1. Governance
March 29, 2019

Business rates are broken. Should we start taxing land?

By Kevin Muldoon-Smith

Organisations across the political, public and private sector are clamouring to reform business rates. They think the UK’s current business rates policy is outdated and problematic. Their contentions were reflected in the Treasury Select Committee’s recent decision to review the impact of the government’s business rate policy.  

The review could have profound consequences for businesses. But the issue will also resonate more broadly among those interested in urban and regional development, those charged with financing public services, and those concerned with the crumbling built environment and engaged in local wealth creation.

Is it any wonder that existing buildings depreciate in value when the government’s business rates retention strategy only rewards new property developments? Rather than business rates, might it be time to consider a land value tax?

The Need for Business Rate Reform

Business rates were originally devised as a property tax based on a periodic treasury assessment of rateable value. They are designed to be fair, consistent with economic conditions and supportive of growth and competition. But government policy makers have increasingly attempted to make them serve multiple objectives at once. In 2013, central government commandeered business rates to fund shortfalls in local government budgets through the business rate retention system.

Local income from business rates has effectively replaced the government’s previous revenue support grant. Now, not only are business rates expected to provide a tax system, they are also expected to counter the impacts of austerity and plug the gaps in local budget cuts. Annually, they are worth almost £30bn to the treasury.

Press attention directed at business rate reform has focused on the retail sector and the spectre of empty high streets. But although business rates are important to retailers, they are not necessarily the cause of the sector’s disruption. An array of micro and macro concerns afflicting the retail sector magnifies the cost of business rates, which are often relatively high for retailers that pay a premium for centrally located properties.

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To reform business rates, we shouldn’t take our lead from one particular political agenda or sector. We should take stock of the current situation and unite various considerations and priorities. By working backwards, we could arrive at answers to how a new system of property tax could be implemented, keeping in mind the following considerations and priorities:

  • The need for transparency, legibility and simplicity;
  • Being responsive to micro and macroeconomic conditions and incentivising investment in property and business;
  • Being sensitive to the new world of work that favours leaner, hybrid business models that mix bricks and mortar and digital transaction interfaces;
  • Being sympathetic for how Business Rates fall on various property sectors and locations, including retail, leisure, office and industrial, all of which experience property tax in different ways and locations;
  • Tackling the perverse policy of empty property rates, which has helped to reward property vacancy and drive an industry of empty property rate avoidance techniques;
  • Demanding a sustainable local government finance system;
  • Capturing the value created by public spending on physical, social and knowledge infrastructure in local areas;
  • Harnessing the intrinsic but often varied wealth in local anchor institutions and supporting the principles of the foundational economy. 

But business rate reform isn’t the only answer. Land value tax has attracted growing interest as an alternative. In contrast to business rates, a land value tax is based on location, and levied upon the value of land (with or without the property upon it).

The central contention of a land value tax is that the value of land is defined by what is happening in the immediate location and broader region. Land value tax is often considered more progressive because it captures the societal value invested in a given location and can complement policy initiatives like local wealth building. This could remedy one of the central concerns with the business rates retention scheme, which strips out value created by local investment in a periodic national revaluation exercise – known as a “wash through”.

Yet we should be wary of viewing land value tax as a panacea for concerns with business rates. A great deal of land simply has no value and needs a certain degree of initial investment to ready it for further development. Similarly, reducing property tax will not help the high street if the demand to purchase certain products from bricks and mortar shops no longer exists. Nor is it clear how a land value tax would confront the new world of digital platforms that do not have physical footprints, or the reality of commercial businesses that switch use in quick succession. And any reduction in tax may capitalise into higher rents as property owners price-in the change.

A Very English Compromise

The economic and ethical argument for a land value tax is strong. However, the practicalities of moving to this system are not straightforward. Implementing a land value tax would require huge change to tax institutions, a national revaluation exercise using a new method of site appraisal, and a new valuation skill base. Perhaps the greatest obstacle will be political, with wealthy property owners unlikely to favour disturbance.

What we may end up with eventually is a Very English Compromise; a semi-permanent transition combining elements of land value, property and turnover-related tax. This balancing act would be similar in kind to the split-rate tax in North America, where land is taxed at a higher rate than property. This could include profits not easily captured in brick and mortar – for example the digital sales tax that chancellor Philip Hammond announced in the 2018 budget, which would aim to capture value from firms that shift sales and profits between jurisdictions.

The situation is complex and demands a partnership-based solution that unites businesses, property owners and government. Rather than distil the situation into different political agendas or budget silos, or examine it through simplified principles of supply and demand, we should find a consensual approach to land and property tax that encompasses business profitability, local public services, devolution and economic development.

Kevin Muldoon-Smith is a lecturer in real estate economics at Northumbria University. He tweets @muldoon_smith

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