Memorandum by the British Retail Consortium
(BRC) (LGR 24)
EXECUTIVE SUMMARY
1. The retail sector provides vital employment,
goods and services, stimulating economic prosperity and the long-term
sustainability of the communities in which they operate. Retailers
commonly make contributions over and above those made through
the tax system to fund local improvements, often in partnership
with the local authority. We are concerned that changes to the
system of local business taxation could undermine both community
involvement and the vitality of the retail sector.
2. A localised business rate would seriously
weaken business ability to plan and in some cases, pay rates.
This, and other options considered by the Balance of Funding
Review, such as a sales tax, has the potential to distort
markets, increase tax liability and vastly increase compliance
costs as national companies attempt to manage over 350 varying
local taxes. We understand that a sales tax is not being seriously
considered by the Review, due to the difficulties and impracticalities
such a tax presents, so focus our attention on business rates.
3. The national non-domestic rate has overwhelming
advantages to a localised system, particularly in its predictability
and uniform application. The retail sector currently contributes
£4 billion in non-domestic rates each year, a quarter of
the £16 billion collected from all ratepayers. This is set
to increase by 11%, almost £0.44 billion a year following
the revaluation of property in 2005, which will see retailers
paying a larger, and indeed the largest, proportion of all rate
receipts[1].
KEY POINTS
4. Localisation of business rates would
not solve the key problem of funding local government. Council
tax bills have risen dramatically due to a host of reasons that
will remain unchanged. These include ring fencing of grants and
central government spending commitments being passed to local
authorities.
5. Local authorities are not accountable
to businesses through the electoral system. Under a localised
system of taxation there would be little incentive not to increase
taxes. Such a situation would also encourage central government
to pass on un-funded spending requirements to local authorities.
6. Locally set property taxes would distort
the property market and undermine investment in deprived areas
where rates are likely to be higher. Businesses would be discouraged
from investing in areas with high local taxes. Paradoxically,
areas with a low business base and thus most in need of investment
will have to levy a proportionally higher rate, thus creating
a barrier to the very investment they need. Localisation of the
rate poundage is, therefore, likely to achieve exactly the opposite
of the aim of increased investment in less prosperous areas.
7. The removal of the local business rate
in 1990 also removed the key cause of friction between retailers
and local government. Since then there has been a significant
shift towards partnership and voluntary working, evidenced by
numerous town centre management schemes and forthcoming Business
Improvement Districts. Such efforts would be seriously undermined
by a localised business rate.
8. The national non-domestic rate has many
advantages over a localised system. One of the key indicators
of a good and efficient form of taxation is that it should be
certain and predictable. The Uniform Business Rate has achieved
this aim since its introduction in 1990. Localisation of the rate
poundage would negate this and would result in Non-Domestic Rates
becoming a less effective form of taxation and a tax that businesses
would find great difficulty managing.
INTRODUCTION
9. The British Retail Consortium (BRC) is
grateful for the opportunity to present the views of the retail
sector on the Government's Balance of Funding Review, which is
investigating a range of taxes as alternatives to the current
system of council tax. Two of these, a re-localised business rate
and a sales tax are strongly opposed by the BRC. We understand
that a sales tax is not being seriously considered by the Review,
due to the difficulties and impracticalities such a tax presents,
so focus on business rates.
THE BRITISH
RETAIL CONSORTIUM
10. The BRC is the lead trade association
of UK retailing and exists to defend and enhance where possible,
the economic, political and social climate in which its members
operate. BRC members sell a wide selection of products through
centre of town, out of town, rural and virtual stores. Reflecting
the diversity of modern retailing, BRC members include the large
multiples and department stores, charity shops and small and medium
sized independent retailers. There are over 188,000 VAT-registered
retail businesses in the UK operating in more than 322,000 retail
outlets. In 2002 retail sales were an estimated £234 billion.
The retail industry employs nearly three million people and accounts
for almost 11% of the total UK workforce.
RETAIL IN
THE COMMUNITY
11. The retail sector provides vital employment,
goods and services, stimulating economic prosperity and the long-term
sustainability of the communities in which they operate. Retailers
commonly contribute money and resources to the improvement of
public spaces, particularly through voluntary town centre partnerships
and this contribution is set to increase through forthcoming Business
Improvement Districts.
12. The sector has a vital role in helping
to tackle deprivation and interlinked problems such as unemployment,
poor skills, low incomes, poor housing, high crime, bad health
and family breakdown. Retailers can give socially excluded groups
the chance of a living and working environment in which they can
thrive, helping to create new markets and regenerate and revitalise
towns and cities across Britain.
RETAIL EXPOSURE
TO RATES
13. Retail outlets are often limited by
the supply of accessible property, such as in a town centre shopping
area, or retail park, while other non-retail businesses are not
dependent on their trading location. This restricts the market
for retail property, raising both property values and non-domestic
rates as a result. Consequently, retailers pay a quarter of all
non-domestic rates, approximately £4 billion. The Revaluation
in 2005 will see retailers' rates liability rise by £0.44
billion, as a larger burden of the total rates bill will fall
on the retail sector. [2]The
sector is thus sensitive to any changes in the national non-domestic
rate.
14. The burden of rates is felt particularly
on those retail businesses that are categorised as "small".
Even the smallest and least profitable retailers will tend to
occupy high value premises due to the high demand for and limited
supply of retail property. A recent study by the University of
Liverpool found that the mean Rateable Value for SME Retailers
was over £16,000 and that the burden of business rates was
the number one concern among business owners[3].
GROWING BURDEN
OF TAXATION
15. It must be acknowledged that much of
the debate surrounding the Balance of Funding Review concerns
raising more tax, rather than simply devising more equitable systems
of revenue collection. In that regard, the debate cannot be held
in isolation from the overall tax burden on businesses, one that
has increased significantly in recent years (almost £40 billion
since 1997)[4].
At the same time, the retail sector is experiencing considerable
economic uncertainty, demonstrated by static or falling sales.
16. Arbitrary local increases could make
business operations unsustainable, severely restricting cash flow
and removing any ability for businesses to effectively plan their
expenditure. The huge and damaging variations in local rates were
one of the major reasons for their centralisation. In the mid-to-late
1980's rate poundages varied by almost 200 pence in the pound.
Such a massive degree of variation is a major barrier to successful
retail operations and a disincentive for businesses to operate
in areas with high local taxes.
17. We are also concerned that the debate
does not take any account of the level and quality of the services
that business community, and the retail sector particularly, actually
receives. Retailers clearly benefit from the provision of local
services, particularly policing, sanitation, transport and the
general standard of the public realm. However, these services
and the level of council tax currently levied vary enormously
by local authority. It is unlikely therefore that a link between
services and tax would be established through a localised business
rate or that local business would experience an increase in service
provision through increases in the business rate.
THREAT OF
BREAKING THE
RPI LINK
18. The Local Government Finance Act 1988
ensured that the tax take from non-domestic rates in real terms
did not increase or decrease. The multiplier was therefore adjusted
to ensure that tax receipts only increased by the retail price
index. This is an important element of business planning and allows
businesses to control their expenditure with some degree of certainty.
19. The Local Government Act 2003 allows
the link between rates and the retail price index to be broken
so as to compensate "for any error in estimation at revaluation"[5].
The BRC is concerned at the prospect of this link being further
eroded or removed completely. Businesses look for predictability
in business rates, and this is possible when the tax take remains
unchanged. If rates are to be varied depending on local government
spending requirements, rates will be increasingly complicated,
difficult to manage and unaffordable.
RETAILERS INVEST
LOCALLY!
20. The retail sector is sensitive to its
trading environment, as it depends on clean, safe and accessible
locations to attract custom. It is common, therefore, for retailers
to make contributions over and above those made through the tax
system to fund local improvements, often in partnership with the
local authority. This partnership approach is successful as private
sector contributions are directly linked to desired improvements,
rather than becoming lost in a wider and unaccountable system.
As new initiatives come to fruition, such as Business Crime Partnerships
and Business Improvement Districts, the direct and voluntary financial
commitment of retailers in their communities is set to continue.
A localised rate would halt and reverse this trend.
21. It is claimed in some quarters that
local authority engagement with businesses would be strengthened
by the introduction of a local tax. This is a flawed argument:
retailer engagement does not come about as a result of taxation.
The relationship between retailers and the local authorities has
improved dramatically over the past 14 years precisely because
the friction caused by the local non-domestic rate was removed.
Previous attempts to work with local authorities were undermined
by large arbitrary tax rises that were not linked to any improvement
in service delivery.
22. Therefore locally set taxes will discourage
retailers, whether large or small, from investing in areas with
high rate poundages, acting as a disincentive to employment and
community prosperity.
WHERE IS
THE ACCOUNTABILITY?
23. Businesses do not vote in local elections.
Accountability of local authorities to businesses is often indirect
and dependent on recognition by authority's that successful local
business is essential for the long-term vitality of their communities.
This is often an abstract concept at best as local authorities
are subject to a vast range of priorities and targets, none of
which take account the health and vitality of the business community.
No account is currently taken of local service delivery to businesses
through any performance indicators or through the Best Value process.
24. Organisations representing local authorities
claim that businesses are indirectly represented through the local
electorate, who have an interest in the vitality of local business.
This is an unsubstantiated argument and there is no evidence to
suggest that local people will vote based on a local authority's
policy towards businesses. The density of local authorities also
means that people do not live, work and shop all in one council
area and any such link, if it existed, is broken.
25. Research for the Balance of Funding
Review found that there was no substantive link between an
authorities tax raising powers and the level of turnout at elections.
[6]It
is of concern that proposals are being considered to give greater
powers of taxation while turnout at local elections has fallen.
In 1998 local election turnout in England was just 28.8%, rising
marginally to 34% in 2002, but still well below 41% in 1992. [7]Yet
research tells us that greater powers to tax will do nothing to
improve the democratic deficit.
CENTRAL V
LOCAL FUNDING
26. The Government is investigating new
systems of taxation, while failing to tackle the root cause of
council tax increases (12.9% average in 2003-04). The recent Audit
Commission[8]
investigation revealed that council spending increased primarily
because of cost pressures (pay, National Insurance, pensions),
ring fencing and national priorities together with local policy
priorities/service delivery. Council tax bills have thus risen
because many of the budgetary pressures on local authorities originate
centrally.
27. While the BRC recognises that "gearing"
remains problematic, we do not believe that the current debate
will find solutions to long-term problems. Granting local authorities
greater tax raising powers serves only to encourage central government
to pass on costly regulatory requirements and spending commitments
while not properly funding these obligations. This clearly weakens
accountability and further confuses the system of funding.
28. We also recognise the vital role played
by redistribution and equalisation. As local authorities have
dramatically varying bases of business property values, central
redistribution of revenues is essential and this would still be
true under a localised system. Otherwise locally set business
taxes, particularly those based on property, would penalise those
authorities with low business property values. Their most likely
course of action would be to substantially raise local taxes to
generate more revenue to fund services, creating a strong disincentive
to businesses. Yet in many instances these are the authorities
that are most in need of investment. Complex and controversial
systems of redistribution would still be required.
BENEFITS OF
THE CURRENT
SYSTEM
29. The current system, while imperfect,
has many advantages. Over a five-year period bills are predictable
and therefore ratepayers budgets can be planned in advance. This
is essential for businesses with relatively large rates liability
to ensure cash flow. It also protects against large and arbitrary
rises in rate bills. The five yearly cycle of revaluations can
introduce sudden rises in rateable values but these can be mitigated
through a centrally set transitional rate relief.
30. One of the key benefits of the national
rate is that it represents a fair method of funding local authorities
as it allows for vital redistribution. A localised rate would
stop this vital "equalisation". The uniformity of the
national multiplier also allows for a degree of simplicity minimising
compliance costs and its influence on business decisions. Variation
in tax at a local level is not currently a factor in locating
businesses. This would change with a locally set rate.
31. The BRC has supported the introduction
of schemes to bring local authorities and the business community
closer together. Business Improvement Districts have the potential
to further enhance partnership working, giving retailers a direct
influence on their trading environment and bringing private sector
thinking together with public sector service delivery. Local Authority
Business Growth Incentives directly links business success to
additional revenue for local authorities. Such a scheme motivates
authorities to grow their business base, as they will benefit
financially.
NO SALES
TAX
32. The Balance of Funding Review has
also looked into the possibility of setting local sales taxes.
A sales tax would hugely distort local markets, driving consumers
across local authority boundaries to seek lower charges. Local
authorities have responsibility for too small a geographical area
to be able to set a sales tax without distorting the market. A
sales tax would also present a further compliance cost, one that
varied across 350 areas.
33. It is the understanding of the BRC that
the Balance of Funding Review is not seriously considering
a sales tax due to the difficulties and impracticalities such
a tax presents. We do not, therefore, set out a full case against
the tax in this paper. We are willing to submit further evidence
on this issue if the Committee so desires.
CONCLUSION
34. The retail sector believes that a localised
business rate would seriously undermine business ability to plan
and in some cases, pay rates. This, and other options considered
by the Balance of Funding Review, such as a sales tax,
has the potential to distort markets, increase tax liability and
vastly increase compliance costs as national companies attempt
to manage over 350 varying local taxes.
35. The localising of business rates would
not improve local accountability and would actually damage business
engagement. The retail sector is a major employer, occupies the
focal point of local communities and often contributes through
employment and financial investment into those communities. Retailers
and local authorities increasingly work in partnership precisely
because the friction caused by the local rate has been removed.
36. The national non-domestic rate is not
a perfect tax, but it has overwhelming advantages to a localised
system. Retailers, from the smallest to the largest operators,
have a large rate liability and must be protected from local variations
for the benefit of the community as a whole.
1 According to the Valuation Office Agency, for the
2000 rating list retail rateable values made up over 24% of all
rateable values. Retail liability is set to increase by 11% in
2005-equating to approximately £0.44 billion. Back
2
According to the Valuation Office Agency, for the 2000 rating
list retail rateable values made up over 24% of all rateable values.
Retail liability is set to increase by 11% in 2005-equating to
approximately £0.44 billion. Back
3
Business Rates: An interim report on the views of small businesses.
Dr Alan Southern (University of Liverpool) and James Meyrick (Small
Business Research Trust). Back
4
According to CBI. Back
5
Explanatory Notes, Local Government Act 2003. Back
6
Rallings and Thrasher, The Relationship between balance of funding
and turnout in local government elections. Back
7
ODPM: Turnout at Local Elections & House of Commons Library
Research Paper 02/33. Back
8
Council tax Increases 2003-04: Why were they so high? Back
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