Treasury Committee
Oral evidence: Impact of Business Rates on Business, HC 1944
Wednesday 19 June 2019
Ordered by the House of Commons to be published on 19 June 2019.
Members present: Nicky Morgan (Chair); Rushanara Ali; Mr Steve Baker; Mr Simon Clarke; Charlie Elphicke; Kevin Hollinrake; Alison McGovern; Catherine McKinnell; Alison Thewliss.
Questions 344-441
Witnesses
I: Rachel Kelly, Senior Policy Officer, British Property Federation; Kevin Muldoon-Smith, Lecturer, Northumbria University; Tej Parikh, Chief Economist, Institute of Directors; Steve Rigby, Group Property Director, Tesco; and Jerry Schurder, Head of Business Rates, Gerald Eve LLP.
Written evidence from witnesses:
– British Property Federation, Institute of Directors, Tesco, Gerald Eve LLP
Witnesses: Rachel Kelly, Kevin Muldoon-Smith, Tej Parikh, Steve Rigby and Jerry Schurder.
Q344 Chair: Good morning, and thank you very much indeed to our panel for being here for our next oral evidence session on the impact of business rates on businesses. I will ask the panel to briefly introduce themselves, and then we will get the questioning under way.
Jerry Schurder: My name is Jerry Schurder. I am head of business rates at property consultancy Gerald Eve. We work with clients occupying or owning more than 80,000 properties in England to make sure that their rates liabilities are fair. I have long campaigned for reform of business rates, working with a range of trade and business organisations to assist with their lobbying and the forming of their policies. I thank the Committee for inviting me to give evidence.
Steve Rigby: Steve Rigby, group property director for Tesco stores.
Tej Parikh: Tej Parikh, chief economist at the Institute of Directors.
Kevin Muldoon-Smith: Kevin Muldoon-Smith, lecturer in real estate economics at Northumbria University.
Rachel Kelly: Rachel Kelly; I work for the British Property Federation. We represent investors in property in the UK.
Q345 Chair: Lovely. Thank you all very much indeed for being here. Obviously we have a distinguished panel, but it is quite big, so we will try to make sure that we direct questions to appropriate panellists; of course, if you want to come in, please try to catch my eye or the eye of the person asking the question. If you can keep your answers relatively brief, we can cover quite a bit of ground.
Mr Parikh, I will start with you. The Institute of Directors has called for wholesale reform of the business rates system. Do you think the system is completely unsalvageable?
Tej Parikh: Not necessarily. The status quo with business rates is probably unsustainable, and there are probably four reasons for that. If you look over the last few years, a number of reliefs and reforms have been put in place to try to fix the existing system, which in and of itself poses a burden to the taxpayer. Another reason why it is unsustainable is that we are seeing a shrinking in the physical market, and so a shrinking in the tax base. I suppose the primary reason why it is unsustainable is the increase in business rates and the cumulative burden that businesses now face. We need to consider the economic context.
Ultimately, reform depends on which symptoms you want to dissolve. There are longer-term reforms, looking at different potential taxes, but there are also fixes that can be made to the existing system to make it operate better. Ultimately, our position is that, for a number of businesses, the burden is just far too high to cope with at the moment.
Q346 Chair: It is actually just the amount being charged that is unsustainable?
Tej Parikh: Yes.
Q347 Chair: Mr Rigby, you just heard about the physical base shrinking. In your written evidence to us, Tesco talks about an online sales levy, and you have queried the continued extension or changing of reliefs, or cutting the multiplier. Do you think the system can be repaired, or do we need fundamental reform?
Steve Rigby: As we have said, the system can be repaired, but it actually needs fundamental rebalancing, because in the retail industry now, 20% 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.
We believe there needs to be a rebalancing. Our proposal is twofold. In reality, it is a 20% reduction in the UBR, back to a level seen in 2010, to 40p for the bricks and mortar retailers. To create a level playing field, it is a 2% online sales levy, which will broadly have a tax position for the online retailers similar to the tax paid as a percentage of sales for those in bricks and mortar. Broadly, they should be fiscally neutral for the Government.
We think that solves the bigger picture in the retail world, which is obviously undergoing fundamental change. In other areas—transition, frequency of valuation and so on—repair will clearly need to be undertaken as well.
Q348 Chair: To clarify on the online sales, how would that apply? There are a number of businesses, Tesco included now, that are both bricks and mortar and clicks and mortar. People collect from your stores, for example, what they have ordered online, I’m guessing. Would that levy apply? Would a retailer such as Tesco pay both?
Steve Rigby: Yes, we would. We have tried to ensure that we are not penalising bricks and mortar retailers that are still attracting customers into physical buildings. The two exclusions are physical products; they would be for goods that are ordered in the physical stores and goods that are collected in the physical stores. Clearly, there would also be exceptions for smaller retailers and so on, just as the rates system provides for today.
Q349 Chair: Mr Muldoon-Smith, you again in your evidence have called for a system that can “capture the value held in the new world of work and recover the investment put into national and industrial strategies”. Can the current system do that, or again, do we need fundamental reform?
Kevin Muldoon-Smith: Echoing the other witnesses and going back a little bit, I feel a bit sorry for business rates, because they are asked to do an awful lot. Over the past decade or so, there have been lots of things put into place, such as reliefs and delays in valuations, which have made it difficult to follow the market.
On top of that, the world of work has changed as well. Reform is necessary. I think I still agree with the property tax basis, but we need to improve things, such as with more frequent valuations. Check, challenge, appeal needs to be improved, though it is getting better.
Q350 Chair: We will come on to that; do not doubt it.
Kevin Muldoon-Smith: I would imagine. At base, property tax works, but the world of work has changed. I guess the future is that it has to recognise that greater complication, which means a hybrid system in which digital, online forms of tax would be included.
Q351 Chair: When you say that the world of work has changed, do you think a number of start-ups, in particular, and very small businesses are put off taking on physical premises, because of business rates that might be levied?
Kevin Muldoon-Smith: I think they are, but in terms of the way the world of work has changed, businesses now naturally a lot of the time use much smaller spaces. I think that links in with what some of the witnesses and certainly the evidence contributions have talked about: large floor plates taking more of the burden. A lot of the newer businesses, certainly in the office sector, do not need huge floor plates; they use smaller ones. I would not say that they are necessarily put off from setting up businesses; it is that they almost naturally do not exist in the business rate system all the time.
Q352 Chair: You put off going into physical premises; it is easier to carry on in the bedroom, garage, or whatever, for slightly longer, because if you move into business premises, you might start paying tax, which your little business does not want to cope with.
Kevin Muldoon-Smith: I think that a) they could be put off, and b) there is a changing relationship with the need for a physical floor plate. They just naturally don’t need a business property as much. It is kind of more ambiguous. Live/work is one of the examples of a very new way of working, I guess.
Tej Parikh: I suppose the thing that we are interested in is not just whether there is a challenge for them starting up, but also scaling up. What we have noticed is that a number of our members might be put off from opening another property because they might lose small business rates relief, for example, but we also know that support then tails off after the £15,000 rateable value point, and that can act as an impediment to scaling up. I suppose the third point there is on improving your property as well. Adding solar panels and so on can—
Q353 Chair: You get penalised for it.
Tej Parikh: Exactly.
Q354 Chair: Mr Schurder and Ms Kelly, I have saved you until last in this section. We have heard a lot about the business rates system and how it does not work, and everything else. I want to understand how the property market works. You, Mr Schurder—or Gerald Eve—say in your evidence that “business rates should continue to be based on property rental values”, so I suppose there are a few questions there.
First, does that not assume that the market rental system is working? We obviously have a system where, mostly, you have rental reviews that are upward only, and we have already heard evidence to the Committee that the link between rent and rates is broken. What used to happen was that when rates were going up, rent would go down, or vice versa. Where are we in terms of how the market rental system is working?
Jerry Schurder: Business rates are based on the annual rental value of the property at the relevant valuation date. That is not to say that it is the same as the rent that is being paid for the property itself, because that could have been set historically, it may have been indexed, or it may have been upwards only. What business rates are there to do is create a fair measure, so that all properties are valued at a fixed valuation date based on the current market rental value: what could the property fetch on the open market if a willing landlord let the property to a willing tenant? That may well not be the same as the actual rent being paid for the property.
One of the fundamental problems that we have with the system, and have had for many years, is the infrequency of revaluation. Although property rental values change as the economy changes, the market changes and the way that we occupy premises changes—retail is a particular example, obviously—rating has not kept up to speed. It has not been sufficiently responsive. We used to have five-yearly revaluations, and maybe that was thought to be acceptable when the economy was perhaps moving at a slower pace. We should have had a revaluation in 2015; that was postponed for two years—a very perverse decision, but that is what we had.
There was a particular focus on that revaluation and the gap, because the assessments that came into effect in 2010 were massively out of date on the first day on which they were charged. The property rental values used were those of two years earlier, at the antecedent valuation date of April 2008. That was at an almost peak property high, but when the assessments came into force in 2010, the economy and the market had plummeted, so they were already out of date. Property rental values fell and fell during the recession, yet rates continued their inflation-linked upward climb. One of the fundamental fixes that is required to make business rates fair again is far more frequent revaluations—far more frequent than even the three-yearly revaluations that the Government intend to introduce.
Q355 Chair: I am presuming that your business is sometimes instructed to give asset valuations of people’s property portfolios. Is it not the case that people involved in the property market—Ms Kelly, I am going to put the same question to you—want there to be high asset valuations? They want there to be high rents, and it does not matter if properties are sitting empty as long as the rental value is high; people—property businesses—can then borrow more money, regardless of what is going on on the ground. Is that not the reason why our high streets are failing?
Jerry Schurder: I do not regard myself as an expert in property valuations and that aspect of the market. However, if there are high headline rents that are agreed in the market, perhaps in order to maintain a high asset base, there is normally a significant cost to that, in that the landlord has had to put in significant up-front funding; perhaps they had to pay a reverse premium to the tenant to take on the lease, which would maybe assist with all the fitting out. There could be very lengthy rent-free periods. I suspect that my colleagues undertaking asset valuations of properties will be fully conscious that they need to look at the headline rent and ask, “Is it reflective of the current market, or will it reduce at some stage further down the line?”
Q356 Chair: But the difficulty is if the rent reduces. The point you are making is that the system is so slow that the rating system does not catch up with it. You have businesses that might think they could now afford the rent because it has fallen so far, but then they look at the rate value and think, “This is totally out of our league.”
Jerry Schurder: Absolutely correct. There is no shortage of evidence of where landlords have been extremely flexible over recent years because they want to have their vacant properties occupied and have agreed very favourable terms on the tenancy, but the rates have been the barrier and the deal has fallen away. If rates caught up far more quickly with the real world, and the liabilities therefore adjusted immediately, and not with the downwards transitional phase that I suspect we may come to, we would find that property becomes more affordable, and there would be a fair relationship between rent and rates. That relationship has totally broken. Businesses do not realise that if they pay a high rent, the chances are that they will end up with a high rateable value and therefore a high rates bill. That is because the relationship has been broken by the infrequent revaluations and the transitional arrangements, which prevent the largest increases and deny the largest decreases.
Q357 Chair: The same question to you, Ms Kelly. The property market is not working for people, particularly in retail. Rents are often kept too high, and there is the issue of that relationship between rent and rates. Do you recognise the situation as being broken?
Rachel Kelly: I certainly would agree with all of Jerry’s comments. A rational investor is not going to purposefully keep a property empty. They are investing because they want to get a return on their investment. There are a lot of examples of where the business rates bill has just become completely out of kilter with the true value of the space. I have seen examples of where even at zero rent somebody is not willing to renew a lease, or where business rates have doubled the rent being proposed. That is the real challenge.
Q358 Chair: You don’t think it is the involvement of private equity in a lot of our retailers? Again, that has been suggested. A lot of our retailers now have private equity owners who are taking huge amounts out of the businesses and are not very interested in what is going on on the ground, in terms of the balance between rent and rates. That is then having a negative impact on the rest of the high street, where they are trying to get start-ups in.
Rachel Kelly: To be honest, I’m not sure I can comment on that. We don’t really represent retailers, so I am not sure I would be best placed to comment on that.
Q359 Chair: But obviously there are properties on our high streets. You are right: business rates are not confined to high streets; they are paid by businesses of all shapes and sizes away from the high street as well, but the issue is most visible on the high streets, isn’t it?
Rachel Kelly: If I am following the question correctly, I would come back to my original point that even a private equity investor—are you saying an investor in a property, or an investor in a retailer?
Q360 Chair: I think it is the link. A lot of retailers have private equity owners, and the issue is whether they are particularly bothered about the rents, the knock-on impact on rates and the health of the high streets. What are you seeing from your BPF members?
Rachel Kelly: I am not sure about that one.
Chair: Okay, we’ll move on to Kevin and then come back.
Q361 Kevin Hollinrake: On the rates, Mr Parikh and Mr Rigby both said that the burden of rates has become too high, yet the Treasury looks at rates nationally as fiscally neutral. How is it a disproportionately higher burden on the businesses you represent?
Steve Rigby: In terms of being disproportionate, retail pays 25% of the rates bill yet represents around 5% of the GDP. Looking at the example of Tesco, its rates bill is around £700 million, but the corporation tax is about half of that, so the fixed costs in retail have become completely disproportionate. That is over a time when retail is changing dramatically, with 20% of sales moving online. We need only look at the news about some of the business failures—a loss of jobs, and of shops in the physical world over the last year or so. The retail fixed burdens, of which rates is one of the most significant, are too high.
On valuation, we clearly do value our portfolio. We value that on the basis of an annual rental value. Today, we are valuing our big stores at probably 20% below the current rateable values.
Q362 Chair: You are not borrowing on the basis of that, are you?
Steve Rigby: We are not borrowing on the basis of that, no.
Q363 Chair: Ms Kelly, you must have members who, in terms of commercial real estate, are borrowing on the basis of the asset valuation—based on the market rent.
Rachel Kelly: Ah, I see your question now. It is also about whether that is putting pressure on people to maintain higher values.
The trend since the financial crisis has been for much lower borrowings on the whole across the sector. I would say that the trend in borrowing has been a lot lower. I don’t know if that is as much of an issue.
Q364 Chair: Are you able to provide us with some written evidence on that?
Rachel Kelly: Yes, I can provide evidence of trends of debt against property in the UK.
Q365 Chair: I am interested to know the rents and what people are borrowing. Are you able to show how that is affecting borrowing?
Rachel Kelly: Yes, sure. There is a report done every year, and I can provide some data.
Q366 Chair: Thank you. Mr Schurder, I think you wanted to come in.
Jerry Schurder: I wanted to make some points on the burden, because that is the principal reason why we are here today and why there is so much concern about business rates. The burden is just too high and needs to be reduced significantly. You can measure that in a number of different ways, but at a simple level, we started off the current system with a uniform business rate—the tax rate—of 34.8p in the pound in 1990. It was 34.8% of current market rental value. We are now at 50.4%, so it is the highest tax rate of any we have in the country. The total take from business rates has increased at a gross level from £10.4 billion in 1990 to well over £30 billion, well outstripping the rate of inflation, whichever measure one uses.
The evidence shows, if we look at the international context and dimension, that the amount that businesses pay here by way of local property tax far exceeds what is paid in most other countries in the EU and the OECD. I will just bring that to life with one piece of data that I am very grateful to Opel/Vauxhall for sharing with me. Vauxhall UK did research in relation to all the local property taxes it pays across Europe. The UK occupies 8% of its total floor space in Europe, but accounts for 67% of the property taxes that it pays across Europe. That is the extent to which our system overtaxes all businesses. It is not just retail, although clearly there is an emphasis and focus on it.
The starting point must be recognition of that fact, and an ambition to significantly reduce the rate somewhere back down to 34.8p or thereabouts—a third of current market rental value. I believe that business would accept that a tax at about that level would be a fair contribution towards local services, so long as it remained at that 33% or so. That requires annual or frequent revaluations to ensure that the amount they pay is always at that sort of proportion.
Chair: That leads us on quite nicely. We are going to move on to local services.
Q367 Catherine McKinnell: Ms Kelly, I was going to ask you about your written evidence, which calls for the introduction of a business growth accelerator in England. Is the thinking that it should mirror the Scottish accelerator in its entirety, or is there something else that we should be looking at for England?
Rachel Kelly: There are two parts to the business growth accelerator. One is that someone who develops a property would not incur business rates until the first point of occupation, which is really encouraging for speculative development, because a developer is not thinking, “Well, I could develop it, but if I don’t get an occupier, I might be hit by a business rates bill until I can find one.” It is potentially really good at encouraging that kind of speculative development.
The second part of the business growth accelerator is a rates-free holiday for the occupier. I am a bit torn on that, because it is less well targeted. It does help to encourage that development, but you are not quite sure where that relief is going to—whether it is going to a small business or a business that does not really need the relief. If we were going to introduce elements of the business growth accelerator, I think it is about that first part of the guarantee—that you will not have to pay business rates until you have an occupier.
My only other reservation is that I would be cautious not to over-incentivise new development. If reliefs are being given to new development, some kind of equivalent relief should be given to refurbishments as well, so that we are incentivising not only new developments, but maintenance of and improvements to our existing property stock.
Q368 Catherine McKinnell: You are nodding away there.
Kevin Muldoon-Smith: I totally agree with the accelerator, but it is a more progressive type of relief, so if we were to go down that route, it would need to be in the context of evaluating all the other reliefs as well. I tried to go through all the reliefs before this Committee, and even I gave up. There are almost as many reliefs as there are contributions to this consultation. It is brilliant to have more progressive methods out there, but they must be in the context of really evaluating the wider system of reliefs. In the end, that is one of the things that undermines the current business rates system, which is a pretty good tax, although it gets knocked down a little bit. This is something that supports the business community very well, so I would absolutely endorse it.
Q369 Catherine McKinnell: I was going to ask about evidence we have received from the Local Government Association, which calls for greater powers to decide business rate multipliers on a more localised basis. As an MP from the north-east, I can see that local authorities face significant challenges through reductions to their local authority spending envelope, so the idea of local authorities being able to competitively lower their business rates does not seem very realistic. If you were to do that, you would really be asking the local authorities that are struggling the most to start levying greater taxes locally. Have you given some thought to that? Is that something you support, or something you have concerns about?
Kevin Muldoon-Smith: It would be very difficult to lower the multiplier in local areas, and I don’t think we have seen much evidence of that happening. In many ways, that is how the system used to work before the single rate was brought in. It was quite chaotic, in the sense that you would have different rates across different boundaries, and it was difficult to keep track of. I think it is a good thing that local areas have more involvement in and control over their business rates—I just think there are better ways of doing it.
That feeds into some of the business rate retention models associated with the business rate system. There could be a better relationship between the business rates system and business rate retention. It is a slightly different set of terms of inquiry from this one, I know, but there are similar perversities in business rate retention to those that appear in the business rate system—the attempt to always keep things fiscally neutral and to still equalise within the system.
Certainly, in business rate retention, an awful lot of the growth from economic development that local areas might do over time is stripped out of the system, so you can only really reward new property development. I am not really sure how it would work, and a lot of research would need to be done, but if there could be an improvement to the business rate retention scheme, it would give places such as Newcastle or north Tyneside a better set of tools to work with on their business rate base.
Q370 Catherine McKinnell: Mr Schurder?
Jerry Schurder: I have no doubt that business remains vehemently against the idea of local rate setting. They have very long memories, going back to the 1980s, when they were treated as the cash cows to fund profligate spending, with massive increases year on year in some local authority areas. I don’t think business has yet regained its trust in local authorities and the way they operate. There is greater concern that they would end up paying more by way of business rates than that local government would, as you suggest, be in a position to reduce the amount they pay.
The other point is a practical one: it becomes almost impossible for a multi-site occupier to manage its rates liabilities when there are 317 different calculations of rates at a local level. It is difficult enough as it is, with all the reliefs, but to manage that and to budget and predict would become almost impossible.
Steve Rigby: I couldn’t say it any better, to be honest.
Q371 Catherine McKinnell: Presumably, there is also the concern that local authorities that are in a stronger position would be incentivised to undercut their neighbouring local authorities, and it would become a race to the bottom. Or would a race to the bottom be welcome?
Rachel Kelly: I would agree; I would be concerned about that. I don’t necessarily think that it would be the best thing for the Exchequer if local authorities could undercut their neighbours. I think it would just add complexity to the system.
Jerry Schurder: We would still have to have a redistribution system behind the scenes. Otherwise, half of councils would go completely bust overnight.
Q372 Catherine McKinnell: From a business perspective, to what extent are business rates and how they are set a driving factor towards investment decisions—on, say, where you invest in bricks and mortar businesses? Are the business rates the biggest factor that you consider, or are there other more local factors that come into play, such as the availability of skills and the general investment environment that a local authority can provide?
Tej Parikh: Yes, I think it is certainly a very big factor. Whenever a business is looking at potential locations in which to invest in property or find a property, they will be looking at rent, business rates, service charges and potentially the insurance they need on that property. Those total property costs are quite significant; in some cases, we know that business rates are one of the largest costs that businesses will face in a particular area. It is not the only thing; skills are clearly an issue, particularly when we move further outside London and the south-east, as well as access to a general support network.
There is a lot we could do through the LEP system, perhaps, to support businesses in these areas, and to improve local skills propositions. I would say that business rates are a key one in determining where they invest.
One challenge around business rates, I suppose, is how much they fluctuate, and how that creates a lot of uncertainty to do with lengths of reliefs, some of which are temporary and some of which are not. That makes that investment decision that much harder.
Q373 Kevin Hollinrake: Can I touch on the quantum raised by business rates? Mr Schurder, you seemed to imply that the Government always says that the amount raised every year and the increase is fiscally neutral, but you are saying that it is not fiscally neutral—it is actually increasing ahead of inflation. Is that correct?
Jerry Schurder: There are only two aspects of business rates that are fiscally neutral by law. One is the revaluation. What happens is that the amount of revenue raised on the day of a revaluation is the same in real terms as the amount that was raised the day before. We are valuing exactly the same properties, and they pay in total terms. In aggregate terms, they pay exactly the same, with an adjustment for inflation and also an assumption for loss on appeals. That adds a degree of complexity, but that is the underlying principle. The other aspect that has to be revenue neutral by law is the transitional arrangement scheme.
In between revaluations, as new properties come on stream, they add to the total rates take. That doesn’t lead to any reduction in the uniform business rate. That is why I have given the evidence that the total amount raised from business rates has continued to grow, either because there are new properties added to the list and they normally will be more valuable than either a bare site, which has no value, or the property they have replaced, or because the valuation officer decided to assess something for business rates that it had decided to ignore previously.
Q374 Kevin Hollinrake: The point you made in your evidence was that £10 billion was raised in 1990, and it is roughly £30 billion today. If that is not fiscally neutral, what should it be today, based on the £10 billion in 1990? Could you write to us and tell us?
Jerry Schurder: I will absolutely do that. I haven’t done the arithmetic.
Kevin Hollinrake: It would be great if you could.
Jerry Schurder: It is probably not rocket science—he said, hoping not to regret that comment.
Q375 Kevin Hollinrake: If you could, that would be great. It is a very important point.
We now turn to another Kevin to talk about check, challenge and appeal, which you mentioned earlier. You seemed dissatisfied. This was supposed to end speculative appeals. Is it going too far with that objective? Is it deterring people from appeals?
Kevin Muldoon-Smith: To an extent, it has reduced appeals, but whether that is for the reasons it set out to achieve is another thing. I will caveat what I am going to say: I think it has got better over time. However, it was introduced too early, and the portal didn’t work particularly efficiently. It is quite complicated even for rating professionals to use; when you have businesses trying to do it themselves, it is very complex, and that is just getting through the checkpoint. You then get the challenge, and you face a problem at the VOA, which is quite under-resourced. It is also still dealing with appeals from the last set of appeals on the last rating list.
I spoke to colleagues over the last week or so in preparation for this inquiry, and one of their observations was that they had never really got past the challenge point. The thing is out there that appeals are being reduced, but the reality could be that we will get a glut of appeals coming through the system as it starts getting a little more efficient towards the end of the list, if that makes sense. Without doubt, it wasn’t received well at the onset.
Q376 Kevin Hollinrake: You think it is better now, in terms of the service. Mr Schurder, I think you said in evidence that it was “shambolic” and “not fit for purpose”. Do you stand by those comments?
Jerry Schurder: I was quoting others, but I entirely supported their comments. I have a lot to say about CCA—please interrupt me if I go on too long. It is the most preposterous, manifestly unfair system of challenging or objecting to rates assessments that anyone could ever possibly devise. It is unfair in policy terms, and the delivery of the IT has been totally shambolic, yes. While I would agree that there have been some stepped improvements, we have yet to start the revaluation, really, so we are nearer to the next revaluation before the current one has kicked off the ground, and that has real problems and issues for the sustainability of business rates going forward.
If I may address the background policy, yes, it was there to address the huge volume of appeals made against the 2010 revaluation, some of which were said—this was claimed by Government—to be speculative, spurious and unnecessary. I would challenge that. The reason why businesses felt that they had to challenge and engage in that way is that that is the only way in which to extract from the assessing body, the Valuation Office Agency, the evidence that it has used to set the assessments of their properties.
The Government recognised that as a reason in their consultation, “Checking and challenging your rateable value”, which was issued in December 2013—at that stage, intended for implementation in October 2014. It said that business did not have access to the evidence, and that it was very difficult for them to get hold of it, so what ought to happen is that the valuation officer should go first and justify the assessments to the ratepayer. Business agreed with that wholeheartedly.
The difficulty was that the level of information that the valuation office felt that it could share—it said it was under confidentiality restrictions under the Commissioners for Revenue and Customs Act 2005—was at such a basic level that it would have been of no use to businesses, so businesses said, “No, don’t implement this scheme. We need a scheme that provides greater transparency. The valuation office should be required to come to us and to give us the evidence.”
The Government therefore did not implement “Checking and challenging” as it had intended in October 2014, but rolled it into its ongoing review of business rates. They then came up with check, challenge, appeal. Instead of listening and responding positively to the concerns of business, and their own admission of the problems, they went in exactly the opposite way. They have devised a system in which the entire burden of proof is on the business to prove the assessment to be wrong. You get no useful information from the Valuation Office Agency, yet you have to put forward the totality of all potentially relevant evidence at the outset—at the challenge stage—with arguments and case law precedent, just to open the door to a discussion with it.
Q377 Kevin Hollinrake: So your issue, from the appellant’s perspective, is that you went in completely blind? You tweeted quite recently that in Slovenia, everything is transparent and all the data is out there. Is that where we need to go with check, challenge, appeal? Is that the solution?
Jerry Schurder: There are two ways of ensuring that a business can be satisfied that its valuations are fair and accurate. First, the VOA, which after all has statutory powers to ensure that it collects all the information, could justify its assessment to the business ratepayer. There are a number of jurisdictions in the world where that happens. In Johannesburg, the ratepayer can click and see the primary evidence used, and he can click again if he wants to see the secondary evidence that underlies those valuations. There are countries where much greater data is available. The alternative is to follow the Republic of Ireland’s route, where there is a public lease register, and absolutely every single element of information about a lease is available in the public domain.
One could go down either of those routes. I would favour both. There would need to be formal lease registration or, as a minimum requirement, formal notification of the VOA, so that it does not have to go chasing for the information whenever there is a re-evaluation; it would come to it automatically. If businesses could be satisfied that the amounts that they are asked to pay through their assessment are fair and justified by the evidence, they would tick the box, move on and carry on running their businesses. They don’t like this appeal system. They don’t want to have to go through it and wait for years and years with uncertainty over whether they will be successful. They want to pay the fair amount of tax.
Q378 Kevin Hollinrake: I get that. Last question. One idea presented to us is for a kind of trusted ratepayer status. People who can prove that they would not abuse the system would be able to make changes to their own property, declare those and start paying the new rate. Is that something that you would support, or do you think it is unworkable?
Jerry Schurder: It is worthy of investigation. I am not sure quite how one would validate a trusted ratepayer. Would they lose that status—
Kevin Hollinrake: Something like Tesco, for example, which I am sure would not abuse the system. It is a very trustworthy business.
Jerry Schurder: Tesco would be a very good example of a business that could self-assess for business rates, because it has knowledge of the market in which it operates—it is a fairly tight market, in many cases—and it could therefore self-assess and be a trusted ratepayer. However, it may feel aggrieved if it discovers that Sainsbury’s has declared a lower basis of valuation, which has been accepted because Sainsbury’s is also trusted. That then becomes a race to the bottom, and at what stage will they no longer be trusted? It is worth looking into, but I am not convinced.
Kevin Hollinrake: Checks and balances.
Q379 Chair: What do Tesco and the Institute of Directors think about that? Given that we are taking your name in vain, we had better let you answer.
Steve Rigby: First, check, challenge, appeal it is designed to be impenetrable. That is the reality of it. Clearly, we have experts trying to help us on that.
Q380 Chair: Do you think it was actually designed to put people off appealing?
Steve Rigby: Well, it is a process; for instance, when you have more than one shop, you have to register for every single assessment. We have more than double the amount of assessments as shops, because there are different assessments around each shop. Bizarrely for us at the moment, because of outstanding appeals for the ATMs—the cash machines—under the last rating list, we actually cannot really process any appeals anyway under the current system.
Q381 Chair: Do you have outstanding appeal numbers?
Steve Rigby: We have thousands of outstanding appeals.
Q382 Chair: From 2010 or 2015?
Steve Rigby: It is mainly around the ATM inquiry. There is obviously a Court of Appeal decision that ATMs should not be separately assessed, but the VOA is taking that to the Supreme Court. Unfortunately, that ties our hands.
Q383 Chair: Until that is resolved, you cannot really get on with the next set of appeals?
Steve Rigby: No. For us, it is very significant money, and we are still paying rates on ATMs. However, that is probably a side issue. In terms of self-assessment, honestly, whether we have a working system that is better than the current one or whether we went to self-assessment, it does not change the amount of tax, although it might change the burden. The real issue is changing the burden of tax.
Tej Parikh: I would like to echo some of those points. On members’ interaction with it, they would say it is very opaque, and that there are several lines involved in a business rates bill. Sometimes they don’t understand what the individual lines mean. There are lengthy processing times, and there are just general difficulties with the user interface.
In terms of the self-assessment, in theory you might say it creates some efficiencies. We know a significant amount of relief goes to a number of businesses under the £15,000 rateable value. If they can just prove that they fall below that, they don’t need to double up the extra work that is done in the valuation process. I think you need to offset that against the fact that a number of SMEs also might not have the expertise in-house to deal with the self-assessment process, and that could be a challenge for them. In trying to simplify the system, you don’t want to increase the amount of time they spend filling out new forms. It is certainly a good idea, as long as the interface that you do it through is easily navigable, just like the self-assessment forms on personal taxation, for example.
Q384 Chair: Mr Schurder, was there something you wanted to add?
Jerry Schurder: On the statistics, in relation to the 2010 appeals, as at 31 March this year, the official statistics were that there were 66,000 appeals still outstanding, and 45,000 of those are related to the ATM case. Once we have finality, then we can start dealing with those sort of issues.
The other significant issue, I assume we are still on check, challenge, appeal, is to address the concerns about the portal. I have an element of sympathy with the Valuation Office Agency, because the Government only decided the rules for check, challenge, appeal just over two weeks before the revaluation, and the whole IT was meant to be up and running two weeks later. But the VOA was working and designing the scheme for a good two years before that, and I would say that was in a rather blinkered approach, because their focus was totally on a ratepayer who occupied only a single property—could they use the VOA portal? To a large extent, that was wasted effort because the Government had already announced a year before the revaluation that the small business rates relief scheme was going to be made permanent and doubled up, which has taken 665,000 potential users of the portal out of the system, so the VOA should have been talking to the representatives of large business, who are multi-site occupiers, instead of designing a system where everything has to be done one at a time. Poor Tesco have had to upload on an individual basis a copy of their rates demand, just to even start the process.
What has been designed in—I don’t know whether it is deliberate or whether it is incompetence—is a pure deterrent to business to even want to engage in the system. Some of our clients refuse to engage and to start the process, because they are not prepared to require their employees to divulge the personal information that has to be provided—the P60 details, the national insurance number and your passport details—just to register. This is an activity they are undertaking on behalf of a business employer. Why is personal information required?
The same Valuation Office Agency has a totally different scheme in Wales. It is called “authority to act”. All the ratepayer needs to do is send a letter to the valuation office that says, “Here are all my properties, and I have instructed this firm to act and to get on with it.” We have this whole barrier to progressing, throughout the system.
The software is still only in beta mode, and we are two and a quarter years into the system. We are only just starting the application programming interface—the API—through which major ratepayers’ advisers, such as Gerald Eve, will be able to get our computers to talk directly to the VOA’s computers. That is the only way to operate efficiently when you are acting for 80,000-plus properties, as we are. That is the way we have been operating since 2005, but the VOA refused to talk to us until after they had delivered the portal.
I am sure you will hear evidence from the chief executive of the Valuation Office Agency that the API is there, is operational and has been there for months. That is far from the truth. It has been there and available in parts for testing for a while; it has been used live for literally a handful—no more—of checks. We are just at the stage of being able to test it in bulk, for significant numbers. If we are lucky, we will have an operational API by the end of the calendar year. That is when we can start the process. We will find that the Valuation Office Agency will have to deal with those checks and challenges at exactly the time when the next revaluation comes in; it then all has to start again. It is unworkable.
Chair: Thank you. The VOA will come before us, and we will have lots of questions for it. Most of you have said that you like the idea of a property based tax, but there are alternatives, which we will start exploring.
Q385 Alison McGovern: I have what I hope is a simple question. Mr Schurder, earlier you went through the burden of taxation as it relates to business rates, but the burden on business from other taxation, such as corporation tax, has fallen. Given that position, will you comment on the idea of a single consolidated tax for small businesses? Would that work? What would the advantage or disadvantage be? Who wants to go first? Mr Rigby, you moved at the wrong moment.
Steve Rigby: In that case, I’ll go first. Our proposal is to rebalance, rather than replace, the current business rates system for retail. Business rates is an effective tax. It is easy to collect and difficult to avoid, and we do not see a clear case for abolishing a property tax. We do see the need for rebalancing in a sector that has had significant change.
Q386 Alison McGovern: You prefer the current model of a mixed system, but it needs rebalancing.
Steve Rigby: Yes.
Q387 Alison McGovern: Any further comments? I said this would be a simple question.
Rachel Kelly: Business rates should, in theory, be quite a simple tax based roughly on rental values. If someone can afford to pay x rent, we will charge x amount of tax. One of its merits is its potential simplicity, and by trying to combine other factors, you could over-complicate the system. If a party is willing to pay a certain amount of rent, that is an indication of what they can afford and are able to pay. Perhaps the system could be brought back more in line with rental values.
Q388 Alison McGovern: Let me ask the question in a different way. Does anybody on the panel disagree, and think that we should not have the balance system that we currently have, but should go for one business tax?
Tej Parikh: No. 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. We might end up considering hybrid models to try to combine those things—Tesco has one suggestion. The difficulty with things such as basing tax on turnover is that businesses have different models. Some might operate with a higher turnover and lower profit margin, and some with lower turnover. It will be difficult to put our finger on one specific solution.
Jerry Schurder: May I comment on the point about lower corporation tax in this country, which is fully recognised by business? Many businesses say, “I would be delighted to pay corporation tax, but I can’t make any money.” Business rates are one of the factors that get in the way. What business is saying, and what I am saying, is that the basket of taxes is out of kilter.
Chair: That is the point about having consolidated tax.
Q389 Alison McGovern: I suppose the question I am asking is: if it was one consolidated tax, which inevitably would mean putting more burden on the profit-related element in order to create that, would there be any advantage? It sounds like you are saying that it is the overall burden that you are concerned about.
Jerry Schurder: I am concerned about the overall burden of business rates—I am not talking about the overall tax burden. I think business accepts that if there is to be a review of business rates that leads to a lower take from business rates, that gap has to be made up from somewhere, and online is potentially part of that solution.
Alison McGovern: So the Committee could conclude that your expert advice to us is that the mixed system could work if the element of tax based on being a business—the business rates—was dealt with, as the balance is in the wrong place.
Chair: Let’s try Steve.
Q390 Mr Baker: Thank you. The evidence has been fascinating, and once again I am struck by how much complexity people will tolerate when it is imposed by the Government on them and their businesses. I want to turn to another alternative to business rates, about which I have my own misgivings but I want to find out your misgivings or support for it: land value tax. Let’s start with you, Mr Muldoon-Smith: why is it that, despite so much wide support for land value tax, it is used so rarely internationally?
Kevin Muldoon-Smith: In the abstract economic sense, in some ways it makes perfect sense and is a great idea. When you look at international examples, even those who have used it have rolled it back and it has not been universally accepted. The locations that have used it have very different property cultures from ours—there may be more of a public ownership element, whereas England certainly does not work in that way. The structural change that would need to be in place to move to a land value tax would be huge. It would be a completely different type of valuation skill base. There would be the political sensitivity around the very idea that we would move the burden on to land owners.
More broadly, in the abstract sense, I think land value tax is quite good but it has almost had its day before it has had an opportunity to have its day. If it had been brought in some years ago, maybe; but the country decided to go down a different route—property tax. Now, the real change we are seeing is in the nature of work, which means we need more of a hybrid system—bricks and clicks. A potential compromise could be a split rate system, which could be investigated in future. That is used in some countries where land is taxed at a higher rate than property, which incentivises investment a little. I still think that the complexity and the change you would need to go through in the system would be almost impossible.
Q391 Mr Baker: You mentioned investment. Several times we have been told how business rates disincentivise investment. I want to put to you some evidence we have hade from the all-party parliamentary group on land value capture, which said: “A helpful case study in the actual effectiveness of shifting property taxes from capital onto land is given by the city of Harrisburg in Pennsylvania where adjusting the land:property ratio in the city property tax from 1:1”—that is between land and property—“eventually to 6:1”—so a ratio of six on land to one on property—“had a significant impact in the rejuvenation of the city”.
As much as I have misgivings about land value taxes, do you recognise the potential for a land value tax to lead to greater investment and rejuvenate our cities?
Kevin Muldoon-Smith: Cards on the table—I quite like the tax, but I just do not see how practically we could put it in place in this country. I think it has the potential to increase the density of development, promote investment and deal with things like land banking and that type of stuff, but that is very much in the abstract sense. The reality is that it would be very difficult to bring it into place.
Q392 Mr Baker: On the reality, Mr Schurder, perhaps I could come to you. In other evidence, we have been told about the difficulties of identifying who should pay the tax—the original freeholder who let the 999-year lease 100 years ago and now cannot be identified, and so on. What do you think are the practical problems?
Jerry Schurder: I think that is absolutely one of the practical issues. I, too, understand the economic theory, but there are some very significant hurdles to overcome, some of which could be dealt with over time, if we said in 20 years’ time that we should add land value tax in addition to business rates. We would have to have a complete cadastre, which we don’t have, of all parcels of land in the country to make sure everything was plotted and measured and was available. We would have to have a complete register of ownership, which we don’t have, and it would need to be registered at all the different individual levels. Is it the freeholder who sold the 999-year lease and is no longer traceable, or is it the guy who bought the 999-year lease and granted a 100-year lease 70 years ago? There are all those sorts of challenges.
I think the biggest challenge, though, is where the evidence is going to come from to establish the value of unencumbered land—land without buildings—because, particularly in urban locations, there is as good as no evidence of clear land sales on which to form the basis of the valuation. The first thing one would have to do, effectively, is almost have a planning inquiry to determine the highest and best use that could be made of each parcel of land, because that is the rationale behind land value tax: to encourage the highest and best use. Then you have an argument, potentially, about what the value is of the individual parcel of land. I think there would be a 100% appeal rate against land value taxes—which is brilliant news for rating surveyors, so bring it on!
Q393 Mr Baker: If I reflect on the evidence from both of you, I think what you are telling me is that this is a thing where you can see the advantages in theory, but in practice it is too hard. You are both nodding.
Mr Rigby, as a practical person and an operator of a great deal of land, what do you think in general of a land value tax?
Steve Rigby: If I may, I will talk about the valuation process first. Rental values are a common currency in the UK. People rent a home—rent a flat—but they also rent their first shop or their offices. They know the currency. Whether you are a large or small business, rental values are just commonly understood. And even then, we have issues about check, challenge, appeal and transparency, and so on. So I think going to a mystical value of land is, to be honest, a non-starter. But fundamentally I think that if the tax rate for the UBR were lower, investment would be encouraged. The issue is not how we come to it; the total burden is a more important part of it.
Tej Parikh: I certainly think there is some value in investigating how a land value tax might work. We know that there are international cases where it has happened, so it’s not infeasible. There are obviously practicality challenges. The thing for business is that the tax on a key input that is used to drive growth in any corporation is a challenge. At the moment, if they want to invest in their productivity, whether that is by putting in a new piece of machinery or making their building more energy-efficient, they are taxed for that, and I think that is the key problem. What you might give businesses with capital allowances you then take away with things such as business rates. That is why I think the land value tax idea might fit well with some businesses—because it’s not necessarily a tax on the property.
Rachel Kelly: I agree with a lot of the comments, but I would add a couple more. Conceptually, it is very appealing, especially when we think about people who want to invest in their properties by putting in solar panels or doing whatever they want to do. It does seem counterintuitive that they would then pay more tax on that, so I can see why you would want to shift the burden on to a land value tax.
One of the issues that I struggle or grapple with is this. The idea is that you would encourage optimal use of space, or highest and best use, and when I think about some of our urban areas or, say, the challenges with our high streets, I think, “Is that what we need? Is that what we want to encourage?” There are going to be uses that are not profitable—parks, schools, museums—things that we want in our communities, and would a land value tax detract from being able to create that kind of mix in our communities?
Q394 Mr Baker: That’s a very good point. I think it’s a fairly consistent message from the panel that you are not, in practice, in favour of land value taxation. I just need to consult my brief and see whether there is anything else I need to check. Do you have any sense of how land values would change less than rateable values—would you have greater stability in the system if it were based on land value rather than rental values?
Jerry Schurder: I have no knowledge or experience, but an expectation that yes, perhaps it might be less volatile.
Q395 Mr Baker: The word “mystical” has been used in the course of this session. I think that is a good point on which to end my questions, because land value taxation feels somewhat mystical but of great theoretical interest.
Chair: Okay. Let us try another alternative.
Q396 Rushanara Ali: I am not sure that we could describe the other taxes that I want to know about as mystical. Mr Muldoon-Smith, what are the key differences between a sales or turnover tax compared with a profit-based tax?
Kevin Muldoon-Smith: I would not say that I am the best person to answer that one. To give a slightly different answer on the hybrid system, a lot of the witnesses have talked about and may talk about a law on the UBR. I think that that potentially needs to happen. One way of filling the gap in the public purse would be through a digital or an internet sales tax. But I am certainly not an expert on those three things.
Q397 Rushanara Ali: Would anyone else like to come in on that?
Steve Rigby: In terms of what we have said about rebalancing the payments in the retail sector, our proposal is for an online sales levy, which is effectively a sales tax, but is actually a tax on the operator and not on the consumer. Clearly, how they deal with that is up to them. You have to remember that at the moment, the retail bricks and mortar retailers are paying at least 2% of their sales base on rates—it is 2%-plus—so that tax is already in existence in physical bricks and mortar retailing. Our proposal is to level the playing field on that. On a profit tax, corporation tax is a profit tax, in reality.
Q398 Rushanara Ali: How would you contest the argument that an online or other sales tax would just be passed on to consumers? Could you say a bit more about how that would actually work?
Chair: Alison Thewliss has a question on online sales, so we will come back to that.
Q399 Rushanara Ali: Okay. On profit-based taxes, if such a tax were introduced, what would stop a multinational organisation from moving profits offshore? Has anyone done some thinking on some of the obstacles and how they could be overcome?
Rachel Kelly: Our view is that is that the business rates system should stay as a property-based system. If we are looking to the business rates system to address some of those global challenges with international and digital businesses, I think we are trying to do too much. The OECD has done a lot of work in the areas around profit shifting and taxation of digital businesses, and I think that we would be better placed to support that work alongside this. Obviously, we still need to reform the business rates system, but we would keep it as a simple tax of property as opposed to trying to do too much with it.
Q400 Rushanara Ali: So is your conclusion that a profit-based tax, without addressing avoidance, is not really an approach worth pursuing to address that wider problem? It is one of the options that has been proposed.
Rachel Kelly: I think that would be a fair summary.
Rushanara Ali: Do others agree with that? I see you nodding.
Q401 Alison Thewliss: I have a few more questions about your plans for a 2% online sales tax, Mr Rigby. Can you tell me a bit more about the reasons behind your advocating of the online sales tax for physical goods?
Steve Rigby: I think it was twofold. If you look at the retail sector, it has undergone significant change over the last years. Generally, retail was a low-margin business conducted from a physical estate, but that is no longer the case. There is an online market that now represents almost 20% of sales, which is a significant shift in how retail is transacted in the UK.
Our proposal was twofold. First, the burden has become too much for the physical retailers, as we said earlier. The online sales levy is there to level the playing field, because physical retailers are paying at least 2% in terms of rates as a percentage of sales. Actually, rates as a percentage of sales for online is about 0.5%, so the growth in online in the UK is one of the fastest. That is partly helped by the tax playing field not being level between those two sectors.
We have looked at the online sales levy of 2%. We think that because it is 2%, it broadly raises the same in revenue as the reduction for the physical estate retailers would be—about £1.5 billion a year. Clearly, we have looked at the design of that levy in a way that tries not to incur any levels of duplication, but to encourage customers to still shop in the physical environment.
Exceptions from the online sales levy would be orders effectively done in a store—for bulky goods, and so on, that might be delivered at home—and, conversely, things that are ordered online and actually delivered in store, more like the click and collect model. That is the proposal, and it creates a level playing field. Clearly the losers today are all the retailers operating in physical estates that pay a higher tax burden than online retailers.
Q402 Alison Thewliss: What is the proportion within your business of what gets ordered and collected in store, compared with what gets delivered to people at home?
Steve Rigby: I’m afraid I don’t know the proportion within our business today, but we can write to you with that.
Chair: That would be great. Thank you.
Q403 Alison Thewliss: Would things delivered to home count as online shopping? If you were getting your groceries delivered to your home, would that count for the online tax?
Steve Rigby: Yes, absolutely, and we have around £3.2 billion—that is the UK and ROI number—of online sales.
Q404 Alison Thewliss: That would be captured in that as well. John Lewis have provided some information; they thought that it would be a bit too cumbersome to distinguish between all these different types of sales and where things are collected. Why do you feel that that would be easy enough to do within your systems?
Steve Rigby: I am not an IT specialist, but we clearly know whether goods are delivered, or if it is click and collect. That is clear. It would be equally possible to know whether it is ordered in a store. That is clearly not something that is done normally in our stores, but in other stores I am sure that it is absolutely possible to understand whether it is being ordered while the customer is present in the store. We do not see it as an issue, and clearly all those retail ratepayers will benefit from a 20% reduction in rates. We are trying to create a sustainable level of future payments from the rates system, because this would be an affordable level for retail, creating a new tax base that is sustainable and growing.
Q405 Alison Thewliss: I appreciate that. I am trying to understand some of the practicalities. Say I ordered something online to be delivered to my home, and I was out when that happened, and it was returned to the store, from where I collected it later. What would happen with the tax then?
Steve Rigby: If you collected it later, I guess you have gone to the store, so it is a click and collect.
Q406 Alison Thewliss: But I ordered it to be delivered to my home and I was out.
Steve Rigby: Clearly, the IT systems will have to show that it was a failed delivery at home. Therefore it is either redirected to your home a second time, or you elect to collect from store. Honestly, with today’s IT systems that is perfectly possible.
Q407 Alison Thewliss: I understand that you were looking at a limit for small businesses within that as well. Would that have any impact on your smaller stores?
Steve Rigby: No. That is for smaller businesses. We would not see it as being done store by store for us. We were talking about sales thresholds because clearly we appreciate that smaller businesses, just as they get relief under the rating system, which is much-needed relief for them because of the high burden, would benefit in a similar way under this tax.
The one thing we have said is that while it is a tax paid for by the retailer, and there are choices as to how they manage that tax, in terms of sales on marketplaces, the marketplace would pay the tax. That gets over some of the points that there may have been around retailers not being properly registered, and paying VAT and all other things. We hope that that would be a better solution.
Alison Thewliss: That can be quite a complex landscape now, with things like Etsy, various Amazon platforms or eBay.
Steve Rigby: There are many platforms there, but if it is on a marketplace, we think the marketplace should collect.
Q408 Alison Thewliss: Essentially, this would be a kind of industry-specific tax for retail. Would this include only reducing the business rates multiplier for retailers, if the tax was introduced?
Steve Rigby: Yes. I guess what we have looked at is that we honestly believe that there is a specific problem for retail. As I said, 20% of the sales have moved online. Retailers pay 25% of the rates bill, yet they represent 5% of GDP. Actually, 80% of that rates bill is paid for by the larger retailers with only 50% of the sales. Over the past 10 years, rates have continued to increase, despite sales migrating elsewhere. We see that as a fundamental issue.
On top of that, every day we see the issues with store closures and retailers going through CVAs or liquidations. We honestly think that in order to have a meaningful reduction in the physical environment, and create the level playing field of taxation for both in-store and online, this is a retail solution for a retail problem.
Q409 Alison Thewliss: I want to ask your colleagues on the panel this: if this tax only affected retail, what would the impact be on the rest of the business rates portfolio?
Rachel Kelly: I will chip in first. 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 know you have heard oral evidence from somebody doing these serviced office providers. Apparently the serviced office space is projected to double in the next five years.
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.
Jerry Schurder: I think that is a very valid point. Rent is a measure of affordability. We often hear the problem that business rates are unfair on those who are occupying property. If we valued accurately and sufficiently frequently, we would pick up the value of property and the value of occupying property. A tenant would not agree a new lease on a property at a certain rent unless he or she felt that they could afford to pay that rent from the business that they expected to generate from the occupation of that property. So long as we are properly capturing in real time, as Rachel says, the value of property through the rental valuations, we should be picking up the changes as the economy moves and markets increase or decrease in value.
Q410 Alison Thewliss: Lastly, Mr Rigby, if you were to have a system such as this, how would it affect customers in Scotland, who may be ordering from your base in England for delivery in Scotland?
Steve Rigby: Obviously, there are devolved nations that have their own ratepaying and rate-collection regulations and processes, which we know and operate in. Clearly, we would be looking for the online sales levy to be, in reality, a UK-wide taxation, which hopefully could be achieved, so it should not make any difference.
Q411 Kevin Hollinrake: As well as the complexity Alison referred to in terms of where sales were triggered and devolved nations having different systems, you have use classes, of course. Things do not stay as retail. Things move from A1 to A3 or whatever—from retail to office use, for example—and have to be reclassified or declassified. Also, different retailers have different profit margins. I do not mean to be negative, because we need to find a solution to this, but it seems like it would probably add another layer of complexity. It might sound simple, but it is probably more complicated than that.
My business is in the estate agency and lettings business. We get affected by online competition, too. Isn’t this just about adjusting to a new world, and the fact that, in the cold light of day, a business model has to reflect the fact that the property is affordable for the occupant? You are probably caught in the middle of this whirlwind of change that is happening in terms of new online competition.
Steve Rigby: It is a new and changing world. Clearly, other industries are experiencing it to greater and lesser degrees, but I go back to the point that retail’s contribution as a proportion of taxes is literally the highest. In terms of GVA, I think retail is double the nearest commercial use. It is the most intense in terms of property use, yet in reality it has one of the lowest margins. Margins of 3% and 4% are quite common, yet the rates bill is 2%.
We look at what is happening in the physical environment of retail and we see an urgent need to change the burden and to level the playing field for the future, otherwise the migration will go even faster. Retail employs 3 million people. We employ more than 300,000 people who serve customers every day in the hearts of communities. If we are not careful, we will end up with everything being delivered, because they have a 2% tax advantage. A 2% change in margin is a significant issue, and that is effectively what every retailer is losing by operating from bricks and mortar today.
Q412 Kevin Hollinrake: Mr Schurder’s point was that these things adjust over time. Next did some sensitivities over the next 10 years and saw the potential for a 59% reduction in rent on their premises if online sales continued to grow at the rate they are growing today, so this will wash out in time.
Steve Rigby: Yes and no. If you look at the larger retailers, the four food retailers are the biggest ratepayers in the UK. The leases in retail, where we have had significant capital investment in fitting large stores, are long term. They are not like some high street leases, which are for three or five years; they are for 25 years. Our average unexpired leases range, depending on the format, between eight and 12 years. This is not going to wash out as quickly as in some sectors. The second point is that there comes a point when the rent might drop by 59%, but if the rates do not drop by 59%—and, even then, if sales reach such a level that the profit cannot sustain even those dropped rents—we will suffer more closed shops.
Q413 Kevin Hollinrake: Rates would drop over time on that basis, wouldn’t they? Rates would drop to follow the rents.
Steve Rigby: Well—
Q414 Kevin Hollinrake: I was asking Mr Schurder, actually.
Jerry Schurder: I was trying to get your attention, because that is the critical point. If rents fell by 59%—we have seen the various CVAs with 30%, 40%, 50% and 70% cuts—but the UBR was increased under the fiscal neutrality regime to make sure that the total take stayed the same, the rates would not fall directly in line with the fall in rental values. We may see that retail has fallen further than other sectors, and therefore there would not be a one-for-one adjustment, with the UBR going up 70%; the UBR might have to go up 50%, and therefore instead of the retailer seeing a 59% drop in rates, it might see a 39% drop in the rates payable, and that is not a sufficiently responsive system.
Steve Rigby: We have an example in England where rates have dropped by 32%—the rateable value. The rates themselves have dropped by 2%.
Q415 Kevin Hollinrake: The rents dropped by 30%?
Steve Rigby: Sorry—the rateable value reduced by 32%, and the rates payable have dropped by 2%.
Q416 Chair: Is that because of transitional relief taking so long?
Steve Rigby: Absolutely. Again, we talked about the retail sector. Retail is a net contributor of over £600 million to the transitional relief pot at a time when the pressures on retail, and the change, is so high. It is a net contributor.
Q417 Mr Baker: Just a very small question, Mr Rigby. When you mentioned a 2% margin being significant, your body language told us what I thought I knew: when Tesco is turning over about £55 billion a year plus, what does 2% on the margin actually mean for your profits?
Steve Rigby: We make an annual profit of around £1.5 billion, which is between 3% and 4% margin, so it is significant, but honestly, retail is highly competitive. To think that if there is a reduction of 20% in rates, it will go straight to profit—there are investments to be made. It will go into improved pricing, so into all of the retail area. Don’t think it is a tax that is already paid. It doesn’t just go straight to the bottom line in that way.
Q418 Mr Baker: That is a very good point. I just wanted to get on the record a sort of pounds-and-pence sense of what 2% means to you, but you are making—
Steve Rigby: To look at it in a slightly different way, a 2% online sales levy would actually be £1.5 billion of revenue, which could allow the 20% reduction for all—this isn’t a Tesco thing—physical retailers.
Q419 Chair: Before we finish, I have a few questions on reliefs, because we touched on them in a roundabout way, but before I move on, Mr Muldoon-Smith, you mentioned your hybrid proposal. Is there anything else you wanted to add about that? Obviously it was particularly a submission from you.
Kevin Muldoon-Smith: As I said at the beginning, there are so many reliefs that it needs to be reviewed. The one tax, and the relief part of it, that I suppose I don’t feel sorry for, associated with business rates, is empty property rates.
Q420 Chair: I think your proposal earlier was on land value, property and digital-related tax. Is there anything else you wanted to say on that, before we get on to reliefs?
Kevin Muldoon-Smith: In the future, my basic position is to improve the system of property-related tax. 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. A split rate is almost a compromise. It is a halfway house between full land value tax and the property system. If we are crystal ball-gazing, or using the 20 or 30-year timeframe that Jerry was talking about, that could form part of the basket in the future.
Q421 Chair: Okay. Moving on to reliefs, Mr Schurder, you were talking about the antecedent valuation date and the introduction, and the gap that there is. I wondered whether anyone else on the panel had a view on whether that is a problem, or—this again is a point you were making, Mr Schurder—about more regular revaluations being very much needed. I think some of you have already touched on that.
Steve Rigby: I think we would all support the valuation date being as close to the tax point start as possible, and the more frequent the valuations can be, the better.
Q422 Chair: Anyone else, on that?
Kevin Muldoon-Smith: Once-yearly revaluations, if we could. Three-year revaluations, I absolutely endorse; one a year would be brilliant. The practicalities of doing that may be quite difficult.
Q423 Chair: Would you have confidence in the current system being able to cope with an annual revaluation ?
Kevin Muldoon-Smith: Not necessarily, but if we are going to try to be as sensitive as possible to the market, we would want to go down that route. Without going down the software tech portal-type things, there are things out there like automated valuation models and that type of stuff, and they could take some of the burden for perhaps some of the simpler-to-value bulk-class properties. I do not think it would work for some of the more complicated valuations, but there is evidence out there in other countries where AVMs are used. Banks use them quite a bit for valuation. It is quite controversial in practice, but critical would be getting the IT and software correct for it.
I think if you asked most valuers, they would say that an AVM would not replace their valuation practice, but it could certainly speed up the valuation practice if it was brought in. That is something that the VOA could look at.
Q424 Chair: Does the IoD have a position on revaluation frequency?
Tej Parikh: Yes, I think we want it as frequent as it can go, because you want rates to be responsive to the economic cycle. It is not just a disadvantage to businesses that have seen a drop in their rates, where, because they are in downward transition, it takes them a while to benefit; it is also a disadvantage to that economic area, because it is not in sync with the economic cycle there. It can actually slow down the regeneration and recovery of certain areas.
Jerry Schurder: I would just add that Hong Kong, which has a rating system very much modelled on our system—it dates back to 1845, I believe—has annual revaluations. Their antecedent valuation date is six months before the revaluation. It is also relevant that their tax rate is 5% and not 50%, and therefore the focus and attention given to valuations is not quite so sharp as it needs to be in this country, but yes, it can be done.
Q425 Chair: Thank you; that is very helpful. Mr Muldoon-Smith, earlier on I slightly cut you off about empty property relief. Set out your concerns.
Kevin Muldoon-Smith: As I said right at the beginning, business rates are asked to do too much, so I feel a little bit sorry for them. Empty property rates I have less sympathy for. I think it is quite a regressive tax. In good faith you can almost see that it was brought in to incentivise properties being brought back into use, but it has never really done that. There are a lot of avoidance measures out there. Even the way it is designed, it almost rewards local authorities and the public purse to perversely go for empty property rates, because the multiplier is so high.
A small business in a secondary property would be paying less tax, and there would be lots of churn in the building, so there would potentially be some vacancy in that building over a year. If you had empty property rates levied on the property for the landlord at the full rate, there is loads of cash coming in—huge amounts of cash, if you look at how much it makes on a yearly basis. You have then got the reliefs that the Government pay out, which they fund themselves.
I would try to reduce the rate as much as possible. I would want something a little bit more progressive, such as the business rate accelerator in Scotland, where you can almost incentivise occupation. I am not really sure how that would be funded—potentially from the relief that is already there. If you change that funding tranche around a little bit, you could almost reward the landlord and the local government for working together to occupy that property. I feel that with empty property rates, there is a perverse incentive, almost, to have empty properties in a local area.
Q426 Chair: At the beginning, I asked why some landlords seem quite happy to have empty properties sitting there. I am interested in your views on that. You talked about the empty property rate system leading to an “underground industry of tax avoidance” for landlords. That is quite strong language. I do not disagree with you, but can you just expand on that a bit? What are you hearing that landlords are doing?
Kevin Muldoon-Smith: It is such an avoidable tax, because it is such a bad tax that it would be mad not to try to avoid it. There are lots of businesses out there whose business model is helping landlords to avoid tax. There are these fake companies that are set up just to trigger rate reliefs over a time, and then they will be extinguished straight away. You will have just a modem in an office that is masquerading as a business. There are many ways of avoiding empty property rates. That is the other problem with the tax. I am always amazed that people pay it, because it should be avoided in many ways. Why wouldn’t you?
Q427 Chair: Sorry—you are amazed that people pay business rates?
Kevin Muldoon-Smith: No, the empty property rate. It is such an easily avoidable tax that I am always amazed that landlords pay it. We did some research two or three years ago looking at 24 city centres and office accommodation. I based the data on empty property rate returns to local government. Then I profiled it against 10 years; £3 billion was getting paid into the Exchequer and retained by local government. I absolutely want to try to get rid of the tax and come up with something more progressive.
One of the problems is that that would leave a hole in the public purse. I don’t think we are aware how reliant we are on some of the income that is coming off empty properties. It is a huge amount—many billions of pounds—so I would try to lower the empty property rate, to try to incentivise occupation. In some ways, I would go for rates holidays; once there is a business in the empty property, you could replicate some of the schemes from Scotland, where they are given an incentive for occupying the property. It might be phased through the lifetime of the rating list, or it could be a holiday throughout the whole rating list and rates only kick in at the next revaluation. I think empty property rates are very regressive. If they could be turned into something more progressive, that would deal with one of the issues.
Q428 Chair: Thank you. Ms Kelly, I think you and the National Farmers’ Union are calling for the former empty property relief to be introduced, and you are talking about an extended rate-free period. Why is the old system preferable? We have heard some of the pitfalls of the current one, but what is the BPF’s reason?
Rachel Kelly: I would agree with a lot of those comments. A landlord having to pay tax at the very point that they lose an occupier—at the very point they have no income—is fundamentally unfair.
Q429 Chair: Does it not incentivise reoccupation?
Rachel Kelly: I would argue that a rational investor is already incentivised to make sure that their business is occupied. Remember, they still have this investment tied up, with no money coming in.
Q430 Chair: It goes back to where I started, which is: are landlords just interested in having an appreciating asset, or are they interested in having an occupied premise? They are not the same thing, and they are not necessarily incentivising the same behaviour.
Rachel Kelly: True. You are right. It depends what the investment is like.
Q431 Chair: It depends why you are holding the property, doesn’t it?
Rachel Kelly: If you are an investor in retail at the moment, you are wanting the returns. You are not going in there because you think there is going to be any kind of capital appreciation.
Q432 Chair: Really? It is not as if our high streets need buildings appreciating. Is it not more hassle to have businesses keep on starting up, and maybe succeeding or maybe not? You have got tenants who are new to business, and all the rest of it, where you have got a building just sitting there. This is the anger of a lot of people on our high streets. It is about lots of buildings sitting empty and unoccupied, and national landlords who don’t really have an incentive to help to get start-up businesses in. Our high streets are beginning not to look like the thriving places we would all like them to be.
Rachel Kelly: I don’t recognise that kind of landlord. The kind of landlords that we represent do want to get a return on their investment. We have had examples where people have struggled to even get a tenant, because business rates have been so high. I don’t think any rational investor is not wanting to get a return on their investment.
Coming back to some of the wider policy issues around needing to regenerate our high streets—having a sustainability agenda and needing to retrofit properties to introduce solar panels, superfast broadband or whatever it might be—landlords need to have properties unoccupied for a certain period in order to regenerate and refurbish them, but business rates inhibit that. How long does it take to refurbish a property? I don’t know—how long is a piece of string?—but three months seems tight. Previously, we had six months and then you didn’t have to pay 100% of business rates; you could pay 50%. Something closer to that, which is what we had pre-2008, seems fairer.
Chair: We could go on about this for ever, and you know that MPs feel very passionately about their high streets in their constituencies. I can tell you that there are national pension funds, for example, that own properties in the middle of Loughborough, and that are impossible to get hold of and have no interest whatsoever in regenerating the buildings or making sure tenants—I have a retailer in my constituency who is unable to get hold of the landlord to talk about a roof that needs to be dealt with. They are, obviously, struggling to give appropriate customer service with a building that is degenerating around them. That is the anger that people feel about landlords. To go back to where I started, it is better to have high rental values because you can borrow more to fund the rest of your property portfolio, rather than making sure that high streets thrive. Does the British Property Federation recognise the anger that is felt about people owning high streets, but not investing in them?
Rachel Kelly: I have heard in the media of these situations.
Q433 Chair: It is easy to blame business rates. That is what I am saying. We have heard that the system does not work. It is easy to blame business rates for putting people off, but inactive landlords who are interested in appreciating assets, not occupied premises, could be a problem, too.
Rachel Kelly: Potentially, if there are landlords out there that really do not care about having their premises occupied, that kind of behaviour should not be incentivised. Any policy would need to be balanced if there is a genuine concern from Government that there is that kind of behaviour out there. But the landlords that we see fundamentally want to regenerate their properties and get as good a return as possible on them. There is clearly a balance to be had.
Q434 Charlie Elphicke: I would take issue with that. I could take you to the high streets in Dover and Deal where we are beset with national absentee landlords—often rogue landlords—that just want to take tenants for as much money as they can get and not be reasonable, not invest in the properties and not support the high street. Frankly, they are contributing to the problems that we have on our high streets. It is something that the British Property Federation should take up to make sure that landlords come into line and are part of the solution, rather than part of the problem.
Rachel Kelly: Our members certainly want to be part of the solution to regenerating our high streets. If there are landlords out there that are counter to that, certainly we are not supportive of that.
Q435 Chair: Will you help MPs? If a business improvement district is struggling to get hold of landlords, will the BPF offer to help to contact those landlords?
Rachel Kelly: Yes, and in our response we have said that we want property-owner business improvement districts. We want to be part of that conversation. There are three big parties involved in the high streets: landlords, occupiers and local authorities. All of them need to work together to work out what the solution is for the high street. For BIDs not to include landlords seems to be a missed opportunity. I do not want this to detract from the fact that there is a problem with business rates. Yes, you can cast blame at other issues—
Q436 Charlie Elphicke: There is a problem with rents as well—a big problem. We are not talking enough about rents. It is easy to blame the Government and the Government’s tax system, but the rents are too high and landlords are not doing their bit on that, are they?
Rachel Kelly: I don’t know. I would argue that increasingly in retail we see people offering turnover rents. Lease periods are coming down in a lot of sectors. Clearly, it takes time. We have heard about some industries such as Tesco having 25-year leases. Some businesses will want that security of tenure, but others won’t. It is a bit like business rates. It is not a quick system to change, but I think that landlords are responding. That will take time. Equally, it will take time for business rates to reflect that as well.
Q437 Mr Clarke: I must say I am sceptical of reintroducing empty property relief based on what I see in my constituency. There seems to be a situation with large tranches of the high street, particularly in rural East Cleveland in a town called Loftus, where the community are beside themselves about the fact that they cannot, as you were saying, Nicky, even find who the landlord is to try to offer constructive solutions to the fact that large and often quite iconic buildings are left empty, in some cases for four, five, eight years. You can date them back to the financial crash in 2008. The unbelievable damage that this does to the marketability of the wider community—not just commercial, but residential property—is profound, to the point where, ludicrously, Redcar and Cleveland Council ended up having to paint shops on to buildings so that it looks from a distance as though there is a thriving high street. It is crazy. Is there any system of landlord tracing? Part of the problem is that the council and residents’ groups run into brick walls the moment they try and have a conversation with them. It is incredibly difficult.
Rachel Kelly: Yes, we appreciate that there is an issue there. We have supported Government initiatives to increase transparency in property ownership, and I think that would help with that. There are other tools available to local authorities, and I know something like a CPO seems drastic, but if a local authority wants to achieve a certain vision for their town centres and that is not possible with the current ownership or whatever, local authorities should not be afraid to use other tools available.
Mr Clarke: I think there is a willingness to take bold action, but obviously it is far preferable—we cannot CPO the entire high street. In Loftus, probably three quarters of the units are empty. That is end-of-days territory. I appreciate that those concerns go far wider than absent landlords—we need to look at business rates and all the other factors—but we cannot CPO the entire high street. We need to have a proper conversation, and in large part, they are totally absent. If you are able to send a briefing, I would really appreciate that.
Q438 Chair: That is why we started off with how the property market works, because we accept that the business rate system—as all of you have said—is not working, but it cannot just be business rates that are causing businesses to struggle to stay in premises and high streets, and other places not to thrive. You have also all said, slightly disappointingly, “Yes, the system is not working. The amounts are too high, but by the way, we are not really that keen on changing much else”, which is why we ran through all the alternatives.
Finally, Mr Muldoon-Smith, you said you had tried to get hold of the list of reliefs, which we have heard a lot about, and gave up because it is so long. Are there any other reliefs that we should be looking at or testing as a Committee, or any that have been suggested that you genuinely think would be worth the Government exploring?
Jerry Schurder: I am happy to go first on that. As I have said, I believe that if we reduced the uniform business rate by about a third, we would have a workable level of tax. That takes away the need for a considerable number of the reliefs that are already in the system—there are far too many and they are far too complex, and the way they operate differs from one to the other. I am not a supporter of reliefs, and certainly not long-term reliefs. Those that make an element of sense are for exceptional events. We had foot and mouth disease in 2001 where there was a special need.
Chair: Or flooding.
Jerry Schurder: We had flooding relief in 2013-14 when premises could not be taken out of rating because of the rules about the assumption that the property is in a reasonable state of repair, but could not be occupied due to flooding. There is a special relief for that sort of event. Otherwise, we need to look quite harshly at reliefs. The need for them and the calls for them reduce radically if the total tax is reduced.
Chair: I take that point.
Steve Rigby: We would agree. If the valuation is more frequent and the amount of the tax burden is reduced, the need for some of these reliefs is reduced. Certainly, however, when we look at the retail world where you have small businesses, small business relief is needed for that world. Again, however, it is there because the total burden is too high on a sector that is changing. If we had the level of frequency of valuation, the transitional relief would also not be necessary. Today it is there, and it costs a lot of money.
Q439 Chair: Mr Parikh, are there any reliefs that you think are worth keeping, or is it a question of reducing the UBR?
Tej Parikh: As the panel has said, the reliefs are generally there as a stop-gap measure, essentially—
Chair: The fact that we have so many reliefs shows that the system is broken.
Tej Parikh: Precisely. There is certainly a case for small business rates relief, of course, because if you are just starting up, you do not want to be put off starting a business just because of that high fixed cost. That is something we would certainly want to be kept.
There is also a case for looking at the role of reliefs and what role they can play in regional growth. We know that enterprise zones have been quite beneficial to certain areas, so that is something to look at. The other thing, which is something that we have not really spoken about, is the way in which reliefs are applied and businesses get the reliefs. Depending on the local authority, they might not be automatically applied in some cases, and that adds a bit of burden. Even if you might have a relief out there for a business, they still need to go out and apply for it, which can add complexity to the system. If might be possible through the new system to try to automatically apply reliefs, where possible.
Q440 Chair: We had a roundtable session in Birmingham, and we heard that businesses and local authorities there had no idea about the reliefs. Do you get complaints from members that local authorities are not proactive in offering reliefs?
Tej Parikh: Yes. I think part of the problem is that there are a lot of reliefs, which adds to the complexity. Awareness is certainly a challenge as well.
Kevin Muldoon-Smith: To add to that point, I know some businesses that have the reliefs but did not realise that they had them, because they were automatically sent over. Obviously, they will then go to a rating professional and have their rating bills reduced, and they will realise that they already have quite a few. Communication could be a little bit better on that point as well.
I agree that the UBR will have to go down at some point, but that will leave a big hole in the public purse. That goes back to the local government finance side of things. That is another side. To make business rates work and to make them more sensitive, the UBR will have to come down, but that will have a knock-on implication for the public sector. In supporting the UBR decrease, we need to think about what form of tax or other funding would fill that gap. Local authorities are very precariously balanced at the moment, and there will be a knock-on implication.
More broadly, there needs to be a review of all reliefs. The more tinkering you do with the existing business rates system, the more you distort it. I guess what we have at the minute is so many reliefs, and it is almost an ad hoc arrangement in many ways. It is very difficult to keep track of. If we add even more, that will further complicate it. There will hopefully be a deep, one-off consideration of what reliefs are out there, to try—quite crudely; I agree with Jerry—to clean it up a little bit.
Q441 Chair: Ms Kelly, are there any other reliefs that you want to mention?
Rachel Kelly: I would not add anything. I agree with all of that.
Chair: Thank you very much indeed—it has been a very interesting session—for sharing your thoughts. We are very grateful to you for your time today.