This February 2020 submission was prepare by Dr Peter Bowman as Chairman of The Coalition for Economic Justice. The School is a Member of the CEJ, which provides the Secretariat to the All-Party Parliamentary Group on Land Value Capture. Peter was Head of the School’s Economics and Law Faculty.
1.0 About the All-Party Parliamentary Group on Land Value Capture
1.1 The LVC APPG was set up in November 2017 and is chaired by a Member of the House of Commons. It has recently been reconvened for the current Parliament. Its stated purpose is to work in partnership with national and local government departments, land developers and others to create a forum for Parliamentarians and interested stakeholders to discuss and develop innovative proposals to capture increases in land value for the public benefit.
1.2 The APPG is supported on a voluntary basis by a small working party of the Steering Group of the Coalition for Economic Justice, an informal association of third sector organisations who share a common interest in the collection of the economic rent of land for public purposes. They act as the secretariat for the Group.
2.0 Executive Summary
2.1 In the background notes that accompanied the December 2019 Queen’s Speech it was stated in the section on Business Rates that “The Government is committed to conducting a fundamental review of business rates.” This comes in response the quite widespread dissatisfaction with business rates expressed for example in evidence given to the recent  Treasury Select Committee (TSC) report: The Impact of Business rates on Business. The LVC APPG agrees with the conclusion of the report “that the Government needs to be curious, proactive and creative in exploring alternative options to such an important source of Government revenue.” In particular we urge the Government to give serious consideration to the principal alternative presented in that report that is still property based namely a shift of the basis of the tax to site values. In exploring options for reform we encourage the Government to particularly make use of recent studies on this topic:
- chapter 16 of the IFS Mirrlees Review Tax by Design
- chapter 6 of the LVC APPG report of November 2018: Capturing Land Value for the Public Benefit
- the independent report of Corlett et al of September 2018, Replacing Business Rates: Taxing Land, Not Investment.
2.2 The last of these three reports is of particular significance in that it includes detailed modelling of the outcomes reform, in particular its regional impact and hence its potential to contribute to the Government key objective of levelling up.
2.3 Accumulated evidence indicates that a shift of business rates onto site values has the potential to simultaneously be fair, encourage growth and investment, protect small businesses and assist with regional development whilst providing a sustainable and stable source of local government revenue.
3.0 The Need for the Reform of Business Rates
3.1 In the Queens Speech of 19th December which opened the present Parliament Her Majesty Stated that: To support business, my government will … bring forward changes to business rates. In the Background briefing notes that accompanied the Speech it was stated in the section on Business Rates that “The Government is committed to conducting a fundamental review of business rates.”
3.2 In recent years there have been a number of reviews of Business Rates reflecting the view that although a property based tax is an important component of the British system of pubic revenue the present system is no longer fit for purpose and in dire need of a more fundamental reform rather than more piecemeal changes that such as the ones that have been brought in which just add to the complexity and unwieldliness of the present system.
3.3 The most recent review of business rates was conducted by the Treasury Select Committee. The report, entitled The effect of Business rates on Business was published on 31st October 2019, close to the end of the last Parliament. Evidence was gathered from a wide range of stakeholders and provided a useful summary of the present state of business rates. The report provides a platform that can be built on when the Government undertakes its own “fundamental review.”
3.4 Overall the report was very critical of the current state of business rates but was very non-committal about what reform would solve the problems that had been uncovered. The report’s criticism of the present system was fourfold implying that, to be effective any fundamental reform would need to address all these four simultaneously.
3.5 Firstly, in relation to taxation of business generally the report expressed a view that there was an overall lack of clarity about what the best way to tax business was. It was recognised that there was a strong case for some sort of business property tax whilst at the same time noting that the UK has a higher proportion of property taxes than other OECD countries implying this was not a good thing in relation to international competition.
3.6 Secondly there was concern on the effect of Business Rates on investment. As effectively a tax on capital, in their present form they are a great disincentive to investment as any increase in capital including modification to increase energy efficiency result in a higher tax bill.
3.7 Thirdly, there was a concern about the complexity of the present system and the way this complexity had increased by small adjustments to the system. In particular this relates to the way the number of reliefs, including transitional reliefs that are applied following revaluations has proliferated in recent years.
3.8 Finally, there was criticism of the present valuation methodology and the accompanying appeals process. It was stated that the current valuation methodology is highly complex, not uniform across all property usage, and leads to a large number of appeals and an appeal process that is very slow and cumbersome.
4.0 Shifting to a site value basis as a viable way to reform business rates
4.1 Of the options considered in the TSC report, the main alternative put forward, if some sort of property tax was retained, was a change to what was referred to as a “land value tax”. However, rather than seeing a shift to a site value basis as a practical way of reforming and simplifying the present system it was presented as an alternative that had some attractive features but was not viable in practice. The arguments for and against were presented in isolation rather than in the context of the perceived weaknesses of the present system and whether a move to a site value only reform would address these shortcomings.
4.2 The report referred to the evidence submitted by the APPG on Land Value Capture which was in turn based on the report it had produced on 2018 Capturing Land Value for Public Benefit. They stated the three key arguments in favour of a shift to site value – namely it would be fairer, it would encourage growth and produce simplification.
4.3 However, the report made no mention of the evidence submitted by the Institute of Fiscal Studies, one of the most respected authorities on taxation in the UK. They have consistently advocated a shift to site values based on sound economic reasoning and, in particular, making the distinction between the component of business rates that falls on buildings and capital which is a very inefficient tax that distorts business behaviour and the part that falls on land which as a tax on an economic rent is non-distortive, efficient and does not discourage growth.
4.4 It also did not include of the evidence submitted by the Woodhaven Trust. This referred to their recent independent report published in September 2018, entitled Replacing Business Rates: Taxing Land, Not Investment. The report called for business rates to be replaced with a tax on site values only known as the “Commercial Landowner Levy” (CLL). It set out in some detail how this could be achieved. It included a detailed valuation methodology based on hedonic regression analysis accompanied by detailed modelling studies showing who the winners and losers would be by location and business type.
4.5 Taken together, these three pieces of evidence show how a shift of business rates would address the four main problems with Business Rates and its effect of Business that the TSC report uncovered and formulated.
4.6 First, with regards to principles of taxing business rates the tax on site values is based on a sound economic principle of taxing a rent. This is efficient, does not suppress investment and production, unlike the tax on capital which has the opposite effect.
4.7 Secondly, with regards to investment, removing all buildings and fixed capital from the business rating system would remove the barrier to investment, there would be no disincentive for business not to upgrade the quality and energy efficiency of their equipment. Furthermore, if the site value rating included vacant and unoccupied land it would act as an incentive to bring this into use.
4.8 Thirdly, with regards to complexity the shift would produce considerable simplification. By levying the tax on the owners rather than occupiers there would be a reduction in those who have to pay the tax by around 60% with a corresponding reduction in the administrative burden on local authorities. A large number of enterprises including all retailers who are not owner occupiers would be removed from the system altogether. Furthermore, the move to a site value only would greatly simplify the valuation process since properties would no longer need to be valued individually, the valuation would be based only on area and location.
4.9 This should greatly ease the burden of on the VOA and facilitate more frequent revaluations, preferably annually. The valuation of sites only would make use of geographical information systems (GIS) such as the hedonic regression analysis used in the commercial landowner levy which is much less labour intensive than traditional site by site valuations and once the basis for site valuation was agreed on it would be very transparent and would greatly reduce any grounds for appeal so removing a considerable burden of the appeals process.
4.10 Another factor that is of great importance given current political priorities is the geographical variation of site values and hence its regional impact. According to the Woodhaven Trust evidence submitted to the TSC “Differences in land value in different parts of the country mean that replacing a property-value based tax with a land-value based one would shift the tax burden slightly towards the most prosperous regions and away from the least prosperous. Modelling the impact of the CLL reveals an overall tax cut of 6% in England, with a larger cut in every region except London (11% rise). The North East would see a tax cut of 19%, and the North West and West Midlands tax cuts of 18%. The largest cut would be in the East Midlands (27%).”
5.0 Arguments against shifting business rates to a site value basis
5.1 The TSC report also quoted evidence that had been received containing arguments against a shift to basing business rates on site values.
5.2 These included the questioning of the difficulty of valuation, but that was assuming it would be based on market transaction rather than geographical information systems (GIS).
5.3 The issue was also raised of establishing who owns a particular site was, particularly when there were multiple leases. This issue was dealt with in the legislation that extended business rates on unoccupied property.
5.4 There were also more general arguments made, for example in relation to the upheaval caused by change and the fact there would be winners and losers, but this is a just a general argument which would apply for all new policy initiatives.
5.5 Related to this point is a similar argument about the complexities of the new system. The real issue is whether the new system will be more or less complex than the old system.
6.0 Unintended Consequences
6.1 This interest in the reform of business rates comes at a time when the Government is reviewing the extension of permitted development rights to retail properties. This raises a concern that commercial property owners might respond to the shift of liability for business rates onto themselves by changing the use of retail premises to residential in a way that is contrary to local planning policies and community interests. Any reform of business rates would need to ensure that the owners of such properties would, either be prevented from adopting this strategy, or discouraged from doing so, for example by continuing to be liable for the full business rate after a change of use.
7.1 It is good to see that the new Government recognises that there is now an urgent need to reform business rates and that a substantial reform is required to deal with the perceived difficulties and is prepared to act at least as far as undertaking a fundamental review. The reformed tax needs to simultaneously:
- be fair,
- encourage growth and investment,
- reduce complexity,
- assist in supporting the regeneration of the regions through levelling up,
- protect vulnerable small businesses, particularly in the retail sector
- provide local authorities with the income revenue it requires.
We believe that a shift of the incidence business rates onto a site value basis and onto the owner from the occupier is a reform that would achieve these goals and that it be given full and careful consideration in any review.