Impact of business rates on business Contents

3Alternatives to the current system

Time for change?

163.We heard from a number of organisations167 that the current system is no longer fit for purpose. For example, the British Chambers of Commerce, the national representative body of 52 accredited chamber of commerce in the UK, said that:

While there have been welcome steps over recent years to blunt the impact of business rates, the businesses that we represent have repeatedly and unequivocally stated that, in its current form, the system is broken.168

164.Any reforms to the Business Rates System should have particular regard both to the need to maintain the total income for local authorities and to keep the link between individual authorities and the current and potential new businesses in their areas.

165.A number of alternatives to the current property-based tax have been put forward as a way to fundamentally re-work the business rates system. We have reviewed these various options.

Land value tax

166.There are several different names for a land value tax, including site value tax,169 location value tax,170 and landowner levy.171 The basis for all three proposals is the same. The All-Party Parliamentary Group on Land Value Capture outlined what it considered would be the benefits on transferring the tax from property to the underlying land as follows:

It would be fairer to align how much businesses pay more closely with the benefits they receive and would not penalise additional investment.
It would encourage growth:
- By encouraging the best use of land, particularly in more valuable locations.
- By encouraging public investment in infrastructure and other improvements through the provision of a more effective mechanism for capturing the consequent increases in land value and so enable projects to become potentially self-funding.
Simplification
- Shifting the tax base from occupiers to landowners could remove around half a million SMEs from the system all together.
- Limiting the valuation to the land component of the property and making use of geographical information systems would simplify the valuation process.172

167.Whilst noting the anticipated advantages of moving to a land-based tax, organisations such as the Country Land and Business Association, a membership organisation of land, property and business owners, had concerns around how this could be practically implemented in England. They wrote that:

Whilst Land Tax may be seen as a way forward for business rates, there would be a significant hurdle in valuation terms to separate the land value from the value attributed to the buildings and structures on the land and the business use. In addition, there would not seem to be a [more] accurate link between capital values than rental values.173

168.Gerald Eve LLP agreed that, theoretically, the economic theory behind a land-based tax was strong, but that the actual implementation would be challenging. Its concerns included:

The absence of a complete register of interests in land.
The problem of determining who the ‘owner’ is for levying the tax. Is it the freeholder, who may have granted a 999 year lease 100 years ago and is possibly no longer traceable, or the head leaseholder who granted a 125 year lease 30 years ago, the sub-leaseholder, or tenant who has granted a licence etc?
The paucity of sales of bare land which would form the evidence on which to found valuations. One would first have to establish what planning permission would likely be granted for each site (in order to determine the highest and best use available for the site) and then establish its development value. There would thus probably be a 100 per cent appeal rate given the lack of reliable market evidence.
The upheaval from changing from a long-established system to a new untested one, no doubt creating many losers (as well as winners).174

169.Kevin Muldoon-Smith, a lecturer at Northumbria University, summed up the debate around a land-based tax when he told the Committee that the concept makes “economic sense” but that the locations where this has been implemented successfully have had “very different property cultures from ours”. While the theory of a land-value tax has its merits, “it has almost had its day before it has had an opportunity to have its day”.175

170.A land-based tax is theoretically appealing as it charges landowners rather than tenants—although it cannot be known on whom the final incidence of the tax would fall—and incentivises the best possible use of land. However, the practicalities of implementation are very difficult. It is likely that there would be more appeals. There would be an enhanced level of technical judgement required, particularly in built up areas where there are very few sales to generate a reliable value and it is very difficult to separate the value of land from the value of the buildings that are situated on that land. Land value tax would incentivise high-density usage, and there could be instances where this would not be the desired outcome, such as green spaces.

171.In response to this Report Treasury should research examples from other countries with Land Value Taxes such as Australia and Denmark.

Alternatives to property-based taxes

172.We received evidence putting forward proposals of alternative ways to tax businesses at a local level which will be discussed in turn.

Online sales levy

173.One of the most recurring sentiments heard as part of the inquiry was that—particularly for the retail sector—’bricks and mortar’ businesses were adversely affected by the current business rates system compared to online retailers. The All-Party Parliamentary Group on Land Value Capture told us that that there is a “need for the large international online platforms such as Amazon to be taxed more fairly.”176

174.Concerns around fair taxation between online retailers and those on the high street has been echoed by a number of organisations.177 For example, Accessible Retail told us that the “unfairness is compounded by many on-line traders being international and able to switch much of their UK corporation tax liability to lower jurisdictions. The impact is profound.”178

175.Steve Rigby, Group Property Director for Tesco, outlined the need to rebalance the system when he gave evidence to the Committee:

The system can be repaired, but it actually needs fundamental rebalancing, because in the retail industry now, 20 per cent of the sales are online. That is a fundamental change, at a time when the rates burden for bricks and mortar retailers has been rising continually. For instance, Tesco’s rate bill has almost doubled over the past 10 years to £700 million.179

176.In its written evidence to the Committee Tesco outlined a proposal for an Online Sales Levy (OSL), which would be levied against ‘physical goods’ sold online, income from which would be used to reduce the multiplier for retailers, relieving the cost the business rates. They wrote:

The OSL would create a new levy for online sales, which could be used to reduce the significant burden placed on bricks and mortar retailers. The key design features are:

Introduce a 2 per cent levy on the online sale of physical goods. Currently revenues from online sales are £69bn in the UK, meaning the levy would raise approximately £1.5 billion.
Use this money to fund a 20 per cent cut in business rates for all retailers.
Use existing mechanisms to deliver the reduction in business rates.
Exempt small businesses from the levy, by using a revenue threshold, to ensure the OSL does not impact small, online businesses.
Use existing VAT definitions of a physical good and ensure only appropriate sales are targeted.180

177.Having a fair tax base for all businesses is important, whether they are online or ‘bricks and mortar’ businesses. However, we also heard in the written and oral evidence that increasing tax revenue from one income stream may not be the most appropriate way to do this.

178.Chris Harris, Group Property & Development Director for the John Lewis Partnership, a high-end department store, raised concerns about taking one element of John Lewis’ business to apply an additional tax to, the basis for which is not driven by a customer making an explicit choice. He said:

I was describing earlier that our business is intertwined. We have an online and a bricks and mortar business. It is completely combined, and customers do not choose necessarily to go into a shop or online in an explicit way. They just look to shop at John Lewis and, therefore, the way that it is joined up and the fact that you can buy online, collect from store, the fact that our distribution distributes to all channels, the fact that if we do not have it in stock you can order it instore and collect it instore or collect it from your home, it is completely omnichannel and combined. Taking one element of our business and saying, “Let’s apply a tax over there” seems like not the right way forward.181

179.Other organisations such as the Federation of Small Businesses, a not-for-profit membership and campaign organisation, raised concerns over the risk of double-taxation, and the impact an online sales levy would have on a low-profit high-turnover business.182

180.Some other organisations considered that an online sale tax merited further investigation. For example, Rachel Kelly, Senior Policy Officer for the British Property Federation, a trade association for UK residential and commercial real estate companies, told the Committee:

I don’t think that the issues with business rates are just a retail issue. I think that retailers are struggling at the moment, and there is a huge structural shift going on in that industry. I think that the economy is changing broadly and quickly. We see disruption in other asset classes; Airbnb is disrupting the hotel industry. The way we are using office space is changing [ … ].

I think the crux of the issue comes down to the business rates system not accurately valuing property in real time. The way we use property will change. Certain property will become more valuable or less valuable. Taking online retail as an example, as that industry grows, presumably those kinds of distribution warehouses—last-mile distribution points and click and collect points—will have value. There will be physical premises that they are using that will become more valuable. If the business rates system was more adaptable and reflected those values in real time, the burden that different industries paid would be more equally shared.183

181.The Housing, Communities and Local Government Committee considered the differences in the burden of tax between companies on the high street compared to those online in more detail in its High streets and town centres in 2030 inquiry.184

182.Businesses deserve a system that reacts to changes in the modern economy. A number of alternatives to the current business rates system were presented and an equal number of reasons presented as to why England and Wales are not yet ready to move to them. One of the key reasons is that there is insufficient modelling of the viable alternatives, and therefore insufficient data to make a recommendation for change currently. This is true of the online sales levy.

Sales or turnover tax

183.A sales tax could be levied on a service or item at point of sale, either at a local or national level. British BIDs,185 a membership organisation that provides advice, training and services to business improvement districts, advocated the introduction of a local sales tax. They told us that “a local sales tax would link business performance to tax liability more effectively, and it could be operated within the VAT system as a tax at final sale.” They went on to say that “the feasibility of a sales tax and its prospective benefits present a real opportunity to make business taxes work better for government and the British economy.”186

184.The Institute of Revenues Rating and Valuation, a professional body for local taxation, benefits and valuation, also advocated a local sales tax in its written submission to the Committee in which they gave examples of local sales taxes in the USA, Canada and New Zealand. In these countries each state or province can levy an additional sales tax, and that there is the option to “levy a sales tax in additional to conventional property taxes”.187

185.River Island wrote to the Committee explaining the benefits of a national sales tax in addition to VAT that “would be fair to all retailers”, with “ease of management” and “would also save the UK Government a huge amount of administrative cost in running the current business rates system.”188

186.But other witnesses had concerns about the potential negative impacts of a turnover tax. The Federation of Small Businesses were concerned that small retailers would be disproportionately affected by a turnover tax because they often have high turnover but low margins.189 The National Farmers Union (NFU) considered that such a tax would be regressive and have a greater impact on lower income households.190 The Institute for Fiscal Studies, an economic research institute, was concerned that a turnover tax would discourage production and consumption.191

187.The Rating Surveyors Association warned against a local sales tax. It said that “The rate poundage is levied against the real property of the whole country. Attempts to apply it to only parts of the country are likely to cause property market distortions, enormous difficulties of definitions, and an unproductive industry jostling to contrive property to be treated this way or that.”192

Profits tax

188.A profits tax would be analogous to corporation tax, charged on the earnings of a business after expenses are deducted.

189.The NFU took the view that if a profit-based tax could be “delinked from fiscal neutrality for the government year on year and based on the varying profits of businesses” it may be viable.193

190.A profits based tax could be linked to the existing mechanisms that collect corporation tax which would appear to make it simple to collect. However, the Association of Accounting Technicians, a professional accountancy body, raised concerns that while appearing to be an acceptable solution “the reality of profit shifting undertaken by multi-national organisations as well as the various legitimate profit reducing activities that many companies undertake” could make it difficult to collect. It also raised concerns that “many organisations who currently pay substantial sums of business rates e.g. local authorities, schools and hospitals, would no longer make any contribution given there are no profits to tax.194

191.At this time, there does not appear to be sufficient appetite from businesses or consumers to introduce an additional sales or profits-based tax. Based on current information, there is a risk that the introduction of such a tax could adversely affect some sectors of the population and some sectors within business.

Single consolidated tax

192.A single consolidated tax for small businesses was advocated by the Centre for Policy Studies, a think tank and pressure group, with the advantages cited as being a dramatic reduction in the reporting and administrative burden for small businesses, that would make the tax significantly simpler. It said that the case for a simple consolidated tax was that:

The Office of Tax Simplification is clear that we need a better, simpler tax regime for small businesses.
The average small business loses three working weeks a year to the demands of tax compliance, in addition to the financial costs.
Corporation Tax, Employer’s National Insurance, VAT and business rates are not just hard to afford but hard to administer.
All firms with revenue under £1,000,000 should be able to replace these taxes with a simple levy on turnover.
Modelling by Capital Economics suggests this would be revenue-neutral for the Treasury at a rate of approximately 12.5 per cent.
If ‘don’t knows’ were excluded, businesses would strongly support the introduction of such a scheme, 72 per cent would choose to use it if it meant paying the same amount of tax.195

193.While noting that the Centre for Policy Studies advocated for a single consolidated tax for small businesses, we considered the concept more widely for all businesses. Tej Parikh, Senior Economist at the Institute for Directors, raised concerns that a single tax would be challenging. He told us that “ultimately, given changing business models and the need to capture different forms of economic activity, it will be difficult to do that through a single, one-size-fits-all tax.”196

194.On its own, a single consolidated tax would not appear to present sufficient solutions to the issues being experienced by the current business rates system. Nonetheless a single consolidated tax would be simple, it is something that some small businesses want, and, if it was designed to be revenue neutral, could be a viable option in the future.

Hybrid tax

195.A hybrid tax would allow for elements of different tax types to be combined such as the unavoidability of property-based tax and the responsiveness to business performance of a profits-based tax. This would create a new tax that is more adaptable to suit the needs of different industries, and size of business.

196.In its written submission to the inquiry Northumbria University wrote that to ensure a robust and fair business rates system:

the business rate system must be responsive to economic conditions and fairly incentivise investment in property and business; [and that]
the business rate system should be sensitive to the new world of work that favours leaner, hybrid business models that mix bricks and mortar and digital transaction interfaces [ … ]197

197.UKHospitality, a hospitality trade association, supported the introduction of a hybrid system to address concerns that the current business rates system was outdated in the modern economy. It said that “there could be a role for a hybrid system, with a much-reduced property-based system that is supplemented by a system that is more closely aligned to revenue or profitability.”198

198.We discussed the concept of a hybrid system with Kevin Muldoon-Smith, lecturer at Northumbria University who told us that in the future a hybrid tax could provide more flexibility in the business rates system:

In the future, we will have to look at how the world of work is changing, so absolutely I think a hybrid system will have elements of digital in there. I think the existing property-based system needs to be improved. On that compromise of the land value tax system, potentially, there could be an element of land in there, if we wanted to investigate a split-rate system in the future.199

199.A hybrid system is a potentially viable option in the future that would enable the Government to have a tax system that is more reactive to changes in the modern economy. However, to be assessed further it needs a comprehensive plan outlining how a hybrid tax could be constituted, and a blueprint for taking this idea further.

200.It is clear change is needed to the current business rates system. None of the alternative systems presented to this inquiry have demonstrated that they are a clearly superior alternative. However, it should not be up to external stakeholders to develop and evaluate detailed proposals. Given the changing nature of the economy, and with high streets on the decline, the Government needs to be curious, proactive and creative in exploring alternative options to such an important source of Government revenue. We recommend that the Government prepares a consultation in time for the next Spring Statement to identify potential alternatives to the current system of business rates and form the basis for a subsequent detailed evaluation of viable options.

201.The primary considerations given the extended period of time this has been an issue, should be the ease and speed with which any potential reforms can be introduced and the fairness of the system.

167 Organisations include: British Retail Consortium (IBR0057); CBI (IBR0100); Make UK (IBR0128); NoteMachine Group (IBR0127); and R3Intelligence/ Northumbria University (IBR0103).

168 British Chambers of Commerce (IBR0099)

169 Gerald Eve LLP (IBR0013)

170 Woodhaven Trust (IBR0043)

171 Liberal Democrats, ‘Replacing business rates: taxing land, not investment’, accessed 12 August 2019

172 All-Party Parliamentary Group on Land Value Capture (IBR0034)

173 Country Land and Business Association Ltd (CLA) (IBR0010)

174 Gerald Eve LLP (IBR0013)

175 Q390

176 All-Party Parliamentary Group on Land Value Capture (IBR0034)

177 Organisations include: The Booksellers Association (IBR0068), British Institute of Innkeeping (IBR0056); CBRE Limited (IBR0076); The Entrepreneurs Network (IBR0051); Chartered Surveyor Matthew Griffiths (IBR0017); Royal Society for Public Health (IBR0053); and Shop Direct (IBR0072)