Tax Day: Business Rates Interim Report – a summary
The Government published the Call for Evidence for the Fundamental Review of Business Rates back in July 2020 (“Business Rates Review”). Since then the Government has made a number of business rates announcements in response to the immediate demands of businesses suffering as a result of the difficult market conditions generated by the pandemic. These include:
- the freezing of business rates for the 2021-22 tax year (announced in the November 2020 Spending Review); and
- temporary provision for an extension to the business rates discount relief for those in the retail, hospitality and leisure industries (announced in the March 2021 Budget).
The final report on the Business Rates Review has been delayed until Autumn 2021. The Government has explained that it needs to have the “best possible information about the state of the economy and the public finances” in order to guide its “long-term vision for the business rates system.” The Non-Domestic Rating (Lists) Act 2021 has also recently been enacted and postpones the date on which the next revaluation of business rates takes effect from 2022 to 2023.
In the meantime, as part of a slew of consultations and reports issued by the Treasury on “Tax Day” (23 March 2021), an Interim Report has been published which summarises the responses received to the Business Rates Review. A very high-level summary of some of the key findings of, and responses to, the Interim Report is set out below.
- The current system of business rates reliefs is too complicated, there are multiple reliefs and exemptions which can make it administratively burdensome for Local Authorities.
- The complexity of the current system can encourage avoidance and evasion. For example, ‘contrived reoccupation’ of vacant units to take advantage of the six-week rule or claims for small business relief on second properties as ‘holiday lets’. It was suggested that more generous reliefs might disincentivise such behaviour.
- The availability of a broad range of reliefs was thought to be necessary as a result of the high burden that the current business rates system places on ratepayers. However, there is some criticism that the availability of reliefs causes the burden of payment to be concentrated on certain ratepayers.
- An extension to empty property relief will alleviate the pressure on landlords to find new tenants or carry out refurbishment. Alternatively, it has been suggested that the level of empty property rates could be reduced on the basis that the regime has been unsuccessful in reducing long-term vacancy rates.
- An improvement relief should be available to support green investment and energy efficiency i.e. community energy generation.
- There was support from respondents for mandatory and centrally-funded, rather than locally administered, reliefs (to achieve consistency) alongside calls for clear guidance on eligibility and the ability to ratepayers to challenge Local Authority decisions.
- Small business rates relief (SBRR) was thought to undermine the idea that all businesses should contribute to maintenance of local services (since 100% relief can be claimed). It was suggested that rates liabilities should reflect ‘hardship’ and ability to pay and should target small businesses rather than small properties.
- Current thresholds were criticised for deterring business investment and expansion, particularly for smaller businesses. Suggestions for reform include reducing the overall threshold, tapering, removing the limit on multiple properties, an ‘allowance’ akin to the personal allowance for income tax and a fixed fee for those below the SBBR threshold.
- Views were mixed as to whether or not capitalisation of rates reductions into rents occurs. Some reported that market conditions have reduced landlord leverage and therefore the ability to negotiate rent increases means that capitalising is unlikely. The valuation process was cited as mitigating capitalisation since rent is used to determine rates liability on revaluation. Freehold owners noted they would not be subject to capitalisation into rents.
- Other respondents reported that capitalisation does happen and causes distortion in the market i.e. tenants with the benefit of rates relief can increase their rental offer.
- Various suggestions were made to reduce the risk of capitalisation:
- increased valuation frequency;
- time limited relief;
- an annual charge on landlords; and
- sharing of the tax burden between landlord and tenant.
- The current system drew criticism for being inflexible and unresponsive to economic fluctuations resulting in a more onerous tax burden and unpredictability.
- Some felt that the multiplier should take greater account of ability to pay and there was a preference for a “fixed multiplier, with no annual uprating and no resetting at revaluation.” The general consensus was for a reduction to the multiplier in advance of the 2023 revaluation, however the suggested level of reduction varied (i.e. 25p – 45p) with some preferring support through reliefs rather than cuts (since the latter would benefit larger ratepayers).
- There was a divergence of opinions regarding indexing, with some support for a property value-based index and indexing between valuations. However, there was general resistance to ‘annual uprating by inflation.’
- The use of supplements was generally opposed (including for funding of reliefs) other than for funding local infrastructure / capital projects.
- Variations of the multiplier by region/locality or by property value were generally opposed in favour of geographic standardisation (rateable value already responds to regional variation), ease of comparison of costs and incentivising improvements (rather than ‘sitting’ below thresholds).
- There were mixed views regarding variation of the multiplier by sector, some respondents supported a unified approach whereas others suggested targeting industrial and warehousing as a leveller between online and traditional retail (note that a digital / online sales tax is also being considered by Government).
- To avoid liability based on outdated valuations respondents expressed a preference for more frequent valuations. Local Authorities expressed a preference for 3-yearly valuations and this was supported by the majority, with some preferring an annual valuation strategy.
- Specific valuations are preferable to a banded or zone-based valuation system which could result in ‘winners and losers’ and which would require phasing at band boundaries to counter unfairness. Some respondents suggested that a banded approach may reduce the number of challenges to rating lists.
- There was support for retaining the current definition of rents in the valuation process (i.e. based on rateable value) and scepticism that changing the definition to reflect ‘actual rents’ could be broadly prejudicial on ratepayers (i.e. larger companies could negotiate lower rents relative to rents paid by others).
- There were mixed views on transitional arrangements however respondents noted that shortening the revaluation cycle would align bills with current values more closely therefore rendering transitional provisions less necessary.
- Responses to questions around business rates treatment of plant and machinery focused predominantly on green energy and energy consumption. The differing treatment of on-site and off-site energy generation was criticised as de-incentivising green energy investment in property and there were calls for exemptions for green energy generation. Retail and telecoms respondents called for certain P&M exclusions (i.e. for P&M amounting to ‘tools of the trade’ or P&M amounting to <10%).
- Increased digitalisation of the valuation process including provision of information to the VOA is desirable. There were demands for greater engagement from VOA at an earlier stage (i.e. before setting valuation schemes) and greater transparency from the VOA as to how valuations had been determined.
- Provision of information to the VOA via annual returns and sharing of information provided to HMRC and Land Registry (to avoid duplication) were discussed in the context of facilitating more frequent revaluations. There was also support for better resourcing of the VOA and improvements to the portals to increase transparency and interaction with the VOA and its processes and faster resolution of cases.
- The VOA will need to find a better method of reflecting turnover rents in their valuation basis for assessments, particularly given the rising prevalence of such rental mechanisms in leases.
- The introduction of a requirement to provide the VOA with rental/lease information (routinely or when leases are varied / changes occur) was generally supported on the basis that such information would be necessary for maintaining the accuracy of ratings lists. It was noted that this might increase administrative burdens for both ratepayers and the VOA.
- The proposal to introduce a requirement to notify the VOA of changes to a property that could impact its business rates liability was positively received on the basis that such information would provide a better understanding of non-domestic properties. However, there was concern that notifying all changes could place a substantial administrative burden on ratepayers (i.e. determining the sort of change that would require notification would require professional input). To mitigate this, annual declarations might be preferable to repeated notifications triggered by every lease change.
- It was suggested that ratepayers would need to be incentivised to provide additional information and not penalised for omissions. A cure period would need to be available in which ratepayers could make disclosure or implement a VOA requirement.
- There were mixed views on making a register of commercial lease information publicly available with some supporting the greater transparency it would bring and others suggesting that more detailed / sensitive information (such as that contained in non-registrable side letters) should be restricted to agents and ratepayers only. Existing public registers (i.e. the Land Registry register of leases) could be enhanced rather than require duplicate information and a separate register.
- Proposals to replace Business Rates with Capital Value Tax (CVT) met with opposition from respondents. Sources of significant drawback cited were:
- difficulty with implementation (we do not have a complete register of freehold ownership in England and Wales and as such identifying land-owners can be challenging);
- disruption as a result of such implementation (including renegotiation of leases);
- difficulty with assessing liabilities based on capital values rather than those based on rental values due to a smaller evidence base (lower volume of capital transactions) and the fact that planning permissions would need to be accounted for;
- disproportionate impact on business requiring high land use;
- potential for concentration of the burden of taxation on a smaller number of property owners (i.e. pension funds);
- property owners would not derive much by way of benefit from local authority services so should not be responsible for funding them;
- valuation based on transaction value could affect pricing (i.e. tactical pricing) and encourage avoidance (i.e. misreporting); and
- CVT would have little or no positive impact on investment.
- Some potential benefits of CVT as an alternative were also noted by respondents. These included:
- greater stability as a basis for calculation when compared to rental values which are more changeable; and
- shifting liability from occupiers to owners would be more economically efficient and would encourage investment in properties.
- An online sales tax (‘OST’) has been proposed as a method of ‘levelling the playing field’ between online and traditional retailers by distributing the tax burden more fairly. Although an OST is unlikely to replace business rates (given the amount of revenue that the latter generates) some respondents suggested ringfencing of OST to contribute to business rates reductions. More information about OST is expected to be available in autumn this year.
- The scope of OST was the subject of diverse responses, inclusion of all online good sales was favoured although some argued for a system of exclusions based on the VAT system. There was agreement that the focus should be on ‘large profitable online retailers’ rather than smaller businesses and that the scope should include travel, accommodation and software sales.
- A ‘delivery tax’ was suggested as an alternative to an OST since there were concerns that an OST might be difficult to define i.e. identifying where and when an online sale had been transacted and determining whether or not sales such as click-and-collect should be carved out).
- Although there was some suggestion from respondents that OST could assist with rejuvenation of the high street there was also cynicism as to whether the OST would encourage consumers to return to brick-and-mortar retail and, moreover, concern that OST would amount to a ‘tax on innovation’ which would be counter to the direction of consumer habits and ‘may lead to market distortions.’
- The primary concern regarding OST was that consumers may ultimately shoulder the cost of the OST as a ‘pass through’. This could have the greatest impact on the vulnerable, those on low incomes and those in rural areas who rely on online shopping.