With a £22bn deficit and the prime minister declaring “those with the broadest shoulders should bear the heavier burden”, it seems likely that the October budget will see the government look at possible means to increase taxation. Although, during the election campaign, Labour said it would not raise council tax, this could very well come into orbit now the “black hole” in government finances is claimed to be bigger than foreseen.
Our view at Colliers is that any reform or replacement of the current business rates regime should also consider looking at council tax since both systems are key pillars of local government financing and part of the same funding equation.
Contrasting approaches
The current business rates system raises nearly £30bn for local authority funding, but now, with the multiplier at 54.6p, it has become increasingly unsustainable for many businesses. Such high rates bills have been blamed for helping to put retailers out of business and destroying the high street. We have long been calling for a rebasement of the multiplier to something businesses can afford – say a 30p in the £ tax. There also needs to be a review of the current relief system to make sure everyone pays something, but a fair amount they can afford.
The business rate multiplier increases each year with inflation. Properties are also revalued every three years to make sure rates correlate to commercial property values. And monies raised are pooled so that richer areas of the country can support those not so well-off.
By contrast, there has been no national council tax revaluation since 1991 and the system is unreformed, despite soaring house price inflation in the period, particularly in London.
We therefore seem to have a property tax that appears to bear no relation to the current value of residential property or to the growing social needs of many of our communities. And there is currently no pooling of council tax monies raised.
Strange results
Comparing three very different local authorities (see box) shows that Westminster Council collects £128m in council tax from its local residents, which is actually less than that collected from residents in Solihull and only £14m more than that collected from residents in Stockton-on-Tees. This is despite having more homes paying council tax bills than either of them and much higher residential property values on average. Indeed, the average household in Westminster pays a council tax bill of £979 a year – less than an average householder in both Solihull and Stockton (£1,926 and £1,275 respectively), despite the London borough being a much wealthier area.
The average house price in Westminster is £2.3m, compared with £337,000 in Solihull and £155,000 in Stockton. We can therefore see that the average household in Westminster pays a council tax bill which is a tiny 0.00043% of the value of its house, compared with 0.0057% in Solihull and 0.0082% in Stockton on Tees. In other words, the average household in Solihull is paying proportionally 13 times more in council tax compared to the value of their property than the average household in Westminster, and the household in Stockton 19 times more. Surely this raises a question of fairness?
One could argue that the borough of Westminster is a big collector of business rates, collecting £1.89bn in business rates a year, dwarfing that collected in both Solihull and Stockton. The latter actually raises more through council tax than business rates. Westminster Council keeps 30% of its business rates and so is well able to fund its own local services without the need to impose a high council tax on residents. Westminster also sends 37% of its business rates income to help fund the Greater London Authority and 33% to the central government to use as it thinks fit – primarily to fund local services in other parts of the country via grants and other means.
This is all well and good, but business rates and council tax sit side-by-side in the accounts of local authorities, both are key contributors to local funding and both are supposed to be property taxes based on value. But where businesses in Westminster are paying a high business rates tax, which is being used to support both the local authority itself and the rest of the local authorities across the country, residents in the borough are effectively being subsidised with low council taxes and there is no pooling system to help the rest of the UK.
Business rates and council tax compared
|
Westminster |
|
|
Total council tax collected |
£128m |
|
Number of homes paying council tax |
130,734 |
|
Average council tax paid in the area |
£979 |
|
Average house price in the area |
£2.3m |
|
Average council tax as a % of average house price |
0.00043% |
|
Business rates collected |
£1.89m |
|
Solihull |
|
|
Total council tax collected |
£148m |
|
Number of homes paying council tax |
76,835 |
|
Average council tax paid in the area |
£1,926 |
|
Average house price in the area |
£337,000 |
|
Average council tax as a % of average house price |
0.0057% |
|
Business rates collected |
£65.8m |
|
Stockton-on-Tees |
|
|
Total council tax collected |
£114m |
|
Number of homes paying council tax |
89,428 |
|
Average council tax paid in the area |
£1,275 |
|
Average house price in the area |
£155,000 |
|
Average council tax as a % of average house price |
0.0082% |
|
Business rates collected |
£44.324m |
Source: Colliers
What’s the solution?
This is not to say we should squeeze everyone in Westminster to the full and make them pay unrealistically high council taxes just because the value of their properties have gone up so dramatically. That would be unfair on those who are asset rich but cash poor and simply could not afford to pay such a hike. It could also lead to rushed sales and a dip in the local residential market. It could make Westminster even more an enclave of the very, very rich as they would be the only ones able to afford to live there. But we do feel any property tax should be regularly reviewed, so that it more fairly reflects current values. It seems inequitable to put pressure on the business rates regime, without looking at the other half of the local authority funding equation, represented by council tax.
The imbalance does needs correcting in some form, particularly if it could help reduce the burden on business rates. Something the new government might very well consider.
John Webber is head of business rates at Colliers
