Broadband - Business, Innovation and Skills Committee Contents

7 Business rates


105.  Business rates are a tax on the occupation of non-domestic properties. There are two methods by which business rates are calculated in the broadband industry; the Tone List method and the Receipt and Expenditure (R&E) method.[125] BT's network is assessed on the R&E method, whereby it pays tax on what the Valuation Office Agency (VOA) assesses as the hypothetical rental value of BT's entire network, based on profits. By contrast, the Tone List method, which is applied to all other providers, requires them to pay a tax per kilometre, on the basis of the size of the network. The level is set by the VOA on a five-year ratings cycle. The reason behind the distinction is that VOA considers BT to be a utility operator and smaller networks to be ordinary businesses.

The industry's concerns

106.  In 2004, the Broadband Stakeholder Group published a review of business ratings. That review concluded:

The communications industry is capital intensive and investment decisions are based on long term business plans. Over the last twenty years, the life of the modern communications industry, the Valuation Office has changed the method for assessment repeatedly. These changes in methodology have caused both uncertainty and mistrust in the industry.[126]

107.  During this inquiry we found that industry continued to have those concerns. The UK Competitive Telecommunications Association claimed that business rates continued to have a negative impact on the market, both in the way in which they were applied, and also because of the distinction made between BT and other operators. The Association argued that:

Operators other than BT face regulatory uncertainty as to the tax treatment of any NGA investment since the way in which business rates will be assessed will be decided only after the investments are made […] This anomaly is bound to have an impact on the ability of BT's rivals to compete in the NGA market.[127]

108.  This point was echoed by TalkTalk which argued that the current system created "competitive distortions, uncertainty [and] risk, given the likely rates cost is so unclear."[128] Furthermore, it believed that unless this was tackled, it could result in a "large and excessive additional cost burden thus deterring roll-out."[129] Vtesse believed that the current application of business rates to the use of fibre "disproportionately taxes new entrants and discourages investment".[130]

109.  Vtesse also highlighted the impact of the application of the R&E method to the BT network. It asserted that as a result of applying the R&E method, "[BT's] fibre estate has grown by a factor of four between 1995 and the present day" while at the same time its rates bill had "decreased substantially by 27% since 2006".[131] When this was put to the Minister, he argued that the valuation had reduced as a result of local loop unbundling and BT's disposal of its telephone exchanges.[132] Despite the distinction between the ratings method for BT and other companies, and the apparent benefits this gave to BT, he remained confident that BT's rates valuation was "very carefully and meticulously carried out" and based on "objective valuations about how much things are worth".[133]

110.  By contrast Vtesse, a company investing in NGA networks, argued that the best incentive for private investment in NGA would be for the Government to disapply business rates from fibre optic networks. In a similar vein, Virgin Media and TalkTalk have recently been quoted as stating that a lowering of the tax rate would help investment decisions.[134]

The Government's position

111.  The application of business rates to NGA networks is not a subject covered in any depth within Digital Britain. It did, however, argue that in respect of the Final Third:

[The project] would need to focus resources on geographic areas where the market would not otherwise invest and to subsidise only that activity which contributes to next generation broadband deployment. For this reason we do not believe tax incentives for investment would be the best means of delivery.[135]

Digital Britain highlighted Government support to the industry given in the 2009 Budget to local networks through "a doubling of capital allowances,[136] and argued that BT's "announced deployment to an additional 500,000 homes" was, in part, the result of the increase in capital allowance.[137]

112.  The arguments against the current application of business rates were not accepted by the Minister. In particular, he took the view that the case had not been made for removing business rates from fibre networks:

We have a very long-established system of rating which applies to all business establishments, including, for example, mobile phone masts, and I think it would be difficult to justify a carve out for this particular kind of facility.[138]

He acknowledged that the system was not perfect, and that if the criteria used by the VOA was incorrect, it was open to challenge. In particular, he said that if there were "errors in how things are done then they certainly should be looked at."[139] That said, he remained opposed to "exempting this particular kind of facility from a system which is extremely well-established and delivers and works perfectly well."[140]

113.   It is clear that the issue of business rates, in terms of both how they are applied to the industry, and the level at which they are set, remain contentious issues. If new investment, and new entrants to the NGA market are to be encouraged there needs to be a level playing field. BT does not merit a method of taxation which differs from other providers, and one which appears to deliver to that company more favourable terms than its competitors. We conclude that the current arrangements hinder the delivery of investment in NGA, which is being championed by Government. We recommend that the Government review the application of business rates to fibre optic networks as a matter of urgency, and develop a uniform system for all providers.

114.  We acknowledge that the Government has offered a measure of support to the industry, through the increase of capital allowances. However, we believe that using business rates is a better way of using the tax system to encourage investment in the NGA infrastructure. Indeed, we believe that the importance of NGA warrants consideration of either a reduction, or even a temporary removal, of business rates on fibre optic cable to encourage NGA roll-out. This would be a more effective use of limited public sector funds than either the recent changes to capital allowances or direct intervention.

Internal networks

115.  In applying business rates to fibre, the VOA does not discriminate on the basis of use. During our inquiry, an example came to light of how this "blanket" approach discriminated against internal networks. Sohonet, a London company working in the film industry, has its own internal network which it uses to communicate between the United Kingdom, Australia and the United States of America. Its difficulties with fibre business rates was highlighted in a recent press report. Sohonet's fibres are exclusively for this and consequently spend large portions of time inactive, unlike telecommunication companies whose networks are always busy. Therefore, the network, while essential, is not as profitable as the same cable owned by a telecommunications company, but nevertheless is rated the same.[141]

116.  When we highlighted the example of Sohonet to the Minister he told us that he was not aware of the particular case. However, he remained convinced that:

an important strength in the rating system in the UK and that it is based on pretty objective criteria. It may be in some instances that the criteria used are incorrect and then they can be challenged, and there have been challenges in court over this and the courts have upheld the view of the VOA. But if there are errors in how things are done then they certainly should be looked at.[142]

117.  Although this example is not central to our Report, it does, again, highlight problems with the current application of business rates to fibre optic networks. We are concerned that in its application of business rates to fibre optic networks, the Valuation Office Agency has not taken into account the use of internal fibre optic networks used privately by companies. Applying business rates to these networks on the same basis as commercial networks runs the risk of having a significant detrimental effect on companies with their own networks. We recommend that the Government instruct the Valuation Office Agency to review this area of business rates.

125   Ev 163 Back

126   GVA Grimley Report, The effects of business rates on the communications industry, June 2004, p 21 Back

127   Ev 157 Back

128   Ev 151 Back

129   Ev 151 Back

130   Ev 161 Back

131   Ev 164 Back

132   Q 240 Back

133   Q 239 Back

134   "How the government taxes the UK's broadband future",, 4 November 2009 Back

135   Department for Business, Innovation and Skills, Digital Britain, June 2009, p 64 Back

136   Department for Business, Innovation and Skills, Digital Britain, June 2009, p 66 Back

137   Department for Business, Innovation and Skills, Digital Britain, June 2009, p 60 Back

138   Q 232 Back

139   Q 243 Back

140   Q 234 Back

141   "Dark days for fibre start-ups" The Guardian, 26 February 2009 Back

142   Q 243 Back

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