develop encouraging real economic growth.

15 What evidence and analysis should the government take into account when evaluating the impact of and any changes to the range of reliefs and exemptions present in the business rates system?

A significant point to take into account in evaluating reliefs and exemptions is the relation between business rates and total occupancy costs. For rented properties reduction of business rates in the long term simply feed through to property owners in higher rents and so do not stimulate growth.

One of the effects of reliefs and subsidies in agriculture has been to raise land values. This has made it very difficult for new entrants and has led to a consolidation into larger and larger units contrary to the requirements of a healthy free market.

Not all non-domestic property exists to perform an economic function so it is reasonable to give relief to property that exists to serve the community rather than generate wealth.

When it is recognized that it is much more economically effective to base business rates on site values then it would follow that for sites of very low value, i.e. sites at the economic margin there is a strong argument for taking these out of the tax base. Typically at the margin are a large number of low value properties that provide only a very small fraction of the revenue. To take these out of the system would encourage growth at the margin whilst reducing the administrative burden.


In conclusion three basic reforms are proposed to business rates which together would address most of the points raised in the review, but in particular would facilitate the business rates system to encourage genuine economic growth.

  • Recognise that property taxes are a composite of a tax on real estate improvements and a tax on site values follow the recommendations of chapter 16 of the Mirrlees Review and shift the basis of the valuation of business rates onto the site value.
  • Take note of the findings of the Final Report for HM Treasury and HM Revenue and Customs Feb of 2008 the Relationship between National Non-Domestic Rates and Rents on Commercial Property and related studies to recognise the relationship between business rates and rents, follow the example of Hong Kong and shift the incidence of business rates onto the owners of the property and unused land.
  • Follow the example of Denmark and move to revaluing on an annual basis.
  • Follow the advice of the VOA and adjust the non-domestic rates multiplier in consideration of economic conditions

[1] Who Pays Business Rates? Stephen Bond, Kevin Denny, John Hall and William McCluskey Fiscal Studies (1996) vol. 17, no. 1, pp. 19-35.

[2] Government white paper on business rates supplements 2007 chapter 3.

[3] A Final Report for HM Treasury and HM Revenue and Customs Feb 2008. The Relationship between National Non-Domestic Rates and Rents on Commercial Property: Empirical Evidence from Enterprise Zones

The Impact of Tax Incentives on Local Real Estate Markets: the Question of Incidence Shaun. A. Bond, Ben Gardiner, Peter Tyler 2011.

Investigation into a small business rate relief scheme in Northern Ireland, 2008


[5] A. Muller, Property Taxes and Valuation in Denmark,