Our response to part one of the government’s business rates reform consultation was to suggest a reduction of the multiplier and reform of the reliefs system, so that everyone pays something towards maintaining the local services they use. In part two of the consultation – Call for Evidence – we look at the system as a whole. Our belief is that business rates should be reformed – not abolished – and we should learn from the best practices adopted in other countries and implement them quickly.
Reform not abolition
While not disputing many of the problems with the current system, we believe there is a place for a well-managed and transparent business rates system in this country.
Business rates provide an easy and manageable way to collect tax and, as a physical and property-based tax, one that is difficult to evade. A collection-driven property tax provides an increased revenue yield. The tax has been in existence for more than 400 years, raising approximately £26bn per annum for the Treasury and paying for the local services and amenities that we all take for granted.
More countries are introducing a property-based tax similar to the business rates system that we have in the UK than are doing away with it. When the World Bank or the IMF are called into a country to sort out its finances, one of the first questions they ask is what property-based tax the country has in existence. If it does not have one, plans are put in place to introduce one.
The current basis of valuation is sensible. It is what happens after that has caused the problem. Unfortunately, various governments over the past 30 years have over-complicated the system, making it more opaque and increasing the level of this tax disproportionately. As a result, there has been a growing chorus of criticism but that does not mean the system cannot be modified and still retain many of its positive attributes.
Doing things the Dutch way
The UK could do a lot worse than to learn from the Dutch business rates system – also a collection-driven property tax. In the Netherlands there is an annual revaluation process, which ensures the tax is more in line with property values (as opposed to the UK’s current five-to-seven-year gap between valuations). The Dutch tax is thus a fairer reflection of how businesses are doing. The actual costs of carrying out revaluations on an annual basis can also be more cost effective in the long term.
In the Netherlands, the taxpayer receives an official assessed value of its real estate property and a justification in the form of a valuation report as to how the value was arrived at. There is a more collaborative and transparent exchange of information where ratepayers are part of the process to gather and supply information to create this assessment. This results in a value officially determined by the government but acceptable to taxpayers. Everyone buys into the system and, as a result, challenges to valuations are less likely. Compare this to the UK where there seems to be an antagonistic view to ratepayers questioning values and the Valuation Office Agency becoming more entrenched in its view that it must be right.
Unlike in the UK where people do not really understand the connection between their rates bill and the services they get, the Dutch system is more transparent about what it is being paid for. The value agreed is used by various governments for taxation purposes. The municipalities use a value for levying taxes on real estate properties, the water board for the water system and the internal revenue services for income tax purposes. Again, this helps buy-in.
Strong communication and information sharing with taxpayers is also considered critical – in stark contrast to the UK where the VOA seems to fight tooth and nail to hang on to information, using data protection to prevent ratepayers and their agents from accessing this. There is probably a lot the UK could learn from such transparency.
Regular revaluations
In our submission, we also called for a move to more regular revaluations or annual revaluations – so that assessments reflect values at the antecedent valuation date more accurately during the life of a list, reducing the likely significant shift in liability following a revaluation. This provides greater certainty for businesses.
Once a regular and short period is established between revaluation cycles then a transitional scheme is unnecessary.
Plant and machinery
There should be regular reviews of what is or is not rateable in relation to plant and machinery. Without a regular review, there will be inconsistencies and criticisms of the system.
All plant that is an integral part of the trade process should be exempted from business rates. This removes business rates as an obstacle to investment, allowing the rating system to complement government policy or targets.
Online sales tax
There are merits in an online sales tax – but as an amelioration not as a total replacement of the current system. An online sales tax would work if the tax take is ring fenced for the finance of local government and goes towards reducing the tax take from business rates applied across the board. It should be used to support a reduction in the uniform business rate, thereby making taxation fairer for all parties.
Restore credibility
We believe there is a place for a well-managed and transparent business rates system in this country. Together with our response to part one, our response to the Call for Evidence has enabled us to point out how the system can be improved in order to restore some credibility. More importantly for the country, for the system to help pay a proportion of the tax burden in a fair way that will undoubtedly be critical to its economic health in a post-pandemic world.
John Webber is head of business rates at Colliers International
