COMMENT The Covid-19 pandemic has further exposed the flaws in our business rates system as a means of funding local government services. Any reform in the autumn must therefore consider alternative means of financing – including a review of council tax.
During the pandemic, many cash-starved councils petitioned the government for bailout “capitalisation directions” due to loss of income. The 15-month 100% business rates holiday (to the end of June 2021) given to the retail, hospitality and leisure sectors would have cost local government around £14bn in income if central government had not stepped in. And with additional concessions for the next nine months, further income loss from business rates is on the cards.
The Local Government Association warned ministers that any planned shake-up of the business rates system must “recognise the importance of this income stream for funding key local services”.
In a normal year, business rates contribute £26bn net to government coffers; collected and used by local authorities to pay for local services. Yet £26bn from this one source is unsustainable. Nearly one-third of the total rates bill is funded by bricks-and-mortar retail (£7.6bn), despite the decimation of high streets in recent years and effect of the pandemic. Many retailers and those in the hospitality industry will struggle to pay their bills after the capping of the rates holiday relief at the end of June.
At a basic level, current business rates are too high. Rates bills are linked to rental levels of 2015, despite plummeting values. Some retailers are paying higher rates bills than they are paying in rents. The government’s recent legislation – that will not recognise any Covid-related rates appeals on the grounds of material change of circumstance – puts another nail in the coffin for any respite from high bills.
We have long been advocates of business rates reform. The multiplier at 51p in the pound is too high, creating an effective 50%-plus tax on business occupiers, the relief system is out of date, the system is unfairly skewed against the retail sector, revaluations are too spaced out to reflect proper rental levels and the appeals system is a disaster.
Reform is essential and the government must look at other forms of income to alleviate the burden.
What can be done?
One area the government should consider is council tax. Council taxes are domestic rates, just as business rates are non-domestic rates, yet while business rates are based on rental values, council taxes are calculated on the value of the property – as of 1 April 1991. The highest band, H, is for properties valued at £320,000 and above.
While it is shocking that we have not had a business rates revaluation since 2017, it’s probably more shocking that we haven’t had a council tax revaluation for more than 30 years.
This lack of revaluation has meant that house values and council tax bills are now way out of step. According to a survey by Xendpay, some of the richest areas in the country have the lowest council tax bills and some of the poorest areas have some of the highest.
The London borough of Kensington & Chelsea, for example, has the UK’s highest average house price, at £1.2m (February 2021). However, residents enjoy England’s fifth-lowest council tax bills – an average of just £1,515 a year.
In Hartlepool, the average house price is £115,437.76, which ranks it as 308th out of 313 boroughs in the country. Meanwhile, its average council tax bill is £2,528, the sixth highest in the country.
Council tax comparison
|
Local authority |
Population |
Business rates collected |
Council tax collected |
Annual council tax paid in highest band (H) |
|
Westminster |
255,000 |
£2.35bn |
£105m |
£1,655.12 |
|
Solihull |
215,000 |
£118m |
£106m |
£3,401.65 |
|
Stockton-on-Tees |
197,000 |
£87m |
£90m |
£4,202.66 |
Source: Colliers
Colliers has carried out its own research comparing the boroughs of Westminster, Solihull and Stockton-on-Tees in terms of business rates and council tax.
While Solihull and Stockton raise similar revenues annually from both taxes, in Westminster the picture is totally different. Westminster raises a massive £2.35bn from business rates, due to its higher property values. This is almost 22 times what it raises from council tax.
Some £1.01bn of the business rates collection is returned to the central government pool to help other parts of the country as part of the levelling-up agenda.
Given the wealth of many homeowners in Westminster and the value of houses there, it seems incongruous that there is such an imbalance from the two collections.
In Westminster, property owners in the highest band of council tax, band H, pay £1,655.12 in council tax a year (there is an additional supplement for residents in Queens Park and Montpelier Square) – despite many houses in areas such as St John’s Wood and Mayfair being valued at several million pounds.
In Stockton, band H is £4,202.66 – yet there are actually few homes (if any) in either band H or band G; the highest band appearing to be band F, where property owners pay £2,999 a year in council tax – nearly twice what is paid in Westminster. In fact, only in bands A and B in Stockton, the lowest-value houses in the borough, do residents pay less than the highest council taxpayer in Westminster.
However, it’s not just in Westminster where house values and council taxes are out of step. Multi-million-pound homes in Kensington & Chelsea change hands daily, but the highest band of council tax in the borough is £2,627.20 a year.
If, as a country, we want our public services to be paid for – and I think the pandemic has shown how important this is – then we need to think wider than just relying on business rates. The government is considering other options such as a tax on online shopping or a tax on deliveries for online purchases – and all options should be explored. However, until the windfall generated by the G7 agreement on the taxation of global tech companies becomes a reality, something has to change – and a more equitable council tax regime would certainly be a good start.
John Webber is head of rating at Colliers
