7 Business rates
Background
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",
www.computerweekley.com, 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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